Cash Flow versus Capital Gain

There are many investors who have been successful with investing in property. Many of them swear that positive cash flow property is the best way to invest while others focus on the potential capital gain from the investment property.

This is a very important question to raise at this stage of the decision making as it will determine where you buy and the type of residential property you purchase.

Should you purchase property for cash flow or for capital gain?

To determine which is more important, let’s look at what each strategy provides.

Positive Cash Flow
In brief, positive cash flow property means that you will not be out of pocket each week after receiving the rent, paying the loan interest and other expenses, and claiming the appropriate depreciation.

To achieve a positive cash flow, either the property must have a higher than average rental compared to the purchase price so that the rent is more than all expenses including interest or the property has a large amount of tax deductions that provides the investor with a refund so that they are not out-of-pocket and there is money left over, or a positive cash flow!

While positive cash flow properties are sometimes hard to find, they are there. Typically they will be found in large regional areas around Australia. These areas often have a strong economy, low job vacancy rates and low unemployment. These areas often have lower capital gain growth compared with city areas.

One benefit of purchasing property for cash flow is the fact that there are fewer limitations on how many properties you can purchase. Investors are often only limited by there equity they have to lend against as their cash flow is positive for each property, ensuring cash available to make repayments.

The financial figures are crucial to determining if a property is cash flow positive.

Capital Gain
Investment properties purchased for capital gain are usually found with a certain radius of a major city, say 2 to 12km, and are more likely to rise in value due to the increased scarcity and demand of such properties. While the financial figures are still important, the location and house type is critical for the buyer looking for future capital gain.

Areas close to capital cities, with an existing infrastructure which can manage the demands of population growth, have historically been the first to experience capital growth. Suitable areas would include a comprehensive transport network to the city, schooling, shopping centres and other facilities used by young families.

The problem for an investor seeking high growth property is that property prices in the desired areas often increase faster than the rental returns. For many families, unless you have a high income, this could become a problem.

Negative gearing can be a wise strategy for investors however the key point is that good capital growth is absolutely critical if you are negatively geared.

The benefits are that if the property was sold, they may make a significant capital gain, or alternatively, if the property was revalued at a higher price, the investor could draw down some equity to fund another investment property!

Outcome
So how do you know which one to choose? The answer very much depends on your own personal goals and circumstances and for this reason; we recommend you consult an expert in financial planning or your accountant.

Ultimately, whether you prefer the high rental yield from positive cash flow property or high capital growth from your investment property, or a combination of both, the success of your investment will depend on your total returns – rental income and capital growth.