One of the most important aspects of being a mortgage broker - and where my passion lies - is to educate clients about property investment. Why? Because knowledge is power and when you have some of the basic pieces of financial education in place, you can very quickly turn your money situation around. The hard fact is that no one else will equip you with the facts, insights and strategies to make your money work smarter for you; schools, the media and even our own family members are usually not equipped or motivated to help us to understand how to make our money work harder for us.
But I’m here to change that!
What’s the difference between cash flow and capital growth and why do you need to know this?
One of the key concepts that buyers and investors need to understand is the difference between cash flow and capital growth in property investment.
Cash flow refers to the income generated by a property investment, while capital growth refers to the increase in value of the property over time. Both of these factors are important when it comes to evaluating the potential return on investment of a property, but they are fundamentally different in nature.
Cash flow is the income generated by a property investment on a regular basis. This includes rental income, as well as any other sources of income such as vending machines or parking spaces if you own commercial property. Cash flow can be positive, negative, or neutral, depending on the expenses associated with the property.
When cash flow is positive
Positive cash flow is when the income generated by the property is greater than the expenses associated with it. This is often the goal of investors who are looking for a steady stream of income from their investment. Negative cash flow, on the other hand, is when the expenses associated with the property are greater than the income generated by it. This is not necessarily a bad thing, as it can be offset by the potential for capital growth in the property and can also be beneficial in certain tax circ*mstances. This is what is called negative gearing.
Is capital growth your long-term goal?
Capital growth, as mentioned, refers to the increase in value of the property over time. This is often the result of factors such as inflation, supply and demand, and improvements to the property itself. When a property increases in value, it can be sold for a profit, providing the investor with a capital gain.
Capital growth is often the goal of long-term investors who are looking to build wealth over time. However, it is important to note that capital growth is not guaranteed and can be affected by a variety of factors, including economic conditions, changes in government policy, and shifts in market trends.
Getting the balance right
When evaluating a property investment, it’s important to consider both cash flow and capital growth. A property that generates positive cash flow can provide a steady stream of income, while a property that has the potential for capital growth can provide a long-term return on investment.
It is also important to consider the risks associated with each type of investment. A property that generates positive cash flow may be more stable in the short term, but it may also have limited potential for growth. On the other hand, a property that has the potential for capital growth may be more volatile in the short term, but it may also provide a greater return on investment over time.
As a mortgage broker, my role is to help buyers and investors understand the risks and potential rewards associated with each type of investment. I work with my clients to identify their goals and priorities, and to help them find the right property investment that aligns with their financial objectives. I partner with other values-based experts in their fields too - financial advisors, buyers agents and accountants to ensure my clients have the best options when making their next investment decision.
In addition to helping my clients find the right property investment, I also provide a range of mortgage broker services to help them navigate the complex world of property finance. This includes helping them to secure financing for their investment, negotiating with lenders to get the best possible rates and terms, and providing ongoing support throughout the life of their investment. I also review the property values so my clients can extract equity to use as the deposit for the next investment property.
Overall, understanding the difference between cash flow and capital growth is critical when it comes to property investment. By considering both factors, buyers and investors can make informed decisions about their investments and build long-term wealth. As a mortgage broker, my goal is to help my clients navigate this process and find the right property investment to meet their needs and achieve their financial goals.
I hope these insights about the difference between cash flow and capital growth in property investment have been helpful to you. As you continue on your investment journey, it's essential to have a trusted advisor by your side. If you’re keen to know more, book a free call by clicking the link. Achieve your investment goals and secure your financial future.
Disclaimer: The information in this article is for educational purposes only and is not professional financial advice. Personal circ*mstances, financial situation, and needs have not been considered. Please seek personal financial, legal, and tax advice before taking any actions based on the content of this article. The views expressed are the author's own and do not necessarily reflect those of any organisation they are affiliated with. The author is not responsible for any losses or damages arising from reliance on the information provided.
