CG Versus Cashflow – which type of Investment Property should I buy next?

As investors, we always ask ourselves whether the next step is to purchase a Capital Gain (CG) focused or Cashflow focused property to add to the portfolio. I was no exception, and having gone through purchasing 7 properties now I thought I could share some of my own experiences in this regard to help everyone decide where they could go from here.


If you look at my current portfolio, the roles and underlying thinking of each property are:
1. IP – Granville unit, NSW – CG
– 1km to train station
– Granville is in close proximity to Parramatta, Sydney’s second CBD

2. PPOR – Hornsby unit, NSW – CG
– 500m to Horsnby train station, 700m to Westfield shopping centre
– Hornsby is self-sufficient. Has a Westfield, hospital, plenty of good schools around the suburb.

3. IP – Slacks Creek house, QLD – Cashflow
– Highset with rumpus and bathroom downstairs to be able to rent out for more
– Can also expect some CG component due to close proximity to Springwood (based on Greater Springwood Master Plan)

4. IP – Woodridge house, QLD – Cashflow
– Highset with downstairs not fully built out. Can be made into dual-living
– Existing powered big shed can be converted into granny flat

5. IP – Murrumba Downs house, QLD – CG
– 500m to new Kallangur train station
– Within 2 km radius to Petrie train station and the upcoming new University of Sunshine Coast

6. IP – Eagleby house, QLD – Cashflow
– 750SQM corner block, can be subdivided later down the track if desired
– Perfect configuration for Granny Flat from side street

7. IP – Newcomb house, VIC – CG
– Within 3km to Geelong CBD
– 2 bedroom to 3 bedroom transformation to manufacture equity

So within the portfolio 4 are defined as CG player and 3 as Cashflow player. If we exclude the PPOR, then it’s 3 CG and 3 Cashflow. In essence for every 1 CG player purchased I would buy a Cashflow player to offset the negative cashflow, and make the portfolio easier to hold long term.

Because most of my portfolio are based in QLD the general yield is not too bad. For example even though Murrumba Downs was defined as a CG player by me, it’s gross yield during settlement was at 5.4%. At that time my intention is to offset with a cashflow player so I looked at Logan again, picking Eagleby, which was returning gross at 6% yield from day 1. Later on if I build a GF, can take the gross yield over 10% easily.

By having this concept in mind, that’s when I was able to take more risk and jump into the Geelong market in early 2017 and focus on picking another CG player. Note Newcomb’s gross yield from day 1 was only at 5%.

For investors in the current environment I would suggest you review your portfolio to determine the yield and cashflow that the portfolio is doing for you. My general advice is for each CG player you would want to offset with at least 1 cashflow player. If your CG players are heavily negative (say at 3% gross yield) then you may want to consider offsetting with 2 cashflow player at 6% or even 7%. The goal is to try bring the overall portfolio cashflow to positive if not neutral which will make it easier to hold long term.

With interest rate currently at record level, this is one strategy to mitigate the risk of having to force sale any of the IPs when interest rate returns to 6% or even 7% historical level.

As always, if you have any questions about any of the above content feel free to leave a comment or reach out to me directly using the contacts form.

Cheers,
David

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