I found this article “Your End Game” by David Whitburn in the August issue of New Zealand Property Investor quite enlightening. Here are some snippets:
The three pillars of property investment are: cashflow, equity and growth. You will excel with a healthy mix of all three, and be stressed if you have nothing and probably say property investment is “too hard”. I know of property investors who bought property in towns in 2006 and sadly, seven years later they have had issues with rising rates, vacancies, tenant damage and reduced cashflow. … Then of course there are the Auckland and Christchurch property investors with undamaged properties, who in the same timeframe have had mild cashflow increased, but the value of their properties is up over 50% and still growing.
When you stop using your personal exertion to create cashflow (working for an income), you need something to replace it. This is where your assets must work for you. It is absolutely imperative to create cashflow.
My son’s old accounting teacher used to say, “Cashflow is the lifeblood of any business” – that simple statement equally applies to property investment.
Cashflow and equity
Some of you will have strong cashflow now, and others weaker cashflow. Some will have good equity, others poor equity. If you have weak cashflow and poor equity, you have more work to do. Equity is important but in the future when you have “retired” it is not as crucial as cashflow. Think of equity as an apple tree and cashflow as the apples. Having a big apple tree is likely to yield you more apples. These apples will feed you for a very long time. Having a tiny apple tree withering away producing fewer and fewer applies is stressful.
This is both growth in rents (cashflow) and also growth in house prices (equity). It is all about location. Buying in areas dependent on a single industry, or areas suffering population decline can prejudice your growth.
That’s why the Canterbury property market is a very exciting opportunity for any buyer of property -with the rebuild gaining pace we are beginning to see a number of Christchurch suburbs develop and become increasingly desirable. For example, the once considered dreary suburbs of Sydenham and Addington have been described by Lonely Planet as Christchurch’s “most dynamic neighbourhoods”. My opinion is that in Christchurch, you really can’t go wrong wherever you buy.