Cash flow vs capital growth
What will make you richer faster? Is chasing positive cash flow the best way, or is a capital growth strategy the better option to suit your situation? Before deciding on your preferred option, you need to look at some of the pros and cons of cash flow and growth property investments.
Cash flow strategy
– Using a cash flow strategy means investors are getting a weekly income and realising the value of their investment over the short term.
– Investors have more cash in their pocket to cover regular property expenses and unforeseen property expenses.- Extra cash can be used to pay down loan creating equity.
– In a residential property scenario where a property has a high rental yield and cash flow, it generally has very negligible or no capital growth.
– Since investors are earning a positive income, they can’t take advantage of a negative gearing tax benefit and instead have to pay tax on their rental profits.
Capital growth strategy
– Increased value of the property over the long term more than outweighs the cash flow benefits in the short term.
– Investors are more likely to make a loss with a capital growth strategy and can take advantage of a negative gearing tax benefit.
– LVRs are generally more generous, because banks are typically more comfortable lending for properties in desirable growth areas, often big cities.
– Cash flow is negative, meaning investors with a capital growth strategy need to dip into their own pockets to cover property-related expenses, such as mortgage repayments and council rates.
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