TPP577: Cashflow vs Capital Growth: Which wins?

Hey everyone it's Robby here with RobD and you are listening to the Property Podcast and this week battle lines are drawn. We have two juggernauts going head to head. We have team cashflow or rent and team capital growth. We know people get passionate about this and this week we're going to find out who the winner is. Yes, welcome to the Property Podcast. Thank you for joining us. This is the show where we share what we've learned from more than a decade in the industry and doing over 100 million pounds worth of property deals per year. Doing that over a long period of time and seeing how things pan out brings you a lot of perspective and that is what we are hoping to bring to this capital growth versus cashflow debate to settle the matter once and for all. So that is coming up. I make sure you stick around to the end because in hub extra Robby is bringing a resource that will entertain you and shock you. That's time for our new story of the week. This one is a new story. You may have not picked up on because it's not one that's made national press but it's an interesting one and that's one of the wealthiest people in the country, the Duke of West Minister. His company, his property company called Growfner has started their lending arm for residential property and they're looking to lend 900 million pounds. Now this is interesting for a couple of reasons, one such a big plague coming into the market and sees this as an opportunity, but two, that there are more people just come into the market in general and lending is improving for developers. Why does this matter? Well, a more active property market is normally the sign of a better property market and it also shows confidence in the sector. This is starting to become a norm now, positive signs in the property market, good news. But remember, last year it was such a distant place from where we are now, it's just incredible how quickly this changes. So of course we'll keep you updated with these trends that are happening. This keeps your head of the curve than most of the people operating in the property industry and that's our job on the property pod class to keep you ahead of the curve of others who are operating in the property industry. You can see these green shoots coming through, you can see the positivity in the market. The major headlines might not be reflecting that yet, but in time, I think they will. Well, that's good, ready to rumble battle commences today. We have two tribes going to war, cashflow tribal or the rent tribe or capsule growth tribe. There is some passionate people on the internet who say you should only ever focus on rent. You have others that say you should only ever focus on capital growth. You have us in the middle, let's say both are great, but one is more powerful and you may know what the answer is already, but we might be wrong and in this episode, we might change our opinion because we're going to bring those two tribes together and we're going to decide what is best, is it best to focus on your rental income or is it best to focus on capital growth, which is the one that will make you the most successful in property investment? Yep, we are basically going to bring everyone together, shout, fight and then run away and let everyone go at it and we'll end up walking away on scale, hopefully. But for anyone who's not familiar with where battle lines have been drawn in this debate, let's see if I can sum up each argument in the ultimate nutshell. So cashflow is what matters, right, is what you can see, it's what you know you're going to get and it's what ultimately pays for not just your properties but your lifestyle as well. So you've got to have the cashflow. But then on the other side, the capital growth advocates are saying, cool, but your 200 quid rental income doesn't buy a private jet. Ultimately, it's the growth in the value of the property that matters. So anything that compromises that is a compromise, not worth baking. Now, I think before we get into a more detailed examination of each side, it's worth acknowledging that there is always a tradeoff because of course you'd rather have both and you can have both, but you've got to choose to lean towards one or the other. You have and let's explain why. So if you go for a property that's focused on rent, it's probably the type of property that will struggle to get the capital growth that other areas can get. So an example of an area where you can get quite strong rental income is whole. The yields that you can get in whole, particularly if you go the cheaper end of the property market, are super, super strong. Yeah, the capital growth in that area has not been so strong. But there are other areas, let's say central Manchester, where the yields are okay. They're perfectly acceptable, but nowhere near as high as whole, but the capital growth has been phenomenal. So it's that tradeoff, you can still get both, you will get a bit of capital growth for yield-focused properties and you will get rental income for capital growth-focused properties. But you will get less of the second one, whichever one you prioritize, you'll get less of the other one. And by the end of this episode, you should know which one you should be prioritising. Yeah, and you need to know because otherwise you'll guarantee to end up disappointed. And Rob, actually, I think it's important that you are prioritising because if you're not doing either, then you're probably really failing. You should have a strategy laid out and you should know what you want in the long term. And then the right type of properties will be slotted in. If you're not picking a property for rental income or capital growth and you're just picking it because you generally like it, then you're probably not doing as well as you should be. So if this focus and this choice is really important. Yeah, exactly. We ran a webinar a couple of weeks ago, but we went through our strategy and the properties that we bought with that strategy in mind. It was super popular. We might run it again at some point, but we started by saying, this is our strategy. This is exactly what we're trying to achieve. And then we showed here are the properties that we bought with that strategy in mind, and you could clearly see how one mapped onto the other. We also said at the start, this isn't going to be everyone's strategy. So if you had the opposite strategy, these would be terrible properties to buy. For this strategy and this strong viewpoint in terms of what we want, it's something that we've developed over years. And we've both spoken in the past about mistakes that we've made on stumbling along on our way to that strategy. So if this episode can shave a few years off that process for a few people, then that'll be 20 minutes well spent, in my opinion. So let's get into a more detailed breakdown of