09 Mar Myths: You can’t get good cash flow and capital growth at the same time – Josh Masters
Recently we heard in the show that investing in property is not all about cash flow. Rather we should be looking at it as a high growth low yield investment strategy. But is it possible to get both cash flow and capital growth in one property. Josh Masters, from the website buyside.com.au, says yes and he tells us how today.
Kevin: Dispelling another one of the myths, and that is that you can’t get good cash flow and good capital growth at the same time. Let’s find out if that’s true. Josh Masters joins me. Josh, of course, is from the website buyside.com.au.
Good day, Josh. Good to have you on the show again. Nice to be talking to you.
Josh: Thanks, Kevin. Good to be here as always.
Kevin: Is it possible to get good cash flow and capital growth at the same time?
Josh: I think it is. It’s definitely possible; there’s no question about it. There have been a lot of properties in history that have done that. Some of the properties that just came off the top of my head were some of the mining towns where we saw exponential capital growth happening because of the strong demand in mining. The captured market really made a renter’s paradise, as well.
It’s almost the quintessential investment – isn’t it? – something that gets yield and growth, but it’s very rare. I think the question is probably more around do you want to risk something for the yield and the growth together, because it is a high-risk investment?
Kevin: It is very high risk. You mentioned mining towns. We’ve had a good look back on that. That was all about the timing, wasn’t it? It was possible to get both, but there were places like Moranbah where unless you actually pulled out at the right time, you were in for a fairly major capital loss.
Josh: Yes, that’s right. Exactly. That’s where the risk comes in. You can never try and time the market. It’s one of those things that you just don’t know when it’s going to happen. It’s great for the period of time that it does and everyone is making a fortune, but over time, everyone piles into it. Karratha was another one. Moranbah, of course. Port Hedland. All these were stellar performance for the time that they were there, and for those people who got in early, they did really well.
There are exceptions in the market. I have found there are some high-yielding properties. For example, let’s take Western Sydney. If you had invested five years ago, you would have gotten almost positive capital growth there. You could have probably picked up 6.5% on your yield. Now, that would have been great in a low interest rate environment, but as the market progresses, people throw more money into it, prices rise. Those price rises suddenly, bring on the capital growth, but the rents don’t keep pace. It’s not a captured market like you would find in a mining town, so what you’ll find is the yields drop.
Now, if you go out to Western Sydney today, they’ve had great capital growth, but now the yields are sitting around 4.5%, which is actually pretty good for Sydney right now, but it’s still in a negative-gearing situation for most people.
Kevin: What do you prefer in your own investments, Josh? Do you look for cash flow or do you look for capital growth?
Josh: Personally, I’m all about capital growth. Many of the clients who come to me are looking to build wealth for the future. They’re looking to do it in a reasonably low-risk environment, and they want a safe investment, but they want to build their wealth over time, and they can afford to put a little bit of money aside for the negative gearing allowance. That tax benefit also helps them.
In my opinion, if you really want to grow a portfolio and you want to grow your wealth – which everybody is in it for, generally – it has to have capital growth. If your property sits there for ten years and it doesn’t grow in value, if you’re making $5000 a year in your hand over each of those ten years, it doesn’t count for much if that property hasn’t made significant gains on it price.
I’d rather invest in something, for example, in Sydney, where ten years ago, the price might have been $500,000, and now it’s $1 million. Suddenly I have $500,000 in equity, half a million dollars in equity. It makes that paltry $5000 a year in positive income almost insignificant after taxes are taken out.
Kevin: Josh, great talking to you as always, and thanks for your time.
Josh: My pleasure, Kevin. Thanks for having me.