firstly, many people don’t consider real estate investment until they start thinking about retirement and

secondly, most of today's real estate investors have grown up during a period of rising real estate values. In other words, most real estate investors invest primarily for capital growth.

Historically house prices have risen by around 9% per annum compound during the past thirty years.

Taking Sydney house prices as an example, if you bought a median price house 20 years ago, in 1983 for $79,200, that property could today be worth $450,000.

If we project this level of growth into the future, then today’s median priced home of $450,000 will be worth $2.5 million in another 20 years time.

This seems to imply that regardless of how much money you lose through negatively gearing your real estate holdings, you'll eventually make it up in capital growth.

This is certainly the story pushed by the property marketeers.

Even though I also have grown up in this environment of rising property prices and have made a lot of money from the capital growth of my property portfolio over the years, I think it is a dangerous strategy to blindly follow the capital growth scenario.

First of all, property prices have fallen as well as risen. Some of the strongest falls occurred during the Great Depression in 1932 and in 1974 following the stock market crash.

You may be aware that during the Thatcher years in England, people literally walked away from their properties because the mortgages were higher than the value of the properties.

For many of us, these are events that have occurred during our lifetime, therefore it could happen again.

Secondly, the number of baby boomers retiring and dying during the next 20 years or so will have a major impact on the investment scene as they liquidate their assets to cash up.

Thirdly, the generations following the baby boomers are much smaller in size, therefore there may be an oversupply of certain types of properties in some areas.

Already there is a oversupply of inner city appartments in Sydney, Melbourne and Brisbane with more under development which will be completed in coming years. This has led to falling rents and landlord incentives for tenants to get the properties rented out.

Those people who have paid too much for their properties and are highly geared are at great risk since the cash flow from their properties does not cover their outgoings.

Some banks have already stopped lending on some inner city apartments because they feel that current prices are unsustainable and they are concerned about the oversupply of properties in some areas.

Unlike during the 80's, the future risk for property investors is not likley to be in high interest rates. The future risk is in a deflationary environment with falling property values and rents.

We are already seeing deflation in some manufactured goods, particularly in the USA as manufacturers try and bolster demand for their products and this is likely to spread to other sectors as demand changes.

For those of us who have grown up in an inflationary environment, this comcept is almost unimaginable. It happened almost overnight during the Asian currency crisis and changed people's lives from one day to the next.

I think there is a reasonable likelihood that we could experience deflation and therefore a defensive investment strategy is worth considering.

There are basically two ways to make money in property.

One is through capital gains and the other is through rental returns.

The capital gains can arise in a number of ways. On the one hand you may renovate the property and create a capital gain soon after you purchased it. Another way is to wrap the property by providing vendor finance and on-selling the property to someone who may not be able to obtain finance from regular lenders. Another is simply by holding the property and benefiting from the overall rise in property values over time.

Some of the capital gains enjoyed by property investors have been very substantial and created the impression that this is the major reason for holding property.

While I enjoy the capital gains of property investing, (the properties I bought 10 months ago have increased over $200,000 till now) I think it is a safer strategy for the future to focus on positive cash flow rental returns.

The cash flows from your properties offer you a greater degree of certainty and security than the speculative opportunity of a capital gain.

No one can tell you the possible capital gain you will enjoy and the timing of that gain.

For long periods of time, real estate appears to do nothing. Then all of a sudden it may increase dramatically and before you know it, the value of your properties seems to skyrocket as buyers scramble to buy up everything they can get their hands on.

Rents on the other hand, tend to be far more stable and predictable. During property booms, rents will have trouble keeping up with the escalation in property values, however they tend to climb steadily in small increments as the rental demand continues.

If you are investing in average properties, in average suburbs, you will generally find a tenant and the worst case scenario may be that you have to drop the rent by $5 a week. This is hardly a major risk.

The properties that are hardest hit in an oversupply situation are the high priced, inner city apartments.

One of the biggest lies perpetrated by property marketeers is that positively geared properties do not enjoy capital growth. This simply isn't true!

Often there may be a timing difference between when inner city properties enjoy massive growth and when this filters out to the outer areas. In my Super Secrets to Wealth course I explain this phenomenon by the pebble in the pond theory. For astute investors this represents a buying signal.

I and my students can demonstrate that we enjoy both positive cash flow and capital growth.

It's actually quite logical when you think about it.

Imagine a number of boats all sitting on a muddy river bed at low tide. As the tide rises, does it lift all the boats out of the water or does it only lift certain boats up?

Obviously a rising tide lifts all the boats.

It's exactly the same with real estate prices.

When the tide of rising real estate prices flows in, it lifts all properties regardless of their rental returns and the condition of the properties.

I'm sure you have observed this yourself.

So next time someone tells you that positive cash flow properties do not enjoy the type of capital growth that negative geared real estate does, recognise it as a lie and ignore what you are being told.

About the Author

Hans Jakobi has a mission. He is dedicated to teaching ordinary people how to take control of their financies and build wealth. Hans teaches that you are the only person you should trust with your money. He is a Chartered Accountant with a Degree in Ecomomics and Accounting. After applying his knowledge to a multi-million dollar investment portfolio himself, he now teaches the keys to achieving financial independence. He says that you have reached financial indpendence when you no longer have to work for money, because your money now works for you. Click here to learn more about Hans Jakobi's teachings: http://www.moneysecretsonline.com To subscribe to his Free 15 Day Financial Freedom NewsLetter send email to: msonewsletter@onlinemediasolutions.com