At one point, property investors would find themselves asking this question to themselves or fellow investors – invest for growth or cash flow? To put it bluntly, investing in growth and cashflow are equally important, however the choice on which one you should invest in first highly depends on your financial standings, goals and attitude towards risk.
For seasoned investors, they generally understand the reasons that contribute to healthy growth and also why some properties perform better than others in when it comes to cash flow. As a result, they are able to select and invest in properties that work in their best interests.
However, for those who are new in the property investment industry, you may not have the experience and knowledge, and you may opt to choose to invest in growth over cash flow, or vice versa. In this case, the choice may not always be favourable.
To give you an idea of things, a common mistake that investors make is the apartments and other assets in Melbourne and Brisbane are known to produce good cash flow, but they disregard the fact that both places have poor growth. Having poor growth in the long run can terribly disrupt your returns, and you may end up losing part of your investments.
Many investment companies and wealth consultants usually advise investors to take up property based on the investors’ affordability. These properties often include new properties that do not have good growth prospects. For those who have limited budgets, or are new to the property investment industry, buying this type of property may be a good option for you. However, profit wise, you will not definitely get lesser returns as compared to another property that has good growth prospects.
As you can see, both cash flow and growth go hand in hand. But if you can afford to focus on only one aspect then choosing growth would be a better and smarter approach. Why is this so?
Cash flow usually comes into the picture when the property has matured and its price has lifted up. The rental amount catches up to the current market price and with a good growth, you can easily get a 7% to 12% yield in the long run. Even with a poor rental yield, the amount will not be too unbearable for investors. A $10,000 shortfall in a year, comes up to approximately $192 per week, before tax. And if the growth of the property gets better, then the situation becomes advantageous to the investors.
So in this regard, growth is the better and smarter approach as compared to cash flow. Investors should strive to find good investments that can lead to desirable growth, specifically within short and medium durations.
If growth is not an option, investors have to focus on cash flow investments. Investors can still gain significant returns out of their assets, but in order to reach high significant returns, it will probably take longer – approximately 20 to 30 years.
The tables below are examples of growth between 2 properties with a 600,000 purchase price.
Property A – Solid growth
| Year | Capital Growth | Property Value | Equity |
| 1 | 3% | $600,000 | $60,000 |
| 2 | 5% | $618,000 | $78,000 |
| 3 | 7% | $648,900 | $108,900 |
| 4 | 8% | $694,323 | $154,323 |
| 5 | 8% | $749,869 | $209,869 |
| 6 | 10% | $809,858 | $269,858 |
| 7 | 12% | $890,844 | $350,844 |
| 8 | 8% | $997,745 | $457,745 |
| 9 | 7% | $1,077,565 | $537,565 |
| 10 | 7% | $1,152,995 | $612,995 |
Property B – Poor growth
| Year | Capital Growth | Property Value | Equity |
| 1 | 1% | $600,000 | $60,000 |
| 2 | -3% | $606,000 | $66,000 |
| 3 | 0% | $587,820 | $47,820 |
| 4 | 2% | $587,820 | $47,820 |
| 5 | 2% | $599,576 | $59,576 |
| 6 | 4% | $611,568 | $71,568 |
| 7 | 4% | $636,031 | $96,031 |
| 8 | 2% | $661,472 | $121,472 |
| 9 | 3% | $674,701 | $134,701 |
| 10 | 1% | $694,942 | $154,942 |
As you can see, after 10 years, the equity for Property B stands at $154,942 as compared to Property A, which is $612,995.
In terms of property value, Property B stands at $694,942 whereas Property A has $1,152,995.
The difference in figures is huge, even though both properties were bought at the same price. Thus as an investor, you ought to be able to identify the location and other factors that will either push or deter growth.
Let us move on to cash flow. The tables below are examples of cash flow between 2 properties.
Property A – With low yield – Average 3.5%
| Weekly Rent | Yield | Vacancy | Letting Fee | Income PA |
| $403.85 | 3.5% | 2 weeks | one week rent | $21,000.00 |
| $415.96 | 3.5% | $21,630.00 | ||
| $449.24 | 3.6% | $23,360.40 | ||
| $494.04 | 3.7% | 2 weeks | one week rent | $25,689.95 |
| $490.30 | 3.4% | $25,495.54 | ||
| $513.95 | 3.3% | $26,725.33 | ||
| $599.61 | 3.5% | 2 weeks | one week rent | $31,179.55 |
| $729.12 | 3.8% | $37,914.33 | ||
| $787.45 | 3.8% | $40,947.47 | ||
| $842.57 | 3.8% | 2 weeks | one week rent | $43,813.80 |
| $297,756.36 |
Property B – With good yield – Average 5%
| Weekly Rent | Yield | Vacancy | Letting Fee | Income PA |
| $403.85 | 3.5% | 4 weeks | one week rent | $21,000.00 |
| $407.88 | 3.5% | 4 weeks | one week rent | $21,210.00 |
| $406.95 | 3.6% | $21,161.52 | ||
| $418.26 | 3.7% | 4 weeks | one week rent | $21,749.34 |
| $392.03 | 3.4% | 4 weeks | one week rent | $20,385.60 |
| $388.11 | 3.3% | $20,181.74 | ||
| $428.10 | 3.5% | 4weeks | one week rent | $22,261.07 |
| $483.38 | 3.8% | $25,135.93 | ||
| $493.05 | 3.8% | $25,638.65 | ||
| $507.84 | 3.8% | 4 weeks | one week rent | $26,407.81 |
| $225,131.66 |
So what does this tell you?Although Property B has a good yield and promises a higher weekly rental rate, it takes double the time for the property to get a tenant as compared to Property A. This is probably because Property B is located in a high risk area. By the end of a 10 year period, the total gross rent between both properties may not be too different.
In summary, a good investment that produces good growth will benefit the investor greatly as compared to a cash flow property that cannot fails to deliver.
If you are still unsure of the way to go ahead, get independent and credible advice from those who have the experience, knowledge and expertise, backed with reliable facts and figures. Guard yourself from the ones that only serve to sell you unachievable dreams, and focus on looking for the right strategies – the ones that suit you and can work to your advantage.[/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]
