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Bryce Holdaway Blog post by Bryce Holdaway

The Secret Revealed: Should You Buy For Capital Growth or Yield?

Alright folks, I want talk today about the number one question I often get — “Should I buy for capital growth or should I buy for yield?”

My answer is very, very simple: it depends. It absolutely depends on what your strategy is.

So, first of all I want to make a very clear point here… strategy is number one.

What are we aiming for? What’s the end game? What are we reverse engineering? In our book, we talk about How to Retire on $2,000 per week in passive income — is that your goal? Do you want a thousand a week? Do you want $3,000 a week? Whatever it is, we need to know what your strategy is based on a couple of things. First of all, we’ve got a few levers that we can play with — time, target, income and expense. What does that mean?

When we’re building a portfolio it’s like pulling the levers on a crane, a bobcat or a bulldozer — you move these back and forth.

How much time do I have until you want to retire? Are you starting young or are you starting them later? What’s the target? Is it $2,000 a week? Is it a $1,000 a week? How much income do I have? Is there any chance of my income going up? Or is there any chance that my income will be going down — I’m going on a sabbatical, I’m taking a part-time job so I can go and study, all those sorts of things. The last thing is around expenses. What is your essential in your discretionary spend? Is it high, is it average, is it low? Those are the four things (the levers) that we can play with, which help us determine what the strategy is so we can work out what your end game is.

 

When it comes to buying property, there’s 3 broad strategies we can talk about.

The first one is to buy a growth asset, which is typically the ones closer into the major hubs, the CBDs, the main built-up areas. (Find out more on how to find one here.)

The second one is a balanced asset. You might find a balanced asset, for example, on parts of the Gold Coast, or parts of the Sunshine Coast, or investing in regional locations, where they’re close enough to a capital city job market so they’ll still get a bit of growth, but they’ll also have a slightly higher yield.

The third one is income assets. This is where we’re typically getting lots of rent. The cost to buy them is a bit lower. We often call these “Cash Cows”.

The question is, “Which one should you use?” Again, the answer is really simple: it depends on what your strategy is.

So let’s have a look at the difference between growth versus yield…

 

Let’s compare two strategies that look like this: the first one is 8% growth, 4% yield. The second one is 4% growth, 8% yield — effectively, what we’re doing is we’re comparing a growth asset with a yield asset.

(For clarity, please see the next section demonstrated on the video.)

So, if we have the growth asset doing something like that (video shows an upward curve), it has exponential growth, and then you’ve got income through here (shown in video). If you compare that with the yield asset, it’s growing through there (shown in video) and then you have the income that’s superior to the growth asset, and then it crosses through under here (shown in video). I know that’s a little bit rough, but the point is that the growth of the asset in capital growth is significant.

And then you have this scenario right here (shown in video), at about the 17 year mark, where the income from the growth asset exceeds the income from the yield asset.

So, you can see early on that the fact that you’re getting a little bit more income might help someone who is wanting to retire out your debt because they’ve got a few investment properties already and the extra income will start to accelerate the debt retirement. It might also be suited to someone who is on low income and they cannot afford to buy a growth asset — this will help them retire out some debt. Or this strategy might work for someone who’s close to retirement and doesn’t have a lot of time up their sleeve — this can also help them in the early days.

So it’s important to understand that there is no one-size-fits-all. I want to make that really clear.

So the question, “Should you chase grow or should you chase yield?” becomes my initial answer… it just depends on your strategy, on what you’re chasing. There’s definitely no one-size-fits-all.

What is it that we’re buying in the marketplace? Well, we’re buying many assets that are growth assets, many assets that are balanced and many assets that are income! Because we’re actually using real estate as simply a vehicle to achieve the lifestyle design YOU want, which comes from having an end goal of a passive income that we have reverse-engineered based on your specific circumstance.

But a typical portfolio might look like this…

We might buy 2 assets that are growth assets, then we might buy one in the middle that is a balanced asset and then we might bring it home with either one or two income assets. So you can see the capital base is growing via the growth assets, then we’re starting to level out the income and the debt on the balanced asset and then, towards the end of the portfolio, the idea is about retiring out the debt.

 

So there you have it, folks…  “Should I buy for capital growth or should I buy for yield”? The answer is it depends. It really depends on what we’re shooting for and the type of asset that is appropriate for the type of strategy you’ve put in place. So next time you’re faced with the decision of whether you should buy capital growth property or whether it should buy an income asset, the question really comes down to, “What is most appropriate for my portfolio right now?”

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