Positive cashflow vs capital growth - which strategy works best for you?
January 7, 2014 / Written by Rich Harvey
When buying investment property in Australia, one of the critical steps is determining whether to opt for a positive cashflow or capital growth strategy. Both strategies work and have their pros and cons.
Put simply, investing for positive cashflow means having a property that brings in extra income on a regular basis. Buying a positive cashflow property means renting it out to tenants, and contending with all the responsibilities that come with being a landlord.
While this may represent more work than investing for capital growth, it also offers the chance to steadily bring in more money, providing tangible results right away.
Finding a positive cashflow property can be easier said than done, however. You must not only find a home that is likely to attract renters, but you must also make sure that the amount of money you bring in from rent exceeds the amount of money you pay toward home loans, taxes, repairs and other financial obligations relating to the property.
Meanwhile, investing for capital growth means purchasing a property that will increase in value over time. This tends to be a long-term investment method, as you'll want to hang onto the property for quite some time before selling at a profit. Holding a property for at least one property cycle (seven to 10 years) means the magic of compound growth really kicks in to generate wealth.
This can make investing for capital growth more difficult, as it doesn't necessarily provide immediate results. Additionally, you'll be taking a LONG TERM PERSPECTIVE on the property market as a whole, making it essential to select a property that has a good chance of appreciating in value over the years.
Choosing a strategy
Each method has its pros and cons, but which one works best for you will ultimately come down to you personal goals and financial circumstances.
If you have the time and money necessary for a capital growth investment, this can be a great way to diversify your portfolio and gain ownership of an asset that can pay off big in the future.
However, if you're looking for immediate returns on your investment, choosing a positive cashflow property may suit your needs better.
Using an expert buyers agent and independent property advisor can really help you work out which strategy to use and which properties best fit the chosen strategy.