Income Resource Club > Property > Cash Flow vs Growth
Cash Flow vs Growth Strategy
Positive Cash Flow Properties
These are properties with a low capital growth profile of 4-6% and high rental yield (return) profile of around 6-10%. Occasionally though, the capital growth can be very high for a short while.
Advantages:
- Positive or neutral cash flow;
- Use surplus cash flow to pay down principal and obtain more equity for future investment;
- Small entry price - easy to get started;
- Lower stamp duty & land tax;
- Occasional good equity jump due to demand for high yield properties;
- You can't lose with money in your pocket (unless you get in too late);
- Easier to get a full-doc loan.
Disadvantages:
- Pay tax along the way - money in the tax man's pocket is not going to create wealth for you;
- Slower capital growth over longer term;
- Usually regional or outer areas which can be quite sensitive to economic cycles;
- Harder to get low-doc or no-doc loans for some regional properties due to postcode & population;
- Lower leverage to reduce return;
- Potential higher maintenance of property and more tenancy problems due to social economics.
For further information on Positive Cashflow Strategies, please visit:
Growth Properties
These are properties with a higher capital growth profile of 7-10% (and occasionally over 12% for a short while) and a lower rental yield (return) profile of 3-5% rent (occasionally below 2.5%).
Advantages:
- Tax benefit: negative gearing and delayed CGT;
- Usually consistent capital growth over longer term;
- Usually inner and high population areas which are not affected as much by economic cycles and interest rate fluctuations;
- Easier to get low-doc or no-doc loans;
- High leverage available;
- Potential lower maintenance of property and less tenancy problems due to better social economics;
- Equity increase can be available to invest further.
Disadvantages:
- Negative cash flow if you take on a normal mortgage at a high leverage level;
- Usually more expensive than cash flow properties – potential entry barrier for beginners;
- Higher stamp duty & land tax;
- No guarantee of capital growth every year – you may bet on the wrong horse;
- Harder to get a full-doc loan to access a cheaper interest rate mortgage as your portfolio grows.
For further information on Capital Growth Strategies, please visit:
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