Newbie Investor - CG or CF?

Hi All,

I'm 25 years old, currently residing in Melbourne. I've had an interest in property for the longest time and would love to eventually be in a financial position where I'm comfortable enough to get out of the rat race and concentrate on investing in properties. I'm currently looking into purchasing my first IP in the next couple of years or so.

I was lucky enough to purchase my PPOR with the help of my grandparents. Currently worth $480k approx, owing $190k. My income is 54k plus super but little savings thus far.

I'm looking at purchasing around the $450k mark. I've looked into home and land packages in Plumpton, Tarneit etc however they don't appeal to me too much as I think these areas are more targetted to young/ first home buyers. I've also looked into 2bdr apartments near the CBD i.e. Docklands but it seems as though the apartment prices have been the same for a while now.

I think my strategy is to focus on CF rather than CG at this stage, however eventually would like to have a mixture of both in my portfolio. Is this okay? Or should I concentrate more on CG at this point?

Thank you and looking forward to reading your opinions :)
 
Capital gains is where yo make money.

Hi Tuula,

First off, welcome to the good ship SS forum - setting sale to your dream destination.

What Terry said /\....

The serious wealth is attained from capital growth. CF is for covering holding costs on property purchased for CG..
 
Hi All,

I'm 25 years old, currently residing in Melbourne. I've had an interest in property for the longest time and would love to eventually be in a financial position where I'm comfortable enough to get out of the rat race and concentrate on investing in properties. I'm currently looking into purchasing my first IP in the next couple of years or so.

I was lucky enough to purchase my PPOR with the help of my grandparents.
Currently worth $480k approx, owing $190k. My income is 54k plus super but little savings thus far.

I'm looking at purchasing around the $450k mark. I've looked into home and land packages in Plumpton, Tarneit etc however they don't appeal to me too much as I think these areas are more targetted to young/ first home buyers. I've also looked into 2bdr apartments near the CBD i.e. Docklands but it seems as though the apartment prices have been the same for a while now.

I think my strategy is to focus on CF rather than CG at this stage, however eventually would like to have a mixture of both in my portfolio. Is this okay? Or should I concentrate more on CG at this point?

Thank you and looking forward to reading your opinions :)

Hi Tuula,

Congrats on deciding to invest in property. I will be brief and to the point:

1. If you are serious about as you state " to get out of the rat race and concentrate on investing in properties", then learn as much as you can about property investing. Books (though a lot of ppl find it boring) are a great place to start. Buy 2 or 3 if you wanna be like most people, or buy 10-15 if you are 100% serious.

2. Buy some books or dvds on Jim Rohn, Les Brown and the likes. Its about developing your mindset. I guarantee you, if you don't do this, you will most likely never achieve any great financial freedom that you seek.

3. To answer you question on CG or CF, like the other posters said, You need CG to build wealth and be 'rich'. Period. You will however at some point need to balance some cf properties with CG, but the purpose of those CF properties should be to sustain the CG IPs and buy you some time for your equity to build therefore lowering your LVR and banks will start lending you money again.

If you do all those three points diligently and without compromise, I could almost guarantee you great success in 7-10 years.

P.S: point 2 is of utmost importance.
 
Capital gains is where yo make money.

True, but if you're not focusing on cash flow, you severely limit the amount of properties that you can hold and thus the amount of capital gains you can make.
So in my opinion, after the first couple of properties, you should start looking for the ones that do have yields of 7% or more, otherwise you'll struggle to hold a multi million dollar investment portfolio, unless you're on a very good income.
 
Hi Tuula,

Congrats on deciding to invest in property. I will be brief and to the point:

1. If you are serious about as you state " to get out of the rat race and concentrate on investing in properties", then learn as much as you can about property investing. Books (though a lot of ppl find it boring) are a great place to start. Buy 2 or 3 if you wanna be like most people, or buy 10-15 if you are 100% serious. There are also a few people on here who offer great advice so you would be wise to learn from them as much as you can.

2. Buy some books or dvds on Jim Rohn, Les Brown and the likes. Its about developing your mindset. I guarantee you, if you don't do this, you will most likely never achieve any great financial freedom that you seek.

