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Capital growth versus cashflow

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

So a common question beginning investors ask is – which is better?

And can you get both?

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.

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 (cash flow).

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

Clearly if both exist there is a place for both so to answer the question of what makes a better property investment for a specific investor, what makes a better investment for you, 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 cashflow and capital growth, I would invest for capital growth every time.

This is particularly true if you are considering property investment to build an asset base to one day replace your personal exertion income – your salary from your day job.

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

The few dollars a week your positive cash flow properties might bring in immediately, 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, 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…

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.

A good example of a property that can produce both high cash flow and strong capital growth is a 3 bedroom, 1 bathroom house we recently purchased on behalf of clients of Metropole in the Brisbane suburb of Camp Hill.

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Located in the exclusive “Avenues” area of Camp Hill, where million dollar homes are currently being built and extensive development is occurring, the home is on a 607 metre square block with lock up garage.

Although the property is currently liveable, the client has decided to spend some money on a few cosmetic upgrades to provide immediate capital growth and increase the rental yield.

They are refurbishing the kitchen, bathroom and flooring and giving he place a fresh coat of paint, adding decking and enclosing what is currently a rear toilet and laundry. All of these improvements will cost around $38,000, with work taking two weeks to complete, after which there will be a new depreciation report drawn up and the opportunity to ask a higher rental.

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They have the luxury of being able to sit on the property while new, prestige homes go up around their investment, hence increasing the value of this older detached dwelling and in ten years, can either decide to complete a major renovation or demolish the existing property and build something new.

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With a median price of $670,000 in Camp Hill and average annual growth of 14.2%, this property represents a great buy.

On the market for $589,000, we secured the house for $552,000, with the primary strategy being to buy in an area (and in particular a street), where old houses are being renovated or knocked down to be replaced by million dollar, owner occupied homes.



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About

Shannon is director of Metropole Properties Brisbane and as a successful property investor and licensed estate agent, his years of industry experience helps his clients maximize the performance of their investment properties. Visit www.BrisbaneBuyersAgent.com.au


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