• Tom King

Invest for capital growth or cashflow?


Invest for capital growth or cashflow

The age old question circulating around property investing and what you should be your goal is whether to acquire high yielding positive cashflow properties or high growth and negatively geared properties.

And theres a really simple answer to this…

It depends on your individual financial situation and what your income and goal is.

Lets break it down!

Investing for Capital growth

Purchasing high growing properties usually close to major cities and major population hubs is where you will find a huge demand with a limited supply, therefore causing massive price pressure.

The price you pay for investing in these areas is the rental yield is less as that of regional properties, because the value of the property has outgrown the rental growth and therefore reflects a lower yield. If you are a high income earner with large amounts of disposable income you will be able to hold multiple High growth properties and withstand the negative cashflow shortfall, with the eventual goal of getting debt paid down and increasing your net worth position.

High growth properties will on paper increase your net worth and will be what gets you out of the rat race that is work. As the debt is payed down and the rents increasing your cashflow the properties will slowly turn positively geared. High growing properties will allow you to have options to move on to bigger things such as property development, investing in commercial property or to further increase your portfolio of residential properties.

In the long run it will be better to hold a high growing portfolio and withstand the negative shortfall the portfolio produces as your net wealth position will drastically be worth more than that of high cash flowing lower growth properties.

Investing for Positive cashflow

Investment properties where the rent received on the property is actually more than all repayments will be classified as a positive cashflow property.

These properties are though to be lower growing properties in areas where socioeconomic factors are much lower, but this is not true. High cashflow properties can be found with outstanding growth in major CBD’s across the nation. To find Gems like these, investing outside of your backyard will be essential.

The Sydney and Melbourne market is now saturated with high demand and limited supply. But other capital cities around the nation such as Perth, Adelaide and Brisbane are yet to experience this insane run of growth and pose the same economic factors and lifestyle desires as Sydney and Melbourne.

If you are a middle to low income earner you will have to invest in these types of properties as the cashflow of these assets wont restrain your serviceability with the banks. Although your portfolio should have a balance of high growth and cashflowing properties.

A high cashflowing property can often be a lower entry price. E.g if you have 100k to invest, purchasing two 500k properties that cost nothing to hold and has a good growth potential will be better than purchasing 1, one million dollar property as you will have another property to fall back on for rent if your property becomes vacant. As well as having the option to sell one asset down to debt free another.

So as you can see both cash flowing and high growth properties have there Perks. The average property investor should keep a balanced portfolio of both to achieve the best results.

Remember cashflow will keep your in the property game and allow you to grow your asset base.

But its the capital growth that will really increase your wealth and get you out of the rat race.

Written by

Tom King

Director Bez property buyers