Are You Better off Investing in Property For Cash Flow or Capital Growth?
This is a very interesting topic and certainly one that I get asked about often, so I want to give you my take on it.
Cash Flow Positive Strategy:
A cash flow positive strategy is where the properties rental income pays for all the properties running costs including the mortgage repayments, land rates, insurances and puts money in your pocket each week.
If you are focusing on a cash flow strategy the properties will more than likely be in regional markets with little or no capital growth potential.
If you are earning cash flow from your properties, you will be paying tax on that rental income and unable to use the negative gearing tax benefits.
Capital Growth Strategy:
A capital growth strategy is where the long term growth on the property outperforms the financial benefit of that of a cash flow property.
The properties will more than likely be in capital cities, with better infrastructure, more jobs and stronger population growth, thus the catalyst for capital growth.
The lending criteria (LVRs) for banks are more relaxed on properties in capital cities rather than regional locations such as country and mining towns. These types of locations present a higher risk to banks and therefore a higher deposit is required.
Which one is better and why?
When investing in property, it will be capital growth that builds your wealth exponentially over the long term, so this should be the number one focus when investing in property.
Scenario 1
For example if you invested in a $450,000 capital growth focused property and if it doubled in value over the next 10 years, it would be worth $900,000 giving you a $450,000 gross profit. This property only cost $30 per week out of your pocket after tax and became cash flow positive within 3 years.
Scenario 2
For example if you invested in a $350,000 cash flow property that was $100 pw cash flow positive, it would only provide $5,200 pa income that you would have to pay tax on each year. Even if the property achieved 20% capital gain over 10 years, it’s still only $70,000 Gross profit.
Summary:
Buying a property with the main focus being capital growth and a balanced rental income, costing about $30 dollars a week from your pocket after tax is going to be the best and quickest way to achieve a multiple property portfolio, and become financially free.
Getting your strategy right is always going to be the key to your financial success. If you need help getting your strategy set, get in contact for your no obligation meeting today.
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