Capital growth or cashflow – which is better?

When it comes to property investment you’ll often hear two somewhat conflicting philosophies being bandied around.

A common question beginning investors ask is – which is better?

Cash flow investment strategy 769867-australian-money

Firstly there are the “Cash flow” followers; they suggest you should invest in property that has the capacity to generate high rental returns in an attempt to achieve positive cash flow.

In other words, you want rental returns that are higher than your outgoings (including mortgage payments), leaving money in your pocket each month.

Investing for capital growth

Then there’s the “Capital Growth “crew.

Their favoured strategy is to invest for capital growth over cashflow. 


In other words, you need to buy property that produces above average increases in value over the long term.

In Australia, properties with higher capital growth usually have lower rental returns.

In many regional centres and secondary locations you could achieve a high rental return on your investment property but, in general, you would get poor long-term capital growth.

Clearly if both exist there is a place for both so to answer the question of which suits you best, I really need to know what you want to achieve.

You see…property investment should be part of a wealth creation strategy, not just a purchase in isolation.

Having said that there’s no doubt in my mind that if I had to choose between cash flow and capital growth, I would invest for capital growth every time.

You say you have a high paying job, so I assume you are considering property investment to build an asset base to one day replace your personal exertion income

This means your aim is to grow a large asset base and then enjoy the cash flow your “cash machine” churns out. property investment

The few dollars a week your positive cash flow properties might bring in, is not really going to make much difference to your lifestyle or your ability to acquire and service other, more desirable properties for your portfolio is it?

You can’t save your way to wealth – especially on the measly after tax positive cash flow you can get in today’s property market.

And in a rising interest rate environment as we are experiencing, a property that is cash flow positive today may be cash flow negative tomorrow.

It’s important to understand that wealth from real estate is not derived from income, because residential properties are not high-yielding investments.

Real wealth is achieved through long-term capital appreciation and the ability to refinance to buy further properties.

If you seek a short term fix with cashflow positive properties, you’ll struggle to grow a future cash machine from your property investments – it’s just that simple.

But here’s the trick…. location-smart-phone-mobile-area-map-techonolgy-direction-lost-help-guide

You can’t turn a cash flow positive property into a high growth property, because of its geographical location.

But you can achieve both high returns (cash flow) and capital growth by renovating or developing your high growth properties.

This will bring you a higher rent and extra depreciation allowances, which converts high growth, relatively low cash flow properties into high growth, strong cash flow properties.

This means you can get the best of both worlds.


Subscribe & don’t miss a single episode of michael yardney’s podcast

Hear Michael & a select panel of guest experts discuss property investment, success & money related topics. Subscribe now, whether you're on an Apple or Android handset.

Need help listening to michael yardney’s podcast from your phone or tablet?

We have created easy to follow instructions for you whether you're on iPhone / iPad or an Android device.


Prefer to subscribe via email?

Join Michael Yardney's inner circle of daily subscribers and get into the head of Australia's best property investment advisor and a wide team of leading property researchers and commentators.

Avatar for Property Update


Kate Forbes is a National Director Property Strategy at Metropole. She has 15 years of investment experience in financial markets in two continents, is qualified in multiple disciplines and is also a chartered financial analyst (CFA).

'Capital growth or cashflow – which is better?' have 3 comments

  1. Avatar for Property Update

    August 23, 2016 Sidharth

    The money you spend on renovating will not translate to a propotional increase in cash flow.


    • Avatar for Property Update

      August 23, 2016 Michael Yardney

      I agree that I f the money you spend does not increase your rent considerably, then you’ve wasted your money

      We’ve been involved in 73 Reno projects last year and they’ve all significantly increased the rental


  2. Avatar for Property Update

    January 4, 2013 OrbitonAir

    I agree on some items and completely disagree on other points namely:
    “Real wealth is achieved through long-term capital appreciation and the ability to refinance to buy further properties.”

    The problem with this (and I know because I have numerous properties myself) is that even if you have a huge amount of capital growth in your asset(s), the banks calculation on serviceability will make sure you ‘hit a wall’ so to speak so you wont be able to buy further properties.

    Micheal is correct however if you sell you asset and pocket the capital growth or spend on other properties, but NOT if you just borrow against your capital growth.


Would you like to share your thoughts?

Your email address will not be published.



Michael's Daily Insights

Join Michael Yardney's inner circle of daily subscribers.

NOTE: this daily service is a different subscription to our weekly newsletter so...