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We all know that property investment is a proven path to building wealth – it’s why you’re here right?
But what you may not know what the world of property investment comes with a TON of different strategies to build this wealth, and it can be confusing trying to figure it all out on your own.
No two investors are the same, and everybody comes into it with different goals and expectations from their investments, which is why it’s crucial to understand all of your options, so you can make an informed decision about which strategy is best for you.
Two of the most common approaches to building growth through property investment are capital growth and cash flow.
Each has its own benefits and risks, and choosing one will depend highly on your own financial goals and current position. We’re going to break down both, to help you understand which approach may be the best for you:
What is capital growth
Capital growth is the increase in a property’s value over time. Investors who focus on a capital growth strategy will usually look for properties in high-demand areas, with strong potential for their investment to go UP in value – also known as appreciation.
The pros of Capital Growth:
- Much higher potential for long-term wealth building
- The ability to leverage equity (using the $$ from the increased value of your property) to buy more properties and expand your portfolio
- Your investment passively increases in value, with minimal day-to-day management required
The cons of Capital Growth:
- Often results in lower rental yields which means less cash in your pocket
- This is a long-term strategy, so it can take years to see your investment pay off
- Fluctuations in the market can impact the short-term value of your property
What is cash flow?
Cash flow is the rental income generated by your property (after you’ve considered all expenses such as paying off loans, property and management expenses etc). It’s a strategy that focuses on properties that are highly desirable to renters and are generally positively geared, meaning that you’re still making money in your own pocket even after paying off the mortgage and other costs.
The pros of cash flow:
- Provides an immediate, consistent income
- Ability to use the immediate return on investment to cover lifestyle costs or pay off the mortgage faster
- Less reliance on market appreciation
The cons of cash flow:
- Properties with high rental yields generally increase in value much slower
- Risk involved due to vacancies and rental market changes, resulting in fluctuating income
- Requires more active management – either self-managed or through a property manager
Which is better – capital growth or cash flow?
We’ve said it before and we’ll say it again – there is no one-size-fits-all approach, and while the capital growth strategy may be perfect for one person, for another, the short-term benefits of a cash flow strategy may be far more desirable.
Lots of investors start out with a capital growth strategy, purely because it’s the best approach to build LONG-TERM wealth, and it gives you the ability to reinvest with equity – making it a lot easier to expand your portfolio. Plus, over time, a well-selected property that uses a capital growth strategy ca actually do both – increase in value AND deliver on cash flow.
Our take?
For us, capital growth is the priority, because over time it’s the best approach to help you build your portfolio. Building a strong, diverse portfolio is what’s going to eventually generate both equity and rental income – which is where the real wealth building comes from.
Both strategies have their merits, but capital growth is the approach that will provide you with that long-term financial freedom.
If you’re unsure which approach is the best for you, working with a team of experts like we have here at Propell can be really helpful to help you build a portfolio and choose an investment strategy that makes sense for your goals and lifestyle.
Contact us or give us a call at 1300 776 735, to find out how we can best support you on your property investment journey, with tailored advice to help you achieve YOUR goals – whatever the strategy.
