As investors set out to turn their properties into an asset base that will set them up for a better financial future, a common predicament surfaces; do you invest in positive cash flow properties that pay for themselves, or should you rather be aiming to secure a property that will soar in value with capital growth – but that costs you a pretty penny to maintain?
Director of Rethink Investing, Scott O’Neill, sits down with Your Investment Property magazine editor Sarah Megginson to cut through some of the noise that circulates the topic of cash flow versus capital growth, and help investors understand what type of property will deliver the most gains over the long-term.
“You need both – that’s the answer,” O’Neill shares.
“One of the biggest things with that argument that cash flow doesn’t grow, that’s a general comment. They’re assuming you’re buying in a very terrible area [or] lowest socio-demographic area that’s got high yields and then the growth is [going to be] poor.”
That doesn’t have to be the case, however. He recommends investors searching for income-producing properties should hone into a location that “has better cash flow than normal”.
“You’re still in a good quality area but you’ve got a property that will perform better from a cash flow point of view,” he explains.
Expanding your scope and the property types that can breed an optimal return will also be of value; such as considering a house that has a granny flat, which O’Neill says could bring in $200 or $300 per week.
Commercial property is worth investigating, too.
“You might have a warehouse or a little dentist or an office space where you’re getting two or three times better cash flow in the same area than you would for a residential property,” O’Neill says.
It’s a journey to finding a property that will bring in the right balance between cash flow and capital growth, he adds, and on some occasions sifting through the market “takes a lot of time”.
While capital growth is important, O’Neill advises investors to be wary of the real value of cash flow, especially for when holding expenses spike and investors have to pull the funds out of their own pocket.
“It’s not going to let you retire because you’ve got to pay money towards that,” O’Neill says.
“A lot of people transition out of those growth properties into high cash flow assets because that’s what you actually need in retirement.”
To learn more about the tango between cash flow and capital growth, including how to leverage your extra cash flow and whether it’s possible to become wealthy through cash flow properties alone, watch Scott O’Neill’s full interview above.