Property professionals will generally favour buying for one or the other. In this post, we’ll take you through the pros and cons of buying for cash flow.
Buying for cash flow – the pros
This strategy is based on purchasing properties that have very high rental returns. The rental return or income received from these properties covers all of the interest, maintenance and other costs associated with holding or owning the investment property. This means that the investor has no out of pocket expenses and sometimes will even have money left over at the end of each month. Those that recommend buying for “cash flow” will suggest that you only buy property with high rental returns. In most cases, you would have to purchase in regional centres or buy high risk securities like student accommodation to achieve this. This type of investing is known as positive gearing. Check out our post on Positive Gearing for more information.
Put simply, a cash flow positive property either won’t provide the capital growth needed to acquire further properties, or it will do so at a much slower rate. While you’ll still be making money from your property, those earnings are subject to income tax treatment. Further, a capital growth property will mean you simply won’t be able to afford to add to your portfolio again as quickly as you would like due to the high holding costs.
So is buying for capital growth the answer? Not quite. Check out Should you buy for cash flow or capital growth? Part 2 to see if it is possible to buy for both cash flow and capital growth.