There has been a common question from property investors of late and it’s all to do with cash flow – or rather yields.
You see, some new investors have become so fixated on the higher interest rate environment that the only thing they’re thinking about is cash flow.
They’d rather search far and wide for a high-yielding property than spend the time necessary to find an income- AND capital-producing asset.
There is no question that the interest rate increases since May last year have impacted an investor’s cash flow – even with higher weekly rents.
However, this is probably more the case for relatively new investors, rather than those of us who have been in the game a long time.
That’s because, when interest rates hit record lows and our formerly neutral or negative cash flow properties suddenly turned super positive, well, us longer term investors just enjoyed the ride while it lasted and perhaps even used some of the excess funds to put towards our property loans.
During the course of every property investor’s journey – if they hold for long enough, mind you – you will experience periods of low and high interest rates. There will also be times when property prices are sluggish, flat, or soaring. One thing that has never changed, mind you, is the long-term performance of quality real estate assets, purchased for their potential for superior capital growth as well as solid yields.
Now, I didn’t use the word “solid” by accident when I was talking about yields, because no one ever got moderately rich by chasing cash flow properties alone.
Sure, everyone needs cash flow (or rental income) to service the mortgage repayments but having $50 or $100 a week leftover is not going to make most of us rush out and buy the latest Tesla.
However, a property (or properties) that have the potential for strong capital growth (and a yield that you can afford) over the medium- to long-term can make a massive difference to your financial future. These are the types of dwellings in consistent demand from buyers as well as being located in areas on the up-and-up.
Capital growth is key
The latest unemployment figure was an increase to 3.7 per cent in July from the record low of 3.4 per cent recorded in October last year.
The result has been seen by many economists as a sign that interest rates have peaked, plus, we know that inflation is already moderating faster than many forecasters expected (isn’t that ALWAYS the case).
So, say, in a year or two, we have interest rates down in the four per cent range, which is possible and still low by historical standards, how would you, as an investor, feel if you found yourself the owner of a property that was cash flow positive but was unlikely to ever increase in value overly much?
Perhaps it is a new house in a master-planned community on the city fringe that you bought as a knee-jerk reaction to the high interest rate environment and your fixation on chasing cash flow over everything else.
You probably won’t be thrilled about it, would you?
And that’s because interest rates might rise and fall over your lifetime, but quality property never goes out of style.