{"id":87593,"date":"2024-10-31T15:30:00","date_gmt":"2024-10-31T04:30:00","guid":{"rendered":"http:\/\/propertyupdate.com.au\/?p=87593"},"modified":"2024-10-10T13:02:47","modified_gmt":"2024-10-10T02:02:47","slug":"why-capital-growth-beats-cash-flow-every-time","status":"publish","type":"post","link":"https:\/\/propertyupdate.com.au\/why-capital-growth-beats-cash-flow-every-time\/","title":{"rendered":"Why Capital Growth Beats Cash Flow Every Time"},"content":{"rendered":"

Every property investor is looking for the secret to success, aren't they?<\/p>\n

Some spend years searching for a mythical investment strategy that will be their path to untold riches.<\/p>\n

Alas, while they are on their unhelpful hunt, they miss golden opportunities that could have helped them achieve their financial goals and dreams much earlier.<\/p>\n

One of the most common mistakes that novice investors make is being fixated on rental yield instead of on capital growth, which is where the secret really lies.<\/p>\n

To prove my point, let's take a look at some capital growth facts.<\/p>\n

\"Capital<\/p>\n

1. It's the key to duplication<\/span><\/h2>\n

The thing is most people's incomes mean they only have the capacity to invest in one property at a time.<\/p>\n

These days you can't invest in property without a deposit and it's always been hard to save one of those.<\/p>\n

The key to growing your portfolio<\/a> is duplication, which necessitates more deposits.<\/p>\n

It's highly unlikely that many people can save multiple deposits over their lifetimes.<\/p>\n

But what they can do is use the capital growth (or equity) in their properties instead.<\/p>\n

If they'd invested in cash flow properties, while they might have solid rent coming in, it generally won't do anything to help you with a deposit for your next property.<\/p>\n

2. A question of debt<\/span><\/h2>\n

How do you feel about carrying debt?<\/p>\n

Some people can\u2019t sleep at night for fear of a market crash or interest rate rise. \r\n\r\n

<\/div><\/p>\n

But, as I've said before, a good debt like mortgages on investment properties can provide you with leverage to magnify your gains.<\/p>\n

Yet in order for this to work, you need to have gained to start off with, which isn't necessarily the case with cash flow properties.<\/p>\n

I've seen more than my fair share of investors whose borrowing capacity has been limited by owning low capital growth assets, which prevent them from borrowing to buy better-performing properties.<\/p>\n

And of course, in today's low-interest-rate environment, good debt is really an asset because you can borrow funds at around 2-3% while a well-located property that you will buy with that debt will increase in value at twice or three times that rate.<\/p>\n

And it's likely that your cash flow shortfall will be minimal in this low-interest-rate environment.<\/p>\n

3. Less than ideal liquidity<\/span><\/h2>\n

It should come as no surprise that cash flow properties have less than ideal liquidity.<\/p>\n

What I mean by that is they can be more difficult to sell if your circumstances change.<\/p>\n

Plus, you'll likely walk away with very little additional proceeds from the sale because it hasn't increased in price overly much.<\/p>\n

Selling real estate also carries high divestment costs such as agent fees and advertising, which will further eat into any potential profits from a cash-flow property.<\/p>\n

On the other hand, an investment-grade capital growth property<\/a> will be more attractive to potential buyers and you're likely to walk away with much more money in your back pocket after the sale.<\/p>\n

\"Equity\"<\/p>\n

4. Equity means choices<\/span><\/h2>\n

My final point is that if you buy a property that doesn\u2019t grow in value you have to hope that the rent continues to cover the costs of ownership.<\/p>\n

But the fact is that it's unlikely that you'll get rental growth in a location where capital growth is minimal.<\/p>\n

But if you buy an investment property that goes up in value, you have a number of options that increase over time.<\/p>\n

If you want to, you could use the equity to buy another property and maybe refinance in order to free up cash flow for other investments.<\/p>\n

And it's likely the rent you receive will also keep increasing.<\/p>\n

Another strategy could be to renovate to add value or you might choose to sell it at the point of retirement in order to pay down debt.<\/p>\n

So which is better?<\/span><\/h2>\n

Chasing a magic property investment formula can be a fruitless exercise and if you do what most property investors do, you\u2019re likely to get the same result \u2013 your wealth creation journey will come to a halt while cash flow keeps you in the property game, it\u2019s really capital growth that gets you out of the rate race.<\/p>\n

That\u2019s why I recommend you only buy investment-grade properties \u2013 the type of real estate will always be in demand by owner-occupiers and in locations that will continue to be desirable because of their proximity to infrastructure and amenities.<\/p>\n

The fact of the matter is no one ever saved their way to financial freedom.<\/p>\n

No, they invested wisely in assets that grew in value over time to provide them with a lifestyle everyone dreams of, but unfortunately, relatively few accomplish.<\/p>\n