I had lunch today with one of the mrd team members. We discussed an article that I received today, written by a fairly high profile player in our industry. Our lunch time discussion inspired me to write this blog; which I trust will challenge some mindsets and paradigms.

The article attacked the notion of an investor focusing on capital growth, encouraging us to pursue cashflow in their property research; with capital growth described as “a bonus”.

As we chatted, my co-worker scoffed at this suggestion and went on to outline his personal situation and speculated on where he might be now, had he swallowed such recommendations when he was starting out.

In the 10 years since starting his investment journey, following the mrd “set ‘n’ forget” for busy people ^TM method of investing (even before it was called that) he has averaged 43% per annum compounding return on the equity he had invested. He had turned $20,000 available equity into about $800,000 – with little input of time on his behalf – using gearing and tax advantages to afford to buy and hold the best property he could.

He lamented at the thought of where he may have been, had he tried to find positive cashflow properties. There are many so-called gurus out there promoting such properties (and selling seminars and books on the same subject) however, as my team member commented, “they all seemed to be in way out places he had never heard of”. Most of the locations were heavily dependent on one or two major industries and the towns fortunes fluctuated with the market prices of these industries. Remember, a boom-town can become a ghost-town with a small shift of a commodity price making that industry unviable.

He said he probably would have given up in frustration trying to find let alone manage these older properties in such unpredictable locations. Like so many of us he has a busy life with little time to deal with his investments.

At mrd we follow and teach a simple strategy that we call “set ‘n’ forget” for busy people ^TM where the focus is on capital growth without losing sight of responsible cashflow management!

At the risk of sounding repetitious, we believe it is imperative for our clients to first jump through 3 hoops; before embarking on any investment decision.

1. Borrowing Capacity:

Firstly, an investor must have the financial capacity to purchase a property in an area which our research indicates should offer good capital growth into the foreseeable future (based upon population growth, supply of land and infrastructure spending etc).

2. Holding Capacity:

The second hoop is that an investor must have the financial ability to hold (i.e. service the shortfall) the property after settlement; without placing themselves or their families into hardship.

3. Mental Toughness Capacity:

The third and probably most important hoop is that they must have the mental toughness to follow through on their investment decision/strategy. My attitude is this: If you can’t put your head on your pillow and sleep at night after making the decision to invest in property then it isn’t “set ‘n’ forget” for busy people ^TM.

What is often misunderstood is that what is sold as a positively cashflow property is usually not; once the unavoidable costs of holding such properties are added to the calculation. Numerous people buy positively cashflowed properties only to discover that their new investment costs them in ways they had not imagined.

While it is relatively easy to promote and sell properties that have a positive cashflow, I have to question whether or not these groups are really doing the right thing by their clients…

• Poor locations
• An over dependence on specific industries
• Less infrastructure investment
• Ongoing repairs and maintenance issues
• More vacancies
• Less financially secure tenants
• A lack of capital gain to leverage from sooner

The above do not add up to “set ‘n’ forget” for busy people ^TM; nor pass points 2 or 3 in our “hoop test”.

The sad reality is that way too many people make irrational investment decisions, based on emotion, a lack of education and/or misinformation. Often they discover that their cashflow positive property quickly turns into a no cash flow property.

My lunch companion commented that he would not have the mental toughness to deal with the obvious issues that a portfolio of typical cashflow positive property would present. If it becomes too time consuming or unpredictable some investors opt for selling as a way of alleviating their frustration. This results in an opportunity cost.

My opinion and personal strategy is to remain clearly focused on capital growth. People don’t get rich on rents. In my colleague’s example, he has created about $780,000 in additional equity, which equates to about $1,500 per week, with little effort on his part. His properties have earned him more than his wages and his earlier purchases are now returning positive cashflow to him due to rent increases. In time, as maintenance issues arise he will be able to fund these from the equity growth his properties have delivered.

If my friend had tried to build an equivalent portfolio from scratch using a positive cashflow strategy, he would have needed 50 properties to achieve the same returns that he has achieved with just 5. This would have been a nightmare for him to hold and manage; again failing hoops 2 and 3… and probably hoop 1 as well! Given that a positively cashflowed property may only deliver a $30 a week surplus, after expenses and before tax, would that have been a wise decision?

The article that inspired this blog stated that cashflow should be your main focus and capital gains are a bonus. No, no, no… capital gain should be the focus of an investor and when our properties become positively cashflowed; usually after 3 to 5 years, that is a bonus (in my humble opinion anyway)! The result will then be a near new property in a sought after location and positive cashflow.

My focus is and will remain on pursuing capital growth along with responsible cashflow management. The mrd “set ‘n’ forget” for busy people ^TM strategy focuses on new or near new properties in areas of limit land supply and increasing demand so you have the basic economic factors of supply and demand working for you instead of against you. Such a property offers more choice of managing agents, more choice of tenants (generally better tenants), fewer vacancies, more consistency with rental cashflow, better depreciation and fewer maintenance issues; i.e. characteristics busy people seek (reliability, consistency and a healthy net return).

I accept that my opinions are just that – my opinions – and others will disagree. My strategy is no secret but the culmination of years of experience, mistakes and successes. I place much value on the combined knowledge of the mrd team. This knowledge is made freely available to you, if and when you are ready and comfortable. We welcome to join us on our journey; but wish you well if you are travelling a different (investment) road.

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