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Understanding the Difference Between Income Generation and Capital Growth

Transcription of video below:

I’ve got my glasses on because I’ve been sat down running some numbers and I thought I’d share some ideas with you. 

This is focusing now on the strategy of cash flow versus capital growth. As an example, I can show you a property in the middle of Sydney where I might buy it for $600,000. And even if I rent it out it may not produce a positive cash flow. In fact I can tell you it won’t produce a positive cash flow for me.

Similar situations occur if I went to Singapore, for example, and bought myself a four, five or $600,000 apartment, there is no way I could get enough rent to produce enough cash flow for me.

The problem is the yields are very low and the yield is basically gross annual rent divided by the purchase price of the property. That’s a very low yield if I do the calculation, i.e. rent, minus mortgage minus other costs, what’s the net figure at the bottom.

Now where I’m based here right now if I took a trip up about two hours up into the middle of the North of England I can actually buy a property for about £100,000. I could put five tenants in there produce rent of maybe one and half to £2,000 per month, if that’s dollars you can double that I guess roughly based on where you’re at. Take off my mortgage, take off my running costs and keep about seven, eight, £900,000 a month. 

That’s a good cash flow. 

Now what I wouldn’t get there is the capital growth. Whereas if I buy a property in the south in Bristol, in London, some of the southern areas I know that those markets will go up in value. Whereas if I go into the middle of the country the North of the country, what I’ve got is a situation where the capital growth is flatter. In the south it might be like that in the North it might be flatter, but what I’m getting is the cash flow.

And if I buy five or 10 of those and they’re producing for me £500 to £1,000 a month, I’ve got somewhere from two and a half to £5,000 a month net cash flow. 

If I took it to Sydney or Melbourne or Adelaide or Perth or somewhere like that. Yes, we can buy properties at a high price. And potentially we can get capital growth assuming the market does allow us to grow, but what I wouldn’t get is the pure cash flow. Even if I went to New Zealand where you can get some cash flow. You probably wouldn’t get as strong a cash flow as you might do here in the United Kingdom, but you might get a mixture of cash flow and capital growth.

Again depends if you’re looking at a standard rental property or a multiple let property where yes it will actually produce more cash flow for you. So what I’m saying is this, if you want to live from your portfolio actually, the chances are you might be living in a country where that cash flow from those properties isn’t going to be achievable and that raises the question in your mind, well if it doesn’t work here I can’t make myself financially free.”

And that’s not actually true because the big question you need to ask on the back of this video is okay, if it doesn’t work in the area that I’m living in is there another area that I can get it to work?

And the answer is yes, and I had to do that even based here in the United Kingdom. So if you’re looking to feed your kids and create a financial freedom status. That means you’re going to have to live off the properties, which means you can’t buy properties that are based purely on capital growth. 

All capital growth really does for you is some time in the future,15 to 20, 30 years when you’re a little bit older and you’ve got your zimmer frame and you’ve got your thick glasses or whatever, you will be able to cash in, i.e. sell those properties. Of course you’ve got tax attached to that and then you can pull profits out and you could argue you could live off that. 

But my question is, why would you live 25 years in the future off money that you started earning today by putting into the capital i.e. wait when you could actually build a portfolio that could feed you today and look after your lifestyle today. And live off the benefit of that, albeit you wouldn’t get as much capital growth in the future. 

There is a provocative question which would you prefer?

Would you prefer cash flow now with some capital growth in the future, or no cash flow now maybe even have to support it and the hope that you’ve got more capital growth in the future?

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