While I'm as interested in a positive cash flow for property as the next person, I'm also critically aware of how investors who simply search for high yielding property often create a situation where they never create any real worth from their property investing!

Often a property with a high rental yield for its purchase price is one which has that yield for a reason – and usually it's because it's situated in an area with a single industry, yet little in the way of available rentals.  These areas may experience periods of rapid value growth, but can just as quickly plunge in value, too quickly for the investor to exit the market, leaving them with a poorly performing asset.

While it's critical for investors to at least have enough in the way of yield to assist in the holding of a property, without growth to the value, there is little point to holding such a property. At the end of the hold period, the investor may be able to show a positive cash flow of $20 or $30 a week, but their own net worth will not have improved from the exercise.

And so, if we understand that a very low yielding property is also just as inappropriate, since such a situation can result in both early divesting of the asset (when the costs of holding become too high) and the limiting of adding to the portfolio (when the investor cannot afford to ‘prop up’ additional properties), then it’s clear that the skill in property investing lies in the ability to pick assets which have the potential for future growth, while they have a suitable yield now.  In addition to this, understanding how claiming on-paper deductions, such as capital works allowances on the building, can substantially improve your net cash flow position is knowledge that all investors should have.  This then allows them to make better choices when two properties in the same area are presented – picking the one with the better on-paper deductions can improve the cash flow on that asset, in turn providing more funds to meet expenses and pay down debt.

To achieve this, the investor has to understand a few important points:

  • Present hotspots, or areas being written about, are likely to have already achieved their best period of growth.  Areas usually only make hotspot lists when they are already hot.
  • The adage that the closer to the city you can get, the better the growth, is not correct.  Many suburban and regional areas have performed exceptionally well, often beating the performance of inner city properties, when they are purchased just prior to a major growth spurt.
  • Key growth drivers include a fast growing population, abundant infrastructure planning, diversified employment opportunities and a median household income which is growing faster than inflation, often off a lower base.
  • Blue chip areas may have been good investments in the past, but once they are blue chip then you have most likely missed their best years of growth.  By that I mean that they will maintain their values and still grow, but are unlikely to experience the kind of ‘boom’ growth we would all like to see in our portfolios.

The other driving force behind growth in an area is the dominance of the family demographic in an area.  Families tend to anchor to an area and, rather than move away, move up.  Once children are in school people tend to stay, making the availability of property in the area scarcer.  Where such an area also has the fundamentals above, and is becoming a more desirable prospect, pressure will build as demand takes over supply, pushing up prices, even when those prices in other areas are stable.  This usually happens in areas with highly affordable property, where the yields are higher than they are in inner city areas but where the commute distance to employment is manageable.