Capital Growth vs. Cash Flow – Common Myths Debunked

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.

Here are some of the common myths we hear when discussing capital growth versus cash flow.

1. Cash is king and cash flow will help you grow wealth. 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.

2. Capital-growth oriented 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.

3. Investing for cash flow will allow you to borrow more. 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.

4. Buying for cash flow makes it safer. 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.
 

5. You have to make a choice between cash flow and capital. 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.

Which is best?

 
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.