Unlock the secrets to successful real estate investing with a proven formula that balances capital growth and cash flow. Whether you're buying for personal wealth or for clients, understanding the right metrics can make all the difference. Explore how Australian real estate can be the foundation of your financial freedom and learn to navigate the complexities of property investment with confidence.
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I will share with you the exact formula and the numbers I use for:
If you're interested, definitely keep reading.
Now, I want you to focus on how we can actually grow our wealth with real estate.
Yes, you can dabble in stocks.
Yes, you can dabble in Pokémon cards or cryptocurrency.
However, the foundation of my wealth has always been, and always will be, Australian real estate. The reason for that is: I get the best of both worlds, where I benefit from capital appreciation, which isn’t taxed, and I also get the cash flow, which allows me to enjoy my current lifestyle while building a machine in the background.
Most people fall into becoming an investor by accident. What I mean by this is, maybe their accountant comes up and says: Hey, look, maybe you should invest in something.
…Or you’ve had an uncle say: Well, you’ve got some surplus money, so why don’t you buy real estate? It never goes down.
Although over the long term, yes, property trends upwards, all property does not just continue to rise.
Yes, there are properties that will lose value as well. This is why when you're purchasing property, your entry price is the most important thing.
Now, I’m going to share with you the numbers I look at when it comes to capital growth as well as cash flow.
For example, say you purchase a property for $450,000, and now it’s worth $500,000—you’ve made $50,000 worth of capital appreciation or equity.
Can you use all of this equity? (No, you can’t.)
Can you use a portion of it? (Yes, you can.)
However, to actually access that money, you need to rely on your borrowing capacity, and that is a big hurdle right now for a lot of people.
Why? We’ve seen interest rates go up, and unfortunately, many people are in a position where they can’t access that money. So you sort of feel “asset rich,” but you’re not “cash rich.”
This means you may have to forego some lifestyle choices if you hold that property and don’t choose to either:
If your borrowing capacity is holding you back from actually accessing that money, you could have made over $100,000 in equity over the last 12 months but not feel materially different because you can’t access that money.
Your income is higher than your expenses, and you're in a position where holding that property not only doesn't cost you money, but it puts money back into your pocket. This gives you the best of both worlds, where you can park your money in an appreciating asset while also being paid to hold that asset. Seems like an absolute no-brainer, right?
In the current environment, it’s a lot harder to find positive cash flow properties. It’s still possible, but it’s extremely difficult. So what I’d be looking at is a slight negative or even neutral cash flow. That’s a really good position to be in, especially where interest rates are at and with the rapid growth of rental income that we’ve been experiencing.
This is why I’ve been saying that right now is a peak period to be buying. There are opportunities out there, and some people can’t weather the storm over the next 12 months, when inevitably, we will see interest rates calm down and rents continue to rise.
When you think about retiring with real estate, you're effectively asking: How do I get more passive income to replace my active income?
If you make $100,000 a year, you're probably looking at your investment vehicles and saying: How do I generate $100,000 passively, which would allow me to sit on a beach and do nothing while my passive income continues to maintain my lifestyle?
You might think: I just need the highest cash flow properties to get me there. If each cash flow property gives me $50 a week, and that’s $2,500 a year, I could go out and buy 40 properties to get to $100,000.
However, the idea of highest rental yield isn’t necessarily the best approach.
Therefore, I can go out and purchase as many properties as possible, and then I get to Financial Freedom
Although this may sound like the most obvious choice, it’s probably not. You’re probably scratching your head going: I need passive income to retire, but now you’re telling me it’s not the right move?
Well, this is because you need to understand the rules of the game.
I’ve mentioned this in my other blogs and YouTube videos before: You can go out there and open a board game. What more than 99% of people do is open the board game, hope for the best, learn the rules as they go, and hope they can win in the end.
What I’m saying to you is, why not read the rules of the game before you start playing? More importantly, figure out how to win the game before you begin—this is the biggest rule of all.
