One of the common mistakes that new investors make is focus too much on cash flow and not capital growth or vice versa.
Now that might sound a little confusing, but the fact of the matter is that you need both to grow property wealth over the years.
That’s because it is the capital growth of your portfolio, or the increased equity, that will make the biggest difference to your financial future.
However, to create significant property wealth you not only need to own a number of strategically selected investment properties, but you must also have the ability to hold them for the long-term.
And when I say long-term, I mean decades and not five years, which is another mistake that novice investors make as well.
Of course, this is where cash flow comes in, because without it you have no hope of holding the assets long enough to grow in value in any substantial way.
Why cash flow matters
Cash flow is predominantly the rent that is paid by tenants to live in your investment property.
Over time, that figure generally increases, while your property loan generally decreases, which means that the cash flow is helping to pay off your mortgage.
Cash flow can also mean an investor’s own financial reserves, which might be drawn upon in times of need, such as a vacant property or the coronavirus that we are currently experiencing.
All successful property investors have cash buffers of sorts, which are available to them, however, it doesn’t necessarily mean thousands of dollars in their bank account.
Most investors have access to a line of credit or an offset account that they can use to cover mortgage repayments if their property is empty for a long period or their tenant simply vanishes one night.
Likewise, landlord insurance generally include cover for rental default, depending on the insurer, which investors can access, including at the moment, again, depending on the insurer and the level of cover.
Under the current coronavirus situation, investors also have the option to pause their mortgage repayments if they are suffering financial hardship or they have experienced a significant loss of income, such as from rent.
While paused mortgage repayments will need to repaid at some point, it is a much better strategy that defaulting on your mortgage or, worse still, having their property become a mortgagee sale.
While these mortgage pauses are a sort of cash flow buffer, it does comes with a cost, yet, that cost is small compared to the alternatives.
The best option for investors at present is to do whatever they can to hold their assets because the property market rebound is tipped to be as swift as the virus’s impact on the world has been.