each of the arguments then and Rob, do you want to open up the case for cash flow? Let's do it. And the first and big one and those who in pro cash flow camp will say, you can't eat capital growth. Yes, your wealth on paper might be going up, but that doesn't pay the bills. The rent that lands in your bank account, that's what pays the bills. That's what puts direct money in your pocket. That has to be the strongest argument for focusing on rental income, because it's money that you know is coming in, you know it's going to happen. And then most of the time, you know it's consistent and it'll go up with inflation generally over the long term, it's just the great predictable income. Also, it's instant. Once you rent that property out, the income starts, the capital growth might take time to kick in. I'm certainly will take time to kick in. And if you ever access the wealth from the capital growth, that's going to be in a few years' time. You get the benefit early on through cash flow, so the money starts going in your pocket or your bank account and it starts to build up. Hopefully, you're not spending it each month and it's all going away. So it's great. You are getting instant reward for the investment you've made. And like I said, it's predictable, it's stable. You may be aware that over the long term, rental income tends to follow inflation, so it's pretty much inflation proof. And with capital growth, it can be stable at times. It might go up, but it could go down. Rental income is unlikely to go down, very unlikely, it's possible, but unlikely. The drops in capital growth can be far more volatile than rental movements. So rental incomes normally just steadily move upwards over time, normally. We've had quite a lot of rental growth recently. But what you don't see ever reported in the media because it rarely ever happens is rental crashes. You don't see rental prices only crashing in different areas, that doesn't happen. So that's stability. That predictability means that cash flow, Rob, is powerful. How's that for an argument? Other one? It's a great argument. And you can't refute any of those points. And for me, it's the stability point that is the most persuasive because something completely nuts could happen in the global economy next year outside your control and you end up losing capital growth as a result. But like you said, in order for you to lose rental income and for that to go backwards, something very, very serious would need to have, but I can't even think what it would be. So the cash flow arguments are strong. But someone on the capital growth side would say, yeah, yeah, see all that, it's all true, but you're missing something. What you're missing is that over time, it's capital growth that is going to make up the line share of your returns from property. Just look at people who bought a property for £10,000 in the 70s and today it's worth £300,000 or even buying a property in the 90s, but even buying a property in the 2000s. That property will have done exceptionally well for them and it's not because it's been bringing in a little bit of money every month. That's nice. But what really makes the difference is the fact that that property has flown up in value. But here's a crazy thing and for me, the most persuasive argument for focusing on the capital growth side of things, which is the reason that property has flown up in value over that period. And yes, some of that has to do with house prices themselves. Some of it has to do with the population growing and not enough houses being built. Some of it has to do with interest rates and the cost of debt and all of these factors that may or may not play out in the future. But a large, large part of it is because of a factor that has played out in the past and will definitely guaranteed play out in the future until the financial system crumbles when we start again, which is inflation. And by using mortgages, you effectively get to leverage inflation. So the way I tend to explain this is that if you say you're putting in 25% of the money to buy a property, so you can almost think of the property being divided into four buckets and you're putting in one of those. Then inflation happens and it lifts the value of that property. And let's say that that difference is 2%, so every bucket gets 2% added to it. But because of the way mortgages work, you get to collect all of those 2%, even though you only contributed a quarter of the funds. So effectively, from a 2% increase, the return on investment that you've made is 8%. Now, in practice, there are taxes and costs and things like that. So I tend to water it down and say that you can multiply the growth by 3, but even the fact that you can multiply the growth by 3 is massive. So to take this a step further, let's say that you manage to identify a property because you're focusing on capital growth that grows 1% faster than an alternative property that you could have bought. Well, multiply that by 3, and that's a 3% difference for you in terms of your return on investment. You would need to be collecting a lot, lot, lot, lot of extra rent from the other property to make up for that. And that is only over a single year. So given that that fundamental force is in place and there's a possibility to take advantage of that and maximize it, who's insane to do anything other than focus on capital growth. So, who's the winner, who are you voting for? Is it Team Cash Flow or Team Capital Growth? Well, actually, it depends. There is a winner, but it will depend on you and what you want. So if you need income in your life now in the short term, whether that's to supplement your income, if it's to start to allow you to move away from a job that you don't want to do, then it's probably going to be a rental focus strategy. You buy properties, get enough rent in, that you can then quit your job, go travelling, do extra things that you've wanted to do, whatever it might be, that would be the strategy for you. If you're in it for longer term, so you're quite like what you do right now, you're in no need to change your job, your role, you're very much focused on long term wealth for the future, then capital growth is absolutely the winner. With a long term, capital growth will deliver more wealth. It will, it will deliver more wealth for the reasons that Rob's laid out already. So capital growth over the long term will deliver more wealth, but for some people, they can't wait for the long term. And that's okay, for Rob and myself, our focus is the long term, and you know what, when you focus on the long term, the rent income builds up anyway, it's not that you don't get any, you do get that as well. And for us, it's absolutely the right strategy to go for, but I completely understand that cash flow is right for other people, and I've seen it work well for other people as well. So there is a winner, but it's the