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Published: February 4, 2018

Capital growth or yield? Can I have both?

Whilst it is possible to have both
strong capital growth and
a high rental yield, it's rare.

How do you decide what is best for you?
Why not try to get both if you can?

Would you like to know how to buy an investment with a guaranteed 6.5% yield, in a strong capital growth area?

Would such an investment be ideal for your short and long-term goals?

The answer is not straightforward. Everyone’s personal circumstances differ, and different investment strategies bring different results. It is possible, and I will outline the details later. You need to understand what will bring profit and what will bring problems. But first, you need to identify what results you are looking to achieve.

Create your plan. Bulletproof your success.

To find the best investment property for your goals, you need to understand "you". This may sound obvious, yet many investors do not look at all their circumstances. This is well worth the effort and time investment.

The plan considers many things. It will look at your risk profile and if it is aligned with your partners. How your age and career impact your plans. Your current family situation and future. Your health, hobbies, location and residency. Your current and anticipated future financial situation and what is affordable.

Changed circumstances can create huge challenges to cash flows, especially when unexpected. The plan you create will incorporate your short and long-term objectives.  While we can’t predict the future, we can foresee likely outcomes if we identify a roadmap to follow. Start your investment journey with a comprehensive, well-considered plan.

Plan for the unexpected.

Life often throws curve balls. Sometimes they are welcome and sometimes they are not. An ideal plan will incorporate flexibility to cater for change, predicted or unexpected. Build in a financial buffer from the outset to bring stability and peace of mind. Be assured, the time spent to prepare the plan will deliver dividends in the long run.

Many investors fall into the "emotional” trap when buying an investment property. Most people love property and get excited when they see they see possibilities. The trap is when they focus on a specific property and lose sight of its ability to deliver their plan. They deviate from their plan to accommodate their emotional response.

As an example
We can take an average young couple, both working with reasonable equity in their own home. Their plan allowed for a portfolio to build over several years. It allows for their plans of starting a family and the financial commitment that brings.

While they have the capacity to borrow more, the first investment is more modest. This positions them well to go back to the market sooner, despite dropping an income to start a family. If they lost sight of this and spent to their maximum initially, they would limit their outcome.

You are less likely to become emotionally attached to a property if you stay connected to your plan. Place all your emotional energy instead, into creating your plan.

Dream big and refer to it often.

How do you know if you are ready?

Do you have a solid income, cash reserves or available equity in your home? Have you benefited from recent strong capital growth? If so, it's time to leverage the opportunity. Step one is to get your financial capacity established. Seek professional advice and understand the possibilities.

High yield and high capital growth potential.

From time to time, opportunities are available that have the “Magic Mix”. That is high yield and strong capital growth in the one property.

Several of our clients have been fortunate to enjoy these over the years. Some have purchased more than one. It does become addictive.

A display home is the builders’ opportunity to "show off" to the public what they can deliver. The builder sells the home to an investor and leases the home back for the duration of the land sales period. Most display homes sell at completion rather than off plan. This way, all upgrades and inclusions are in the price. You generally pay top dollar.

The property presents in premium condition inside and out. Landscaping is generally extensive. The builders know how to appeal to the emotions of homeowners looking to build!

The leaseback period varies depending on how much land is available for sale. At the end of the leaseback period, the property returns to the owner ready for a tenant in “as new” condition.

The leaseback rent is generally between 6% - 8%.

Sounds too good to be true? It can be. You must be very careful and know what to look for. This is where you need specialist advice. In our experience, 80% of leaseback properties DO NOT make great investments. Those that do, make excellent ones.

Leaseback Pros and Cons.

The positive advantages are:

  • Buying as a split contract for construction enabling stamp duty savings. Stamp duty is calculated on the land only.
  • Fixed price contract. Often the builder adds more inclusions- and you don’t pay for them.
  • Strong, guaranteed yield, 6%-8% paid monthly.
  • No vacancy or wait for the first tenant.
  • Property returned in "as new" condition, post leaseback. Often appliance warranty begins at this point.
  • Generally, a higher ongoing rent post leaseback.
  • High depreciation due to higher end finishes and inclusions.
  • No property management fees.
  • Higher level of landscaping than normal investment property.
  • Gardens well established by the time property is tenanted.
  • Homes in high-quality neighbourhoods.
  • Generally, builders build display homes in owner-occupier demand areas. This creates better growth potential.

Cautions when buying a leaseback property:

  • Careful examination of the post leaseback rental yield. It will be lower than through the leaseback.
  • Sometimes finance harder to achieve.
  • Unnecessary inclusions and upgrades.
  • Inflated pricing as the yield is high and sometimes built into the pricing.
  • Valuations can be an issue.
  • Buying completed display with high-level inclusions.

 

Good leaseback opportunities are rare.

However, when they do become available,
they are snapped up very quickly
by savvy investors.

When the mix is right - you have "Magic".

 Are you interested in knowing when these
"Blue Moon" opportunities become available?

Are you interested in chatting about
your plan and strategy? Let us know below...

 

Drop us a note and we will be back to you soon.

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