Cash Flow verses Capital Growth, the 64 million dollar question...over a burnt snag

We all know that Australians' favourite topic over a weekend BBQ is the property market. And further to that, each of us has their own selected strategy. The most common two being, buy for cash flow or alternatively buy for capital growth.

After 25 years working in the property space in many different roles, I've observed many variations of the above, and I've also played in each space myself. I don't attest to having the secret sauce, but I can tell you firsthand about my experience with the above.

Some years back, "we" (I can hear Julie in the background reminding me it was a we, as I pepper her with questions) bought an old house in the thriving metropolis of Coonamble for the massive sum of 85K. If you don't know where Coonamble is, just drive west out of Sydney and keep driving for six and a half hours (we actually never went there during the entire time we owned the property). The property had a government-sponsored pensioner in it paying $200/week in rental. So that's a whopping 12% gross rental yield. I needed to test out this whole positive cash flow idea for myself.

After property management fees, rates, repairs, mortgage payments (we put an 80% interest-only mortgage on it), we were left with around $5,000 for the year, of which we then paid income tax on. Nothing too sexy about that! We sold it after about 7 years from memory, for $108K, which we were quite surprised by given the town is renowned for unemployment, domestic strife, and break-ins, etc. Even writing this, I'm thinking to myself, why did I even entertain this whole thing? So once you take out agents' fees, tax, conveyancing, and all other outgoings, I'm estimating we made about 45K. Given we put in about 20K in cash, you could say we more than doubled our money. Seems like a lot of work, and again in the sales exercise, I think we were very lucky as most properties in town can sit on the market for 6 months or more.

I suppose if you had 10 or more of these, it may start to become a little more appealing. I can tell you the person who put us onto the area did own a lot of them; however, his life was plagued with transient property managers and nightmare tenants due to the low socioeconomic status of the town. So is it really a good strategy?

It's very hard to compare this strategy to that of buying in a capital city and perhaps being negatively geared and out of pocket each year but riding even a 7% growth rate. Yes, you need more money upfront to purchase. But even if you're out of pocket 5K a year but riding at 7% capital growth per annum on, say, a 600K property, that's $259K in equity over 7 years if you sit on it and don't sell.

Of course, we could dig down and pull this apart even more. We did do the above also both in Sydney and also Melbourne. So for me and my burnt sausages as I explain the above to my mates whilst trying to control the resultant fat fire and my lukewarm beer, I'm for capital growth instead of cash flow every day of the week. And if you try and tell me I can have both and you're going to sell me a course on how to do that, I'll never invite you around for another BBQ ever!!

Andrew Nott