3. To answer you question on CG or CF, like the other posters said, You need CG to build wealth and be 'rich'. Period. You will however at some point need to balance some cf properties with CG, but the purpose of those CF properties should be to sustain the CG IPs and buy you some time for your equity to build therefore lowering your LVR and banks will start lending you money again. I would also work on increasing your income any way you can.

If you do all those three points diligently and without compromise, I could almost guarantee you great success in 7-10 years, so at the ripe age of 32-35 you could have the world in your hands. No exaggeration.

P.S: point 2 is of utmost importance.
 
I think my strategy is to focus on CF rather than CG at this stage, however eventually would like to have a mixture of both in my portfolio. Is this okay? Or should I concentrate more on CG at this point?

Thank you and looking forward to reading your opinions :)

The strategy can depend on your disposable income (from ability to feed shortfalls and tax situation).

The Y-man
 
Usually start with CG to give you enough equity for more deposits then switch to cashflow purchases just before you run out of serviceability.

But with only $54k income you probably will need to focus on cashflow very early on.
 
Thank you all, for your valuable advice.

I will definitely look into some books and DVD's to further educate myself.

So far, I'm thinking for my IP I will focus on CG, perhaps some simple development as I have some family that will be able to help me out with renovating. Which should hopefully increase the weekly rental income by a bit. Then down the track, sell. I'm thinking Werribee/ Melton, but like I said earlier I'm still new to this so a lot of research will go into which areas I should buy in.

My second IP will be for CF - maybe an apartment near the CBD.

How does that sound? Also when looking for a property for CG, what are the main factors should I look at firstly e.g. location growth yields, median house prices. I understand that it will be due to various factors, however I'm not too sure where to start.
 
How does that sound? Also when looking for a property for CG, what are the main factors should I look at firstly e.g. location growth yields, median house prices. I understand that it will be due to various factors, however I'm not too sure where to start.

Previous growth doesn't predict future growth, sometimes even the opposite is true due to property cycles, e.g. Sydney goes up after it's gone down, it doesn't just go up at the same rate indefinitely. So median prices are not that useful except to tell you the maximum you should pay in that area.

Better to look for things that allow future population demand, like infrastructure improvements, new employers, suburbs going through gentrification etc. Sometimes just a new trainline or highway can open up an area as an option for many people whereas previously it would have been too difficult.

If you're going to be reading or watching DVDs anyway, check out Margaret Lomas's 20 questions. You can use that as a starting point for your own property search strategy:
http://www.booktopia.com.au/20-must...nvestor-margaret-lomas/prod9780731407743.html

No one person has the perfect answer, but you'll develop your own way. You need the right mix of analysis and action, too much analysis and you won't get started, not enough and you'll go in blind.
 
So far, I'm thinking for my IP I will focus on CG, perhaps some simple development as I have some family that will be able to help me out with renovating. Which should hopefully increase the weekly rental income by a bit. Then down the track, sell. I'm thinking Werribee/ Melton, but like I said earlier I'm still new to this so a lot of research will go into which areas I should buy in.

My second IP will be for CF - maybe an apartment near the CBD.

I think your definition of Capital Gains (CG) and Cash Flow (CF) may be backwards.

Melton is a nice area and there's probably going to be some capital gains, but its distance to the CBD, almost unlimited surrounding land (endless supply) suggests that it's not what I'd consider a long term capital gains prospect. Personally I think Werribee is a bit of a dead end. It's an old suburb in an area with a lot of new development going on all around it.

Inner CBD apartments are rarely cash flow oriented, in fact I don't think they're very good investments in either respect. There's more development that will be ongoing for years at what is usually an artificial price point driven by the nice new apartment, not by any real fundamentals. It is possible to invest well in the inner CBD apartment market, but it's high risk with a big downside.



It's extremely difficult to find anything cash flow oriented in Melbourne, all the way out to the outer suburbs. It's been this way for a very long time and has only gotten worse.

The price points in Melbourne have also become extremely high in the last 12 months which makes me wonder if we're nearing a peak. It's possible that after Christmas the market might just keep on going up, but I suspect we'll see a bit of a correction in the near future and possible a few years of complete stagnation (no significant capital growth). This would continue until the rents start to catch up with the property values.

If you're going to look close to Melbourne, I suspect Ballarat or event Geelong would have some value. Frankly though, most people I'm dealing with are looking interstate.
 
