Cash flow vs capital growth – Steve Waters

Cash flow vs capital growth – Steve Waters

I guess it would be fair to say that there’s been a lot written and spoken about whether or not you should be looking at cash flow versus capital growth when it comes to property investing. Well, Steve Waters, who is the founder and director of Right Property Group says if that’s what you’re doing, you’re making a mistake. Today we will find out why.

Transcript:

Kevin:  I guess it would be fair to say that there’s been more written about and more spoken about whether or not you should be looking at cash flow versus capital growth when it comes to property investing. Well, Steve Waters, who is the founder and director of Right Property Group says if that’s what you’re doing, you’re making a mistake. Let’s find out why. He joins me.

Good day, Steve. How are you doing?

Steve:  Very well. Yourself?

Kevin:  Good, mate. Good to be talking to you. Thank you.

I’ve read your blog article. Explain to me just why you think it’s a mistake.

Steve:  I think mainly if you put all your eggs into one basket by either chasing the growth or the cash flow, you’ll be left short somewhere in the future. There’s this premise that if you’re chasing the high cash flow, then there won’t be the growth, and if you’re chasing the growth, there won’t be the cash flow. I think balancing the numbers is more to the point.

Kevin:  Where does it all fall apart?

Steve:  If we look at growth, as I say usually, it does. The higher growth properties, as I say, usually do have the smaller cash flow. I think if we’re comparing today’s cost of money, so interest rates, where perhaps people’s disposable income is okay, my fear is when it gets to 5% or 6% or whatever the average is, that these properties will start to a dramatic effect on the household budget.

Likewise, with the opposite being the higher cash flow properties, those who are chasing that alone potentially won’t have the growth. And at the end of the day, it is that equity or that capital appreciation that’s going to get us to where we want to be.

Kevin:  Is there a right and a wrong time? Let’s have a look firstly at cash flow. When is it time to look at cash flow?

Steve:  I think you should always be looking at cash flow. For me personally and how we help our clients, it’s more about building or creating that balanced portfolio. We’re looking to establish a portfolio that has some higher growth properties but also some properties that fundamentally have higher cash flow to support those negative cash flow properties. And this is all pre-tax dollars, of course.

Kevin:  I guess it comes down to your stage in life, too – doesn’t it – and also your risk profile, I guess, if you’re going to be chasing capital gains over cash flow. I guess early investors, too, have to sacrifice a bit of cash flow, don’t they?

Steve:  When we all first started, yeah, we did whatever it took. Once again, you do need that growth because it’s going to perpetuate you into the next property, because you can’t save the deposits quick enough, so to speak.

Once again, I’m a massive fan of balancing the numbers. Just like you would as a business, you’re looking at the bottom line and constantly adjusting.

Kevin:  How many people in Australia do you know are actually property investors and how many are multi-property investors?

Steve:  The stats, it’s around about 7% of people invest in property, and then it drops significantly those with multiple properties, and the more properties, the less a percentage.

Kevin:  What stops someone? They get one property, is it because they’ve made a mistake or their risk profile changes a bit that they don’t move on to their second or third property?

Steve:  I think it’s a good question. AI think it’s a combination. Usually, life does change, and it’s certainly no secret for those who have multiple properties that the more properties that you have, the more work is involved. It’s certainly not a passive asset vehicle.

Life does take twists and turns, whether that be more kids, education, and what have you. The household budget begins to shrink and the whole argument around affordability and what they can contribute from the household budget to support properties really becomes a major factor.

But I’d also say people’s risk profile has a lot to do with it, and sometimes just one is enough.

Kevin:  Steve, when someone gets to one property and they think “Oh well, I’m now a property investor, I’ve made it,” I forget the phrase you used, but it was almost saying that it’s not a “set and forget” proposition.

Do you think where a lot of investors probably go wrong is that they just actually start but never quite finish the journey?

Steve:  I think that’s a really good point. And with today’s technology, as we were speaking about earlier on, there are so much information out there that the consumer can really use to better their position in terms of due diligence, but it is a lot of work.

I think there is a little bit of a fallacy that their property is passive. Once someone gets one or two properties, the workload involved, and not just the workload, of course, but the ups and downs, the shorter cash flow months when there’s repairs and maintenance or higher cost of interest rates, whatever it may be, it does seem to taint the overall picture.

Kevin:  Is it a matter of being constantly vigilant, always looking at your portfolio, reviewing it, and looking at trimming off at the bottom – making your portfolio more profitable?

Steve:  100%. I think if you approach property as a “set and forget” or a passive asset vehicle, I think you’ll really do yourself an injustice. I know we are constantly reviewing portfolios. We do it every quarter for a normal portfolio, and I say “normal” in inverted commas.

But I think if you go and invest hundreds of thousands of dollars, it is something that you should take seriously and have your finger on the pulse, whether that be interest rates, rents, whatever it may be. It’s a big business to you.

Kevin:  Good advice. Steve Waters there, who’s the founder and director of Right Property Group. Steve, thank you so much for your time.

Steve:  Thank you. Appreciate it.

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Kevin Turner
kevin@realestatetalk.com.au
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