Cashflow or capital gains – which is better for property investment?

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

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

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

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 a particular investor; really it depends upon their investment aims and goals.

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.

Most investors should consider property investment as a way to build an asset base which one day will replace their personal exertion income.

This means they should aim to grow a large asset base and then enjoy the cashflow their “cash machine” churns out.

The few dollars a week positive cashflow properties might bring in, is not really going to make much difference to one’s lifestyle or an investors ability to acquire and service other, more desirable properties for their portfolio.
You can’t save your way to wealth – especially on the measly after tax positive cashflow you can get in today’s property market. And in a rising interest rate environment as we are experiencing, a property that is cashflow positive today may be cashflow negative tomorrow.

I believe 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 cashflow positive property into a high growth property, because of its geographical location. But you can achieve both high returns (cashflow) as well as 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 cashflow properties into high growth, strong cash flow properties.

This means you can get the best of both worlds.

Michael Yardney is the director of Metropole Property Investment Strategists, a best-selling author and one of Australia’s leading experts in wealth creation through property. For more information about Michael visit www.metropole.com.au and www.PropertyUpdate.com.au.