Tuula,
You need to decide what strategy you are going to undertake and the time frame. Then do the numbers to see what the next step needs to be.
As Danwatto indicated, $54k income does not give you a large servicing capacity, so you need to build that as quickly as you can.

You have reasonable accessible equity in your PPOR, but you need to be able access it. Depending on what other debt/liabilities you have, you may be able to refinance to $380k. However the next step will be to see what rental income you will need to be able to borrow again. I would give some thought to the 1 bedders interstate that you may get 7% or more rent yield for. You may need to build slowly based on income. I would be very reluctant to look at Tarneit or Docklands. For rent yields, it is a demand and supply issue. Melbourne has historically been one of the lowest rent yield cities in Australia for many years, both house and apartment.

Keep researching and asking questions.
Good luck with the journey.
 
For someone with what many would consider a lot of equity at 25, you're looking at some pretty crappy investment choices...

On cashflow vs capital growth, toth is good.

But a $600k cap growth (which is achievable on your equity in 3-4 years if you had a lucky break and bought well) is equal to 60 years of positive cashflow from a property that makes $10k per year. Of course, the ideal situation is to positively gear $10k and make $600k cap growth. But if I had to choose one I'd take $600k.
 
For someone with what many would consider a lot of equity at 25, you're looking at some pretty crappy investment choices...

On cashflow vs capital growth, toth is good.

But a $600k cap growth (which is achievable on your equity in 3-4 years if you had a lucky break and bought well) is equal to 60 years of positive cashflow from a property that makes $10k per year. Of course, the ideal situation is to positively gear $10k and make $600k cap growth. But if I had to choose one I'd take $600k.

Are you saying he can make 600k CG in 3-4 years?


I don't think he has the serviceability for that plan in 3-4 years, though I could be wrong.
 
I really really liked Michael Yardney's 'Rules of Property' and learnt a lot from reading that.

I think it is a great place to start.
 
I think your definition of Capital Gains (CG) and Cash Flow (CF) may be backwards.

Melton is a nice area and there's probably going to be some capital gains, but its distance to the CBD, almost unlimited surrounding land (endless supply) suggests that it's not what I'd consider a long term capital gains prospect. Personally I think Werribee is a bit of a dead end. It's an old suburb in an area with a lot of new development going on all around it.

Inner CBD apartments are rarely cash flow oriented, in fact I don't think they're very good investments in either respect. There's more development that will be ongoing for years at what is usually an artificial price point driven by the nice new apartment, not by any real fundamentals. It is possible to invest well in the inner CBD apartment market, but it's high risk with a big downside.



It's extremely difficult to find anything cash flow oriented in Melbourne, all the way out to the outer suburbs. It's been this way for a very long time and has only gotten worse.

The price points in Melbourne have also become extremely high in the last 12 months which makes me wonder if we're nearing a peak. It's possible that after Christmas the market might just keep on going up, but I suspect we'll see a bit of a correction in the near future and possible a few years of complete stagnation (no significant capital growth). This would continue until the rents start to catch up with the property values.

If you're going to look close to Melbourne, I suspect Ballarat or event Geelong would have some value. Frankly though, most people I'm dealing with are looking interstate.

+ 1

The melbourne market for investors isn't exactly an appealing one

The only place I would consider for around the 350k mark would be frankston
Maybe a couple of places in the outer north but I don't know the areas there very well
 
As everyone has said CG is where the the big money is at but there is also a lot to consider. CG properties are going to be negatively geared and given your income and age then is this something you can afford? Do you have a partner, how much of the world do you want to see, want kids, how many?
Can you wait for the CG, not much use buying and paying closing and then needing to sell in 5 years adding on agent costs and CGT (unless you time the market perfect ofcourse).

CF may give you more flexibility to begin with. So long as you take the CF and pay down bad debt in your PPOR.

OR take on a development as you said. It WILL be hard work but unlike a standard CG buy and hold then atleast your not entirely dependent on what the market does to make your money.
 
On such a low income, yield will be important. Ask yourself this:

1) How many properties can you afford to hold that cost you $50pw in negative cashflow?

2) How many can you afford to hold that cost you zero, or better yet, put money back into your pocket?

CG is important, but you CAN get positive cashflow AND CG from the same property. It's the best of both worlds, especially if you are on a low income and can't afford to be losing money.

FWIW, high rise apartments will usually not be the place to find this kind of investment.
 
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