Capital growth vs cash flow – what’s better?
It’s a common question among property investors; what’s better, capital growth or cash flow?
Generally speaking, there are 2 models of property investment that are available to investors.
- To buy properties that will increase in price above market rates of return (i.e. high capital gains)
- To buy properties that offer rental returns above market rates of return (i.e. high cash flow)
In residential property investment, it’s not often that you’ll find properties that offer high levels of both capital gains and cash flow. Generally properties with high growth expectations come with lower rental yields.
Therefore, investors will need to focus on properties that provide one over the other.
What’s the better option, capital growth or cash flow?
It all depends on your current circumstances, but there are a few considerations to take into account to know where you fit.
Do you want to increase your personal wealth, or do you want a source of income?
If you want to significantly grow your personal wealth, then you should choose a capital growth strategy.
As a general rule of thumb, capital growth is best for investors aged between 20 and 60, who are still accumulating their wealth.
Buying high growth properties will allow these investors to capture the benefits of compound growth as their properties rise in value and amass significant personal wealth.
As you near retirement, you should‘ve created the wealth required to live the type of lifestyle you want.
However, you’ll also require a source of income if you’re no longer working.
This is when a cash flow strategy is necessary as investors can utilise the rental returns as a means of passive income.
It’s important that investors work with a property investment advisor who can advise you on the most suitable properties for your own circumstances and stage of life.