Capital Gain verses Cashflow have been debated for as long as there have been entrepreneurs. Both strategies are important to financial independence but which strategy is best for you?

The best place to start is to be clear about what they are. High Capital Gains are where you pursue above average increases in capital value over time. Ideally you’re looking for consistent capital growth of over 7 percent per annum. Whereas cash flow is an investment made purposely for the guaranteed income per month. Cash flow properties generally have minimal capital growth but they do provide a regular income.

To be exact about how well your property investment is doing you need to work out the total return from an investment property. This  is determined by adding the average long-term capital gain with the annual rental yield. For example if you have a property with an average of 7 percent capital appreciation a year, with a 5 percent rental yield then the total return is 12 percent per annum.

Lets look at an example of high capital cashflow. A few years a go I met an architect who had 3 properties side by side in one of Australia’s most expensive suburbs. While all 3 properties were run down, they were still worth a mint at about $6 million in total.

The architect lived in one of the derelict properties and rented the others out for a nominal rent. Note the rent was a very poor yeild of 2% compared to the actually high value of the property. This was partly because the properties were in poor condition but also due to the historical fact that properties in expensive suburbs have low rents in relation to their value. These 3 properties should have been appreciating for many years at around an average of 10 percent per year in an uprising market. Yet this architect had no cash. He couldn’t afford to do maintenance on the property. He could hardly afford to support himself because his cash was spent on high mortgages with little rent. He hangs on to those properties, unable to raise the funds to improve any of them. He is what’s called asset rich, cash poor. He has been waiting for the properties to double over 10 years when planned to sell one or more of the properties and renovate or rebuild the remaining propeties from the capital gain profits. This strategy works beautifully in an uprising property market. In this situation the architect has options to move forward. He could partner with someone to renovate a property and sell it at a profit or  sold a property as is, to reduce his mortgage. Unfortunately with the GFC properties in exclusive suburbs have not increased their value at all, and in most cases fallen by up to 10% in value over the past 5 years. However if the architect manages to hold onto these properties for the long term and improve them, he will definately profit hansomely.

Lets look at the option of cash flow. This is a slow but tried train to creating an income over the long term. In Australia the best rents are often in country towns where the prices of residential housing is low. This means the rental yeild is above average. For example my neighbour brought 6 units in a coastal town in northern QLD in 2003. The units were purchased below replacement value and because of the low cost,the rental yeild was high at 9%. At the time the mortgage interest was only 6% so the properties were slightly positively geared. Over the years the units had minor improvements made to them to make them more attractive to renters and the rent increased. The properties do not collect enormous amounts of cash but the income derived is steady and slowly growing over a long period of time. There is limited capital growth in these types of properties but it is possible to fund retirement from rental income derived from cash flow property portfolios. While cash flow properties may not achieve extraordinary high capital gains, at least they assist in gaining financial independence by providing income for life.

While the best position is to have a mix of  both high capital appreciating properties and high rental yields. Whether you aim for high capital growth or cash flow depends on your financial circumstances and your long term goals. The best way to make that decision is to be as informed as possible so you can make the right choice for you.

People are often divided into 2 different camps regarding the best type of investment whether it be property or shares. In reality, all investment based on sound research and correct advice is a good investment. However there are differences between property and stock market shares which sway people depending on their needs.

Do shares actually perform better than property? Well the fact is no, they perform relatively similar. For instance, a good property investment in a high performing suburb historically doubles every 7 to 10 years and has a rental yeild of 4%. Therefore the total return from a good property investment can be 13 – 14% per annum. Similarly from 1983 to 2009 stock market shares grew on average 8.4% per annum. Add dividends to the stock and this equals out to 13 -14% growth per year.

Although the relative return per year is in fact very similar, there are vast differences in the involvement, the liquidity and the amount of control you have with the investment.

Property has less volitility and is regarded as a relatively safe investment by the banks who are willing to lend between 80% of the property cost compared to the higher volitility of stocks and where banks are prepared to lend only 60% of the market value of the shares. The volitility of the share market is influenced greatly by market sediment, national and global ecomonic factors and media whereas the property market is influence mostly by local sediment and supply and demand.

Shares are easliy liquidated, whereas property can be slow to liquidate. Tax deductions are treated similarly in Australia as both are considered investments. With property, there are tax benefits on new buildings such as capital work deductions and any costs associated with the property are tax deductible. These deductions are not directly available to share holders. Both investments can be negatively geared .

How ever the biggest difference is the investors ability to change and add value to their investment. With shares, tthe investor has little control over the running of the company whereas in property the owner/investor can add value and improve the investment.

It is best to have a balanced port folio of both shares and property however carefully consider what you want from your investment before you decide where you will invest your money. If you are like us at Montek, we cherish the idea of adding value and influencing how much we can improve the value of property investments.

Welcome to Montek Property new website and first blog post.

We are excited that we can share with you articles, information and courses about property development using this blog.

Please feel free to make comments below as we are interested in what you find helpful and informative.

The first article we will post is about a discussion about how property investment versus share market investment. This was a topic that Montek’s Philip Thomas went on 6PR radio station and talked about this with Ted Bull.

See you in the next post.

“What you can do, or dream you can do, begin it: boldness has genius, power and magic in it.” Goethe