The discipline that one consistently demonstrates with their household budget (cash flow) will significantly influence how many assets one can hold, and the quality of their future lifestyle.
Separately, the total value of one’s asset base will be influenced most by a combination of:
- how long one’s capital is invested in markets,
- location selection through skilful property market intelligence, and
- the level of resilience in one’s investment strategy (spreading the eggs, etc).
8-decades of proof is a damn compelling critical mass of evidence that should give everyone confidence that a well-chosen property purchased today for (say) $650,000 is likely to be worth circa $2 million in 20-years’ time.
One would be wise to always keep this focus ahead of whatever ‘noise’ is occurring at a particular point in time.
The aggregate value of Australian residential property in 2024 was more than $10.5 trillion, less $3 trillion in home loans equates to a whopping $7.5 trillion aggregate value of equity in Australian housing.
Put simply, there are (literally) millions of households who have more than enough equity in existing real estate assets to be planting another ‘seed’ for the betterment of their future prosperity.
A significant portion of those households have the personal motivation to do something positive, but cash flow considerations end up being the cause of either putting off their decision to move forward or, often unwittingly, making a compromised decision to invest in an inferior asset type [refer here].
The framework for responsible household budgets and investment planning strategies contains a few key categories, one of which is combined household income.
Most working-age households across Australia are recipients of two (2) solid incomes.
With a bit of discipline, those who are 45yo+ and consider it important to one day exit the workforce and retire comfortably should be able to service an investment portfolio with 2-properties.
Higher-income households and / or those who started their journey earlier than most will have greater capacity to accumulate bigger investment nest-eggs.
CLICK HERE Asset-rich and cash flow-rich exit from the workforce
Over the last couple of years, an increasing number of people have received a rude awakening when they realised the extent of the current annual holding costs of an investment property.
Wannabe property investors with an expectation of putting (say) $100,000 of their own cash into a real estate asset and miraculously deriving a positive cash flow stream need a serious reality check.
Just as influential as the current high interest rate is the bigger mortgage that property investors now need to take out to purchase investment assets that cost considerably more than 3 to 5 years ago.
As Australia’s pioneer of borderless property investing, a ‘typical’ property purchased for a Propertyology client as recently as 2018 cost $500,000. The loan attached to it was $450,000 (90 percent LVR), the home loan rate was 4.25 percent, and the rental yield was circa 5.3 percent.
The pre-tax annual cost to hold that standard house in 2018 was approximately $3,000.
Current investment cash flow scenario
Fast-forward to 2024/25, a typical well-chosen, low maintenance detached house in a central part of any major urban area with solid investment fundamentals now costs $650,000 to $750,000.
Research insights: SUBSCRIBE HERE
Yes, there are various locations which have a ‘median house value’ below $650,000.
But reading a statistic from a device is very different to finding and buying a skilfully chosen meat-and-potatoes house that is likely to attract a bigger pool of buyers when one decides to exit the market, typically 15-20 years after the purchase.
And rental yields of 5 percent or more are a thing of the past. Although that won’t stop people from spruiking otherwise.
Using discipline to execute a sensible strategy for a purchase price of (say) $650,000 during 2024 often saw a rental yield of circa 4.7 percent.
Assuming the buyer’s LVR was 90 percent, a home loan rate of 6.25 percent, and the property was rented for 48-weeks of the year, the (pre-tax) annual cost to hold that standard house in 2024 was approximately $17,000.
The after-tax impact on the household budget will be circa $1,000 per month.
The lefthand side of the chart above illustrates that, all things being equal, someone buying a $650,000 investment property now with a 10 percent deposit will experience neutral cash flow from Year 15 onwards.
But the position improves significantly when interest rates decline (refer righthand side of the chart).
Someone expecting a cash flow neutral position from Day 1 would need to complete the purchase with a 50 percent LVR (assuming a home loan rate of 6.25 percent).
Looking ahead
Interest rates have flatlined for 12-months.
Everyone from the Prime Minister to the local plumber anticipated rate cuts to have commenced by mid-2024.
My professional opinion is that the current (net) rental cash flow shortfall is at its peak.
Regardless, the consensus is that an RBA cash rate decline cycle must commence soon (resulting in reduced interest expense).
Meanwhile, investment income from rising rent prices appears inevitable due to Australia’s continued dire shortage of rental supply.
Current ‘cash flow’ is an important consideration, but it should never be the primary purpose of investing in Australian real estate.
Make no mistake, households who fail to consistently display discipline and allocate 20 percent of their post-tax income (or $30,000+ per annum) towards their retirement nest-egg are setting themselves up for failure.
In the overall scheme of things, an after-tax outlay of approximately $1,000 per month is a relatively small contribution to hold a real estate asset that cost $650,000.
Invest with the best: CONTACT US
The purpose setting aside that $1,000 per month is to back 8-decades of history to repeat itself and the $650,000 asset grows to approximately $2 million over the following 20-years.
Sensible strategy
For perspective, the price to buy a standard house in most capital cities in 2024 is in the vicinity of $1 million.
And that standard house would be 15+ kilometres from the city centre.
But it makes no sense to inject $1 million or more into a solitary investment asset.
Particularly when decades of indisputable evidence confirms that ‘capital city’ and ‘region’ are nothing more the useless terms which have no bearing whatsoever on rates of capital growth or defining market risk.
What we do know is that properties which cost more to buy have an inverse impact on investment cash flows.
Here is a real-life example of how to intelligently accumulate a high-performing property portfolio.
Propertyology are national buyer’s agents and Australia’s premier property market analyst. Every capital city and every non-capital city, Propertyology analyse fundamentals in every market, every day. We use this valuable research to help everyday Aussies to invest in strategically-chosen locations (literally) all over Australia. Like to know more? Contact us here.
Here’s how we combine our thought-leading research with Propertyology’s award-winning buyer’s agency services.
