Cash Flow or Capital Growth?
Which one’s better?
I’m going to cover it all today.
Hey everyone, Andy Trinh from Duo Tax, here for another video designed to help you become
a better property investor.
Every property investor is looking for the unicorn of property investing success.
In fact, some spend years searching for this mythical investment strategy that will help
them on their path to financial freedom.
But unfortunately, too many investors get caught up in the battle between whether to
buy for cash flow or capital growth.
And because of this fixation, so many miss out on golden opportunities that could have
helped them achieve their financial goals and dreams much earlier.
Everyone will have their own opinion on why capital growth beats cash flow every time.
Or why cash is king.
But maybe the secret lies in buying property that allows you to focus on a little bit of
both.
There’s this common misconception that if you choose a property based on cash flow,
you risk missing out on capital growth, but that’s not necessarily the case.
Both capital cities and regional locations have the potential for capital growth and
cash flow.
You just need to know how to find these properties.
So, in today’s video, I want to talk about what cash flow and capital growth means and
how you can make the most of BOTH strategies in your investment plan.
But, before we start, we want to be clear that this video is for informational purposes.
In no way should you interpret this as financial or tax advice.
We always recommend working with a qualified financial advisor or tax agent to give you
the best advice for your situation.
Alright, let’s get straight into it.
Before you decide between cash flow and capital growth, you need to know the fundamentals
that underpin each concept.
A cash flow strategy is a simple and tempting philosophy to follow.
It involves investing in properties with high potential rental yield and a rental income
that is greater than the total expenses of holding the asset.
In other words, all your investment property expenses like maintenance, home loan interest
and management fees are covered by the rental income you generate.
And then, if you have any extra funds, you can use that to pay down the loan and increase
the property’s equity.
As we mentioned earlier, investors often believe that if they’re going to go the cash flow
route, they have to be willing to accept lower growth rates.
We’ll discuss why this might not necessarily be the case a bit later on.
But for now, if your goal is eventually to retire and live off your property income,
then positive cash flow properties may be your focus.
You can buy investment properties that deliver a strong return, and once you reach your desired
passive cash flow, you can choose whether or not to keep working and live off your property
income.
The philosophy here is that regardless of the capital growth outcome - when we’re
old and retired, we want to live off a stream of passive income - we can’t live off capital
growth.
Another point to consider in favour of cash flow properties is that cash flow is what
helps you build your portfolio.
If you apply for a loan to buy a property, the first question the lender asks is: can
you pay back the loan?
Wherever your income is coming from, it all gets taken into account, and if you don’t
have enough income, then you may not qualify for the next stages of the loan process.
So cash flow is good for serviceability.
On the flip side of the coin, you have just as many advocates for a capital growth strategy.
Capital growth properties are essentially the ones that significantly increase in value
within the time you’re looking to sell.
And the argument with a lot of investors is that this is the only way to create real wealth.
In fact, many of these investors debunk the theory that cash flow will help you buy your
next property.
The argument essentially is that from an income perspective, most people only have the capacity
to invest in one property at a time.
These days you can’t invest in property without a deposit, and it’s always been
hard to save up for one of those.
But, the key to growing your portfolio is buying more property, which then requires
more deposits.
It’s highly unlikely that many people can save multiple deposits over their lifetimes.
But what they can do is use the capital growth or equity in their properties instead.
According to the capital growth advocates, if they had invested in cash flow properties,
sure, they would have a solid rental income, but that generally won’t do anything to
help you with a deposit for your next property.
So, those are the two different strategies and how each could be beneficial depending
on what your goals are.
The most ideal situation to be in obviously is to own properties that don’t necessarily
cost much to hold, but that also offer long term capital growth.
So, in other words, you want to find properties in areas that are growth-focused but have
a strong demand for rental.
This way, you can enjoy the best of both worlds by securing both growth and positive returns
in the long term.
In fact, some investors even argue that you can’t sustain success without doing both.
Because if you only chase growth, you’ll run out of serviceability because you’ll
get to a point where the bank won’t lend you any more money because the cash flow isn’t
there.
But you also need growth properties to build your long-term equity.
The main fault in creating a debate about which strategy is better is it fails to recognise
that smart investors take a holistic approach to their multi-property portfolios – and
healthy portfolios are balanced.
That way, depending on the investor’s requirements at a given point in time, the portfolio can
be weighed slightly towards cash flow or capital gain.
Your property portfolio doesn’t have to be built on a ‘one strategy’ approach
but could consist of a mix of property types that will service the investor’s immediate
needs with a long-term perspective on wealth building.
Each and every purchase needs to be deliberate and have a desired outcome that makes sense
to the overall balance sheet.
You shouldn’t let anyone tell you that property investment is a set-and-forget proposition
because successful investors ensure that their portfolio is reviewed consistently and periodically
so their next purchase will be perfect for their requirements.
The best investments find a balance of both cash flow and capital gains where you can
earn a decent cash flow in the short term while realising a healthy capital gain in
the long haul.
And the best way to create a balanced portfolio is to have a team of property experts in your
corner.
A mortgage broker will help you find a loan product that is best suited for maximising
your return on investment.
A financial advisor will ensure that you are making decisions that make financial sense.
A quantity surveyor and accountant can help you maximise all your investment property
tax deductions for better cash flow.
And a property investment advisor can help you purchase your investments for the best
possible outcome.
You don’t need to do this alone.
In fact, you shouldn’t.
Anyway, guys, that’s it from me.
Hopefully, there were some useful points you could extract from there to help you in your
investment journey.
If you know anyone who might find this useful, please make sure you share this video with
them.
I’m Andy Trinh from Duo Tax, see you next time!