I found out at a networking event recently that, a lot of people were asking me the same question, as soon as I mention that I help investors create wealth by investing in property.
The question I got asked was… “which is better when investing, – cash flow or capital growth?” Some asked in a different way asking… “which do you focus on when looking to invest – cash flow high yielding assets or assets with the best opportunity for capital growth?”
My response to these questions all the time is the same; I say it depends on the investor’s objective and what the investor wants to achieve in the end. The aim of the investor would determine what property investing path way to adopt, in order to deliver either cash flow or capital growth. I make it known to them that cash flow reflects a guaranteed present value today while capital growth is sometimes speculative of a future value which might not be guaranteed.
Here are 3 points I consider when investing for cash flow or capital growth.
1. Income
I invest for cash flow in a high yielding property such as multi-lets, which guarantees consistent rental income on a weekly or monthly basis and this helps mitigate costs and bills associated to the investment property. A major drawback of this path way is that over time, if not properly geared, associated costs might increase or grow higher and begin to affect rental income. Income is dependent on the property being rented. On the other hand, I invest for capital growth because it involves buying an undervalued property, adding value to it and selling it on to make a profit. It could also be a situation where a property is bough and held for a long time to build equity. Although income is made on the upside potential, a major drawback of this path way is the inconsistency of the income. Income is dependent on the property being sold or appreciating in value over a period of years.
2. Expenses
Investing for cash flow will ensure that whenever there are unexpected emergency expenses, there would be available funds to deal with such emergencies. These expenses could include rises in interest rates, tenancy void periods or even having to replace a boiler. Investing for cash flow helps investors build a contingency reserve. On the other hand, investing for capital growth could be costly and expensive to hold due to not receiving income or negative cash flow. With this path way, an investor would usually need to deep into their own pockets to cover expenses associated with holding the property. In some instances, investors do not mind doing this because they believe the upside at the time they sell the property would cover all the expenses they have incurred over the years.
3. Risk
I invest for cash flow in a low yielding property strategies such as single lets which tends to have less risk and gives the opportunity of holding the property for a long-term, with potential of building a safe and secure portfolio over time. On the other hand, investing for capital growth alone, if not done correctly, can be a very high risk strategy in running a property portfolio because investors run the risk of probably being out of pocket and not being able to fund emergency expenses while holding the property for a long term. It is a strategy that is built on the assumption and speculation that the value of a property would rise or continue to rise over time.
Although each path way has its benefit and drawbacks, ultimately the investing decision is dependent on the investor’s objective, personal circumstance and investment goals. Investing for cash flow helps mitigate unexpected emergency expenses, while investing for capital growth helps build huge capital quickly. However, as much as possible, you should aim to diversify and have a mix of both by investing for cash flow in an area with potential for capital growth.
If you find something interesting, have any questions or would like to choose an investing path way in line with your personal circumstance, contact us and I will be more than happy to help.
Regards,
Emmanuel Adedipe | achieving more together
