Capital Growth Or Cash Flow – Which is Better?

When it comes to property investment you’ll often hear two somewhat conflicting philosophies being bandied around.
A common question beginning investors ask is – which is better?

Cash flow investment strategy:
Firstly there are the “Cash flow” followers; they suggest you should invest in property that has the capacity to generate high rental returns in an attempt to achieve positive cash flow. In other words, you want rental returns that are higher than your outgoings (including mortgage payments), leaving money in your pocket each month.

Investing for capital growth:
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. 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 you best, I really need to know what you want to achieve.

But here’s the trick….
You can’t turn a cash flow positive property into a high growth property, because of its geographical location. But you can achieve both high returns (cash flow) and 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 cash flow properties into high growth, strong cash flow properties. This means you can get the best of both worlds.