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Yield vs Growth

How to decide on one, the other — or even both.

DIYBA co-founder Darren Venter spoke with Mike Mortlock, host of the Geared For Growth podcast, to discuss the merits of buying property on the basis of yield or growth opportunities. To learn more, you can find his interview on the Geared for Growth website or wherever you get your podcasts.

When you’re building your investment portfolio, deciding what and where to buy can be complex and time consuming. A way to help narrow your focus is to ask yourself whether you’re going to target a property for its yield or its growth. Now that you’ve thrown this question into the mix, what does it actually mean for you and your purchasing strategy?

Investing in property is a major financial decision, and choosing the wrong direction for your circumstances could affect your portfolio today, or even your financial future. You want to avoid having to sell a property because the cashflow doesn’t maintain the purchase, or because a lack of growth is costing you potential opportunities, so we’ll run through a few of the things you need to consider.

Should you prioritise one over the other?

There is no clear-cut answer. Darren Venter, DIYBA founder, likens the question of purchasing for yield or growth to a ‘toolbox’, where the box is equity and the cash is the key to unlock the box. Savvy investment balances both cashflow and equity, and requires continual portfolio assessment when making purchasing decisions.

The main factor to consider is what cash can do for a property. After all, a high yield provides the income we’re searching for — you can retire off cashflow, but you can’t retire off equity. In addition to creating income, high-yielding properties create serviceability, allowing you to use the cash that is generated to borrow more from the bank and keep growing your property portfolio.

Case study: Dan’s yield vs growth strategy

“When you go into your purchase, you need to understand where your servicing needs to be.”

Darren Venter

To demonstrate the toolbox analogy in action, Darren likes to refer to the investment strategy used for a client, Dan. Dan wanted to fund the purchase of an investment property using his military pension, which meant that his serviceability wasn’t attractive to lenders. Darren and Dan targeted a property with seven bedrooms to yield high cashflow, thereby adding an extra $54,000 a year to Dan’s income serviceability. This strategy generated more income in the eyes of the bank, and allowed him to choose his next investment property for even greater growth.

On the other hand, the case for investing in a high-growth property is that equity allows you to pull cash from a property once it goes up in value. The driving force behind growth is the number of people who want to buy a certain type of property. For example, in Dan’s case, most buyers look for a three or four bedroom house, leaving a seven or eight bedroom property as an opportunity for an investor guided by a cashflow strategy like Darren’s. To secure a property that has high growth potential requires focusing investments in the type of property that families want to live in, surrounded by other homeowners; creating a more appealing property within a market on the rise.

Choose balance for portfolio health into the future

With so many variables that can affect your investment portfolio, making only yield or growth your long-term strategy is probably not the answer. Instead, focus on regular monitoring of your investments. Every time you make a purchase and add a new property to your portfolio, assess your cash flow and your equity position — where are your properties sitting? This allows you to balance your financial and equitable position against every purchase, determining the next move for your investment strategy.

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