Cash Flow Or Capital Growth, Which Is The Better Option?

Most of us would agree that property investment often guarantees sustainable income. As we all know, if a property is acquired and is well managed over the years, the rental income will surely increase, making your investments profitable. In this context, cash flow is fundamental.

The in-depth review by RiskWise has also established that investing in property located in a not so favourable area has the tendency to yield the most, whereas the wealthiest suburbs with the best economic outlook have the tendency to have a poor yield and are most likely to perform more than well in terms of equity on reasonable time.  

Another means of wealth creation and sustaining is through capital growth, which is an appreciation of value over a period of time and not mainly on cash flow.

A good percentage of Australia investors enjoy a 4% to 5% gross rental income on their investment over a short and long-term period of 5 to 12 years and net income of 2% to 3%.

In this regard, the net income of an investment might be much more sustainable if the debt is fully paid and rental income increase over the years. Let us look at a few case studies.

Cash Flow: First Scenario

A building collection of 4 properties with a weekly net income of $100, and $5200 per annum.

Assuming another four properties are added to the portfolio, the investor’s earning will increase to $20,800 per annum. The increase is possible provided that the portfolio is well managed and the investor financial situation is on the rise.

Cash Flow: Second Scenario

A property worth $600,000 with a weekly net income of $550, and a rental yield of 4.7%.

When a property has the right attributes; new or experience some new development, the rental yield could increase to 7%, 8%, or 11%.

For this particular property, the rent could increase and the investor will have a better weekly income of about $850, which is 7.4%.  

This scenario occurs with a simple renovation, development or any value that gets added to the property. Furthermore, on the long-term, the rent will slowly keep up with the price of the property. A good in-demand area will maintain the rent and reduce the vacancy rate.

Cash Flow: Third Scenario

A building collection of 4 properties with a weekly net income of $250 per property, and $52,000 per annum.  

You could succeed on your own if you start little and in no time you will gradually increase your cash flow. However, using the cash flow strategy takes time, and to achieve your aim at a fraction of the time, you would require more capital to purchase more properties. With eight properties, you could potentially earn $100,000 per annum.

Buying all eight properties within 1 to 2 years is the best option, and in 5 to 10 years time, you can increase and attain your set goal of $100,000. However, most investors would not be able to achieve this unless they have a good income and the banks help.

For those who have the necessary funds to commit to 8 properties and apply proper risk management, they will be able to cash out quicker. By selling one or two significant properties, they can get rid of the debt and have zero interest outlay. This in return will give them a better chance to not only keep their existing portfolio but expand it even more.

Cash Flow: Fourth Scenario

Properties worth $600,000 as discussed earlier can grow and be valued at $800,000 within 12 years.

Having said that, another property of equal worth but located in a different locality has the potential to grow its value to $1,200,000 within a space of 8 to 10 years.   

As you can see, there is a stark difference in value just because the properties are located in different localities, have different asset class, or property configuration

This scenario is suitable for all investors who prefer to create more capital on their investment.

Capital Growth Scenario

A property that is worth $200,000.

After 10 years, the property value increases to an average of $600,000. Assuming you experience a weak cash flow after 5 years and have a deficit of $10,000 per year, you can still make $550,000 as compared to the previous worth of the said property which is $200,000.     

Smart investors will prefer this method to make $200,000 or $400,000 as the benchmark on their real estate.

If the capital growth generated on a property is on the lower side, consider continuous ownership for 20 to 30 years. This applies to weaker investments. (Refer to the Underground High Growth Property Report – Appendix tables)

Bear in mind that investors with a portfolio that produces poor capital growth but have a nice cash flow will not be able to cash out quick enough. By the end of the day, even a 5% or 6% rental yield, which after deducting operation costs, would only produce 2% to 3% net cash.

Cash flow over the long term usually serves as the fuel of most investments, including commercial property on certain scenarios.

Therefore, it is imperative to know how to identify suitable investments, where to invest, the kind of property to invest in and new infrastructure needed to boost the growth of such investment. Your ability to take the right step will reduce risk and fast-track capital growth. Most low equity risk properties do speed-up wealth and stabilize cash flow.

So between cash flow and capital growth, which would be the better option for investors to focus on?

It truly depends on your financial, investment goals and your risk profile.

Once again cash flow is the fuel that assists you to hold the asset for the long run. When your portfolio grows substantially, you can sell part of the portfolio to reduce the remaining properties outlays. Needless to say, without cash flow, you would face difficulties to serve your loan and manage your outlays.

Capital growth, on the other hand, is the vehicle, while the premises on the land is the income producer. Capital growth will be critical for wealth accumulation over the short to medium term, and it will assist you further to achieve your long-term and end goals.