Cash flow or capital gain - what goal is best for you?
It’s important to consider your strategy and long term objectives before purchasing your first or next investment property as this may influence what and where you buy.
There are two main goals for investors:
1. capital gain
2. cash flow
While it’s quite realistic to achieve both, the two should at least be considered separately and prioritised before making your move.
There are two different types of capital growth - Capital gain is the profit an investor makes after selling the property, and capital value growth is an increase in the value of the property while you still own it.
Capital gain is the profit an investor makes after deducting the purchase costs and any costs associated with selling the property. This amount is taxable.
Capital value growth can occur if you have improved the property with renovations or as historically happens, the value of your property increases due to wider or suburb specific property trends. If you don’t sell your property you will not have to pay taxes on your capital growth.
Cash flow is effectively what is left in an investors wallet once all ongoing costs are deducted from the rent.
In simple terms, cash flow is gross rental income less property expenses, less loan repayments, plus any tax benefits.
If you wish to generate ongoing rental income, then having a cash flow objective may be the best option for you. While you may need to dip in to your own cash reserves in the early stages to repay the mortgage on the property there are tax benefits associated with this.
However as rentals continue to rise there may be a point where your property may become cash positive – delivering a steadily increasing monthly reserve. These extra funds can be channelled back into the property to drive down the principal debt or spent on other purposes.
What is the best option for you?
Remember, when working out what investment is best to you consider your long term goals before you buy and finance your investment. Some properties may offer better opportunities for capital gains while others may command higher rental values over the years.
It’s also important to discuss your funding options with your financial advisor and accountant. Different loans and repayment structures will suit different strategies so it’s vital to find the right product and strategy that meets your needs.