winner for you. And now if you're one of those people who wasn't really focused on what type of property to go for, and maybe you just had a favourite area that you like to invest in, well actually, this should be a wake up call for you. What is your strategy? Are you in it for the long term or do you need income in the short term? What is it? Once you can answer that question, should start to dictate the type of properties you go for, and also the areas of those properties that you go for, because the area you're investing in right now may not be the best setup for what you're trying to achieve, so you may need to adapt. Doesn't necessarily mean you need to invest across the other side of the country, Rob and I do, but for example, if you're rent focused and you live in Oxford, it's going to be difficult, so you're going to have to look further afield from Oxford until you find an area that will deliver those strong rents that you want. Something else I think is worth saying is that there's danger lurking at both of these extremes. If you so if you see income and capital growth as a spectrum, then you probably want to knock off the extreme sort of 10% at either end, because if you go for super high yield, so you go on right move and you find the cheapest property you can possibly buy with the most amount of relative rental income, then maybe you'll get lucky, but in every case I've ever seen of this ever, that will bring problems, and you actually won't end up collecting some of that rent at all, because either the demand won't be there and you won't have any tenants, or you'll have tenants who struggle to get paying and so on and so on. But then all the way down at the other end of the spectrum, there's also danger. Because if you're going purely for capital growth and you don't have enough income, that puts you at risk, because if something happens and you can't make your mortgage payments, then you lose the property and you end up with nothing at all, and we had situations in the last financial crisis and I'm sure we'll have it again where people were buying properties purely because of the growth, they were having to supplement the property every month with their own cash just to keep hold of it, and that is a dangerous, dangerous game. So it's not about going to one extreme or the other, it's about finding the right point for you in the middle of this spectrum. And all points are good, it's just about what works best for you. For example, I've got some properties in London, which I've owned since I've very first started investing and I bought them because of a focus on rental income. They had the highest yields that I could find at that time. And because time has passed and London's world for a few years and inflation has happened, those properties have doubled and that's great, that's really, really good. But there are properties about a quarter of a mile away, they have tripled in value over that time. And the difference between doubling and tripling could have been at least £200,000. Would those properties that tripled in value have produced less of a rental profit relatively? Yes, they would, but £200,000 worth? No. So at the time, my strategy was on income, so I did the right thing for me then. In retrospect, I rather would have had the tripling than the doubling. But the point is, over a long enough period of time, all outcomes are good, but some outcomes are better than others depending on you and what you want as long as you stay away from the extremes. So make that decision. What tribe are you in? What side of the battle lines do you lie on? You need to make that decision, because being an investor, no man land is the worst place to be. OK, one thing that we can all agree on, is it getting a bit extra is a good thing. And that's why we bring you hub extra before we wrap up the show, a little resource that we found something extra that we've enjoyed that we think you might as well. And Rob, this week, the honour is full to you. Yeah, I've picked up a great film recently, it's a doc you've filmed, and it's called Inside Job. And actually, it came out in 2010, so I've not quick to pick this one up. I watched it recently on a flight, and it's a doc you film on the financial crisis, the 2008 financial crisis, and it is so well done. It's narrated by Matt Damon, so it's just great to follow along and listen to his wonderful voice. It's brilliant from start to finish, and you will be amazed. I know the story of the financial crisis, I know how it unfolded, and why it unfolded. But I still enjoyed the process of going through that. What I didn't realise is the level of corruption involved, and this is not sensational stuff, it's not conspiracy theory stuff, it's just the sheer level of corruption. And if you feel that you're disappointed with the bankers for getting this in this mess, I'm most disappointed with the politicians. It is crazy some of the things that went on. But I won't say anymore, I believe it's available on Netflix and Disney, and if you can't find it there, I've found it on YouTube as well, where you can watch it for free. So there's no excuses, you can all watch it. Don't go, oh I know all about this already, so it's not for me, I promise you, there was things in there that I picked up for the first time, and it's just your dropping of points to some of the stuff that went on. So that's our hub extra little week, inside job, great film, well worth a watch. Looking forward to that, sounds right up my street. So we've delivered our side of the bargain this week, we've brought you an episode, hopefully you found it useful, it's made you think, maybe it's even intersained you, although that could be pushing it. But now it's your turn, because we make a handshake deal on this show. If you've enjoyed more than a couple of episodes of the podcast, then you need to pay for it. And you need to do that by either going over to our YouTube channel, so go to YouTube, search for Property Hub, and subscribe to our YouTube channel, where there's any video for you to enjoy every week, so you get a little extra something there as well, or pass the show onto someone else. Growing a podcast is really, really hard. The way that this podcast is growing over the last 10 years is by people like you recommending it to their friends and their colleagues. So let's shake on it right now. Do one of those two things, and we will keep going and bringing you more episodes like this. We will. We'll also be bringing you more on Tuesday when we'll be back with Ask Rob and Rob. And of course we'll be back with the podcast, same time, same place next week. But if that's not enough, check us out in the home section of the Sunday Times as well, where we'll be answering your questions there as well. So plenty to go out. Lots of property good this for you all. Until then, take care. Have fun. Bye-bye. [BLANK_AUDIO]