![\"Preserving](\"https:\/\/cdn.propertyupdate.com.au\/wp-content\/uploads\/2023\/11\/preserving-investments.jpg\")
<\/p>\nWhen it comes to property investment, many investors strive to strike a balance between the income and the capital growth a property generates, hoping to maximise both.<\/p>\n
However, I have written a lot about the fact that the income from a property, after expenses, probably won\u2019t help you achieve financial independence.<\/p>\n
It\u2019s the power of compounding capital growth that really drives wealth accumulation and does all the heavy lifting.<\/p>\n
However, optimising the income and expense profile of the right asset is critical to maximise your overall return.<\/p>\n
<\/p>\n
When you invest in property, most investors typically borrow the entire cost of the property, including stamp duties, by using equity from their existing properties as collateral for their loan.<\/p>\n
This means they don\u2019t invest any of their own capital upfront.
Their actual investment occurs when they must cover the property\u2019s holding costs because the income it generates isn\u2019t enough to cover all expenses, including the interest on the loan.<\/p>\n
For example, if a property has an average holding cost of $30,000 per year after tax, over 20 years, an investor could end up putting $600,000 into that asset just to maintain it.<\/p>\n
Your investment return is the combination of any positive cash flow i.e., if the property ever covers all its expenses, and the potential net sale proceeds.<\/p>\n
Net sale proceeds are calculated by subtracting tax (CGT), selling costs, and repaying the loan from the sales price.<\/p>\n
The internal rate of return (IRR) measures the relationship between your investment (the holding costs) and your return (net sale proceeds) by calculating your return as an annual percentage.<\/p>\n
This is an important metric because it allows you to assess how your investment performs compared to other potential uses of your cash flow.<\/p>\n
Essentially, it highlights the opportunity cost of not investing that cash elsewhere, making it an important measure for evaluating the effectiveness of your investment.<\/p>\n
The table below compares several property investments, all generating a total return of 9% p.a., but with varying levels of income and growth.<\/p>\n
I\u2019ve calculated the IRR for each asset and the net sale proceeds you would receive if you sold the property after owning it for 30 years.<\/p>\n
This figure is after accounting for taxes, all expenses, and loan repayments, expressed in today\u2019s dollars i.e., adjusting for inflation.<\/p>\n
![\"Maximising](\"https:\/\/cdn.propertyupdate.com.au\/wp-content\/uploads\/2024\/11\/Maximising-property-returns.jpg\")
<\/p>\n
You\u2019ll notice that the lowest return occurs when the yield is between 3.5% and 4.0% p.a.<\/p>\n
This highlights why aiming for a balance between income and yield is often an inferior strategy when selecting an asset to buy.<\/p>\n
On the other hand, the second highest IRR comes from a property that sacrifices as much yield as possible in exchange for greater growth, specifically, a 1.5% yield and 7.5% growth.<\/p>\n
The highest IRR is achieved by a property with a 6% yield and 3% growth.<\/p>\n
However, here are some key points to consider about this scenario:<\/p>\n
To maximise your IRR, the first step is to purchase a property with strong potential for capital growth.<\/p>\n
Once you buy a property, it\u2019s challenging to change its capital growth prospects, so this should be your top priority when evaluating different property investments.<\/p>\n
Generally, this means investing in a high-quality location where land supply is limited and demand is high, and buying as much land as your budget will allow. In short, spend most of your budget on the underlying land.<\/p>\n
The second step is to take steps after the purchase to minimise the property\u2019s holding costs. By reducing these costs, you lower your investment contribution, which helps maximise your IRR.<\/p>\n
It also frees up cash flow for you to direct towards other investments.<\/p>\n
You can minimise the property\u2019s holding cost by making cosmetic improvements to the dwelling to enhance its rental income, reducing interest costs, and maximising tax benefits, among other strategies.<\/p>\n
By following this two-step approach, your goal is to achieve a higher rental yield and reduce holding costs while maintaining the same growth rate without any compromises.<\/p>\n
![\"Rental](\"https:\/\/cdn.propertyupdate.com.au\/wp-content\/uploads\/2022\/03\/rental-yield.jpg\")
<\/p>\n
In mid-2021, my wife and I bought a property in Indooroopilly, Brisbane, for $1.45 million.<\/p>\n
At the time, it was in a very basic condition and had a long-term tenant, resulting in a very low rental income of just $400 per week, which equated to a yield of 1.44%.<\/p>\n
Last year, when that tenant moved out, we took the opportunity to undertake some cosmetic renovations, costing $120,000. These upgrades boosted the rental income to $675 per week and increased the property\u2019s value.<\/p>\n
As a result of these improvements, I calculated that the internal rate of return (IRR) has risen from 10.6% to 11.5% p.a.<\/p>\n
This is a practical example of how to apply this approach to maximise your investment returns.<\/p>\n
It\u2019s essential to never compromise on capital growth.<\/p>\n
Maximising the average growth rate over your ownership period, which ideally should span several decades, is critical.<\/p>\n
For instance, a 7.2% p.a. average growth rate over 30 years means the property could be worth six times its current value.<\/p>\n
That\u2019s how you build real wealth.<\/p>\n
Avoid being lured into investing in properties that may appreciate significantly in the short term but lack the fundamentals to sustain that performance over many decades.<\/p>\n
However, once you own the property, your focus should shift to minimising its holding costs.<\/p>\n
This strategy will maximise your IRR and free up cash flow, which you can then invest in other opportunities.<\/p>\n
When it comes to property investment, many investors strive to strike a balance between the income and the capital growth a property generates, hoping to maximise both. However, I have written a lot about the fact that the income from a property, after expenses, probably won\u2019t help you achieve financial independence. It\u2019s the power of…<\/p>\n","protected":false},"author":9,"featured_media":179637,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[54,3],"tags":[572,1183],"class_list":["post-186789","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-latest-property-updates","category-property-investment","tag-feature-featured","tag-homepage-top"],"acf":[],"yoast_head":"\n