When we look to use property to grow our wealth we need to take into account both capital growth and cash flow. Over the past few years all the attention has been on the great capital growth investors have been generating, however, a solid property portfolio needs to take into account both elements. If we focus too heavily on one factor the other one drops away.
Capital Growth vs Cash Flow: Common Property Investment Myths Debunked
Balance growth, cash flow, wealth.
Balance growth, cash flow, wealth.
Here are some of the common myths we hear when discussing capital growth versus cash flow.
Here are some of the common myths we hear when discussing capital growth versus cash flow.
Myth 1: Cash Flow Properties Grow Wealth Faster Than Capital Growth Properties
Myth 1: Cash Flow Properties Grow Wealth Faster Than Capital Growth Properties
Wrong! There’s no doubt that a little extra cash flow would make all of our lives better. Who couldn't use some extra money every week? However, if you really want to change your lifestyle you need to build wealth not just chase money in the short term. That’s where capital growth becomes important.
If a property is generating $10,000 in positive cash flow, you’ll need eight of them to build a passive income of $80,000. On the other hand, if you grow your equity by $2 million by purchasing just a few properties that see strong growth you can collect $80,000 in rent, assuming a 4 per cent yield. There are different ways to achieve your goals.
Our guide to building passive income through property covers how the cashflow side of this equation actually comes together in a mature portfolio.
If a property is generating $10,000 in positive cash flow, you’ll need eight of them to build a passive income of $80,000. On the other hand, if you grow your equity by $2 million by purchasing just a few properties that see strong growth you can collect $80,000 in rent, assuming a 4 per cent yield. There are different ways to achieve your goals.
Our guide to building passive income through property covers how the cashflow side of this equation actually comes together in a mature portfolio.
Myth 2: Capital Growth Properties Are Too Expensive to Hold
Myth 2: Capital Growth Properties Are Too Expensive to Hold
Wrong! Another common misconception is that you can’t buy properties that are likely to see solid capital growth because they have low yields and are difficult to hold for investors.
This ignores the fact that it’s possible to extract #equity after your property increases in value. If it costs $10,000 per year to hold the property, you can start with an extra buffer for a couple of years, and then potentially extract $50,000 (the potential extra growth) and put in an offset account as a buffer for the next few years. Then repeat the process.
There are also other benefits such as negative gearing as well as the fact that your property will likely see rent increases over time, boosting the yield. Our complete negative gearing guide covers how gearing affects taxable income and when it applies, separating the tax mechanism from the investment decision.
This ignores the fact that it’s possible to extract #equity after your property increases in value. If it costs $10,000 per year to hold the property, you can start with an extra buffer for a couple of years, and then potentially extract $50,000 (the potential extra growth) and put in an offset account as a buffer for the next few years. Then repeat the process.
There are also other benefits such as negative gearing as well as the fact that your property will likely see rent increases over time, boosting the yield. Our complete negative gearing guide covers how gearing affects taxable income and when it applies, separating the tax mechanism from the investment decision.
Myth 3: Cash Flow Properties Improve Borrowing Capacity
Myth 3: Cash Flow Properties Improve Borrowing Capacity
Not Always! Just because you’re generating positive cash flow, doesn’t mean banks will make your life any easier when it comes to borrowing.
These days banks look at the overall level of risk as well as income parameters. Many lenders won’t let borrowers move beyond certain debt-to-income ratios.
On the flip side, when you’re starting out it’s normally the deposit that is the major hurdle that causes the bottleneck for investors. High capital growth properties will actually help break through this barrier and allow you to expand your portfolio.
These days banks look at the overall level of risk as well as income parameters. Many lenders won’t let borrowers move beyond certain debt-to-income ratios.
On the flip side, when you’re starting out it’s normally the deposit that is the major hurdle that causes the bottleneck for investors. High capital growth properties will actually help break through this barrier and allow you to expand your portfolio.
Myth 4: Cash Flow Investment Properties Are Safer Than Growth Properties
Myth 4: Cash Flow Investment Properties Are Safer Than Growth Properties
Wrong! While higher cash flow properties are easier to hold, they can get a bit risky as the type of properties (like NDIS, DHA, Boarding rooms) tend to attract investors only – this limits demand to other investors which is around 30 per cent of the overall market.
In contrast, buying a simple family home in a good neighbourhood broadens your market greatly.
In contrast, buying a simple family home in a good neighbourhood broadens your market greatly.
Myth 5: You Must Choose Between Capital Growth and Cash Flow
Myth 5: You Must Choose Between Capital Growth and Cash Flow
Not necessarily! It’s certainly possible to be creative and take a more active approach to property investment which can allow you to benefit from both cash flow and capital growth. Undertaking a cosmetic renovation of the property or even adding a granny flat is a way to manufacture capital growth and also boost a property’s cash flow.
When weighing up the choice between the two, it’s all about taking an overall portfolio approach that is in keeping with your circumstances and goals.
An investor can consider buying a couple of properties for cash flow and some more for their capital growth potential. This makes for a balanced portfolio that will allow you to service your debt while also reaping the benefits of the capital growth. Our portfolio strategy and sequencing guide explains how the balance shifts at each stage: why early acquisition typically prioritises growth, and how the portfolio pivots toward cashflow as it matures.
When weighing up the choice between the two, it’s all about taking an overall portfolio approach that is in keeping with your circumstances and goals.
An investor can consider buying a couple of properties for cash flow and some more for their capital growth potential. This makes for a balanced portfolio that will allow you to service your debt while also reaping the benefits of the capital growth. Our portfolio strategy and sequencing guide explains how the balance shifts at each stage: why early acquisition typically prioritises growth, and how the portfolio pivots toward cashflow as it matures.
Capital Growth vs Cash Flow: Which Strategy Is Right for Your Portfolio?
Capital Growth vs Cash Flow: Which Strategy Is Right for Your Portfolio?
Cash flow will certainly help you maintain and hold your property portfolio, but it is the capital gains that will ultimately grow your portfolio and make you rich.
You will need to assess both cash flow and capital growth along with the overall risk and how they align with your long-term strategy. If you want help working out the right growth vs cashflow balance for your specific portfolio stage and tax position, our strategic property advisory service is where this question gets answered with your numbers.
You will need to assess both cash flow and capital growth along with the overall risk and how they align with your long-term strategy. If you want help working out the right growth vs cashflow balance for your specific portfolio stage and tax position, our strategic property advisory service is where this question gets answered with your numbers.
Next steps: Should you want to learn how the author built his $5m balanced portfolio in 7 years and aspire to own something similar, feel free to get in touch via email at [email protected] or book an appointment here.
Disclaimer: This article is general in nature and does not take into account your situation. You should consider whether the information is appropriate to your needs, and where applicable, seek professional advice from a financial adviser.
Disclaimer: This article is general in nature and does not take into account your situation. You should consider whether the information is appropriate to your needs, and where applicable, seek professional advice from a financial adviser.
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