Therefore, when you're looking at life and saying: I want to retire early, I need to replace my active income with passive income. That’s the biggest rule in this game.
If you want to execute that, instead of just going for the easiest choice (which may seem obvious), like more income over expenses and positive cash flow, you need to look deeper and understand that with real estate, you need to purchase multiple properties to get to financial freedom.
If you want financial freedom even earlier, you’ll need to purchase more properties.
However, if you rely heavily on cash flow properties, it’s extremely difficult to purchase multiple properties in a short time.
The reason is that if each property gives you roughly $5,000 of positive cash flow, it would take you about 8 to 10 years to actually purchase another property with the deposit you’re left with.
But if you had a $500,000 property that grew by 10%, you’d make what someone would make in cash flow over 10 years in just one year.
This is why you need a balance of both.
The idea is that you have cash flow that keeps you in the game, which allows you to:
Meanwhile, capital growth gets you out of the game—out of the rat race, or whatever you want to call it—where you’re actively building enough assets to achieve financial freedom.
With this understanding, you can see that both cash flow and capital growth have their own places in a well-rounded property portfolio.
You might now ask yourself: What are the numbers I should be looking for when I go onto realestate.com after reading this article to find my next investment property?
The numbers I personally use to identify a good property investment is:
I would also be looking at:
Now, you might say: Well, okay, 7% capital growth—there's hardly any markets delivering that, especially if you look at the last few years. And then, you look at a 5% rental yield. So you're telling me, in a capital city, I need to find a 5% rental yield—am I looking at apartments?
Well, maybe, but then you aren’t actually getting the capital growth you should expect.
This is where you need to start digging deeper and understand that the game of buying real estate and retiring early is actually quite complex. It might seem simple when someone maps out the process of buying 5 or 10 properties over the next 10 years and then retiring, but to actually purchase the right ones? That’s tough.
I’ve had people come to me and say: Ravi, I’ve been looking in the same areas where you’ve been purchasing property personally or through the buyer’s agency, and they’ve been sitting on the sidelines for 6 months because they just can’t seem to find the right property.
For example, in 2022, we saw interest rates increase by more than 300 basis points.
At the same time, national house prices dropped by 7%.
In contrast, our buyer’s agency saw an average growth of 12%.
So, while the broader market was declining by 7%, we were growing by 12%, and our clients were thrilled. That’s why they come back for their second, third, and even fourth properties.
The key point here is that even when markets are dropping, buying the right assets at the right price is essential. You could buy a property in the right area, and it might go up over the next 3 years. But if you’ve overpaid initially, you’re already behind.
Now, something as simple as knowing how a borrowing calculator works is critical. When you use a calculator from a bank or broker, most banks will cap rental yields at 6%.
So, if you go out there thinking: I just want cash flow. I’ll have unlimited borrowing, well, guess what? In the bank’s eyes, you’re maxed at 6%. If you’ve got a property that yields 10%—say in a mining town—they won’t even consider that as income when they assess how much you can borrow in the future.
This is why you need to optimise for both capital growth and cash flow.
When looking at things over the long term, can you actually achieve these numbers?
Well, my personal portfolio grows at around 11% to 12% per year across all of my properties.
I’ve been investing for over 11 years now, and these are the formulas I’ve been using. In my opinion, anything below these numbers is a dud investment, which is where most people get stuck.
If you’ve already purchased property, go back and review its actual performance. You’ll likely discover why those properties are holding you back from reaching financial freedom, which fewer than 1% of the population will ever achieve.
I hope you guys have learned so much from me in this article!
I’ll catch you all in the next one
Thanks guys!
Disclaimer: Search Property Pty Ltd (SP) does not provide financial or investment advice and does not hold a financial services license as defined in the Corporations Act 2001 (Cth). Any advice given by SP is general in nature and does not take into account your personal circumstances or objectives, financial situation or needs.
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