But before getting into any of those details, there is a more important question to answer:

What do you actually want the property to achieve?

For some investors, the priority may be cash flow and keeping the property manageable to hold. For others, it may be long-term capital growth. For investors who already own property, building equity and creating opportunities for the next purchase may become more important.

There is no single answer that works for everyone. The right balance between cash flow, growth and equity depends on where you are now, what you want property to achieve and what your portfolio may need next. This is the thinking behind Blue Wave's “Strategy First. Property Second.” approach. 

Cash Flow Is About More Than Rental Yield

Cash flow is often one of the first things investors consider when assessing a property. At a basic level, it is about the income a property produces compared with the costs involved in owning it.

Rental income is an obvious part of the equation, but there are also loan repayments, rates, insurance, property management, maintenance and other costs to consider.

Rental yield can provide a useful starting point. For example, a $600,000 property generating $30,000 in annual rent has a gross rental yield of 5%.

But that number does not tell you everything.

A higher rental yield may look attractive, but it does not automatically make a property a good investment. You still need to understand the market behind the property. Is there strong rental demand? What does the supply look like? Who is likely to buy the property when you eventually sell? What does the location offer, and how does the property itself fit into the market?

Blue Wave's investment strategy material makes a similar point. Yield is only one number. It needs to be considered alongside demand, supply, the resale market, location, land and tenant profile. 

For an investor, the question is therefore not simply, “Where can I get the highest yield?”

It is, “What level of cash flow makes sense for my circumstances and the role this property needs to play?”

Growth Requires Looking Beyond the Suburb

Capital growth is another major consideration for property investors. Over time, an increase in a property's value can contribute to building equity and potentially create more options for the investor.

However, buying for growth should not simply mean choosing a suburb because it has been labelled a “growth area”.

The more important question is why people are likely to want to live in or buy in that location over time. That means looking at the fundamentals of the market, including factors such as supply, demand, employment, infrastructure, population and the overall appeal of the location.

The property itself matters too. Two properties in the same suburb can have very different characteristics and appeal to different parts of the market.

Growth is also not guaranteed. Property markets can perform differently depending on the location and the broader market conditions, so the objective should not be to predict exactly where prices will go next.

Instead, investors need to consider what type of growth their strategy requires and which markets and properties may support that objective.

Equity Can Create Options, But It Is Not the Goal

Once you already own property, equity becomes a bigger part of the conversation.

In simple terms, equity is the difference between the value of a property and the amount still owing on the loan. If a property is worth $800,000 and the loan balance is $550,000, there is $250,000 of equity in the property.

That does not mean the investor has $250,000 sitting in a bank account. How much equity may potentially be available for another purchase depends on the lender, the investor's circumstances, existing debts and borrowing capacity.

This is where equity can become useful as part of a broader portfolio strategy.

But having equity does not automatically mean you should use it.

Using equity to purchase another property also means taking on additional debt. That new debt can affect cash flow, borrowing capacity and the ability to make another purchase in the future.

As Blue Wave's strategy material puts it, “Equity is a tool, not the objective.” 

So rather than asking, “How much equity can I access?”, it can be more useful to ask, “What would using that equity actually achieve?”

Your Next Property May Need to Do Something Different

This becomes particularly important as an investor's portfolio grows.

Your first investment may have been about getting started. Your next investment does not necessarily need to look the same.

Your portfolio may now need a different type of property, a different market, a different cash flow position or a different price point. The next purchase should complement what you already own and address what the portfolio needs next. 

This is where the idea of portfolio fit comes in.

A property should not only be judged on whether it looks like a good investment on its own. It should also be considered in the context of the other properties you already own.

For example, an investor might already have strong exposure to one market but lack diversification. Another investor might have properties focused heavily on growth and need to consider cash flow. Someone else may be looking for a property that can help support their longer-term plan to purchase again.

The same property could therefore make sense for one investor and not make sense for another.

Borrowing Capacity Is Not a Strategy

Another common mistake is treating borrowing capacity as the investment budget.

If a lender says you can borrow $850,000, it does not necessarily mean that an $850,000 property is the right purchase for you.

Borrowing capacity tells you what may be possible from a lending perspective. It does not tell you what you should invest.

You still need to consider your existing debts, cash flow, available equity, investment timeframe and what you want to do after the purchase.

Blue Wave's strategy material describes borrowing capacity as “a ceiling, not a strategy.” The focus is on understanding what purchase price leaves an investor in the right position for their next move, rather than simply maximising their borrowing capacity.

That can become particularly important for investors who are planning to build a portfolio rather than make a single purchase.

Start With the Strategy, Then Look at the Property

Before spending hours comparing suburbs and scrolling through listings, it is worth taking a step back.

Where are you now? What do you already own? What does your current cash flow, debt and equity position look like?

Then consider what you actually want property to achieve. Is the priority growth, cash flow, building equity or creating an opportunity to purchase again?

If you already have a portfolio, there is another important question: What does your portfolio need next?

From there, you can start thinking about how much you should invest, rather than simply how much you can borrow, and how the purchase may affect your future options.

This is consistent with Blue Wave's strategy framework, which looks at where the client is now, what they want property to achieve, what the portfolio needs next, how much they should invest and how the property may support the next purchase. 

So, What Are You Actually Buying For?

Cash flow, growth and equity are all important parts of property investment, but they do not necessarily have equal importance for every investor.

A property with strong rental income may help make it easier to hold. Capital growth may contribute to increasing equity over time. Equity may then create an opportunity to consider another purchase, depending on the investor's circumstances and lending position.

The decisions are connected.

That is why the conversation should not start with:

“What property should I buy?”

It should start with:

“What do I need this property to do?”

And if you already own property, the question becomes:

“What does my portfolio need next?”

Once you have a clearer answer, it becomes easier to assess the appropriate market, property type and price range.

The property is important, but it should come after the strategy.

Strategy First. Property Second.

This article is for general educational purposes only and does not constitute financial, tax or legal advice. Property investment involves risks, and investors should consider their individual circumstances and obtain appropriate professional advice before making investment decisions.