Capital Growth vs Cash Flow
Real estate is a steady, tangible asset that can provide substantial wealth over time. But a typical question is: cash flow vs. capital growth, which holds more importance when it comes to investing in property?
The truth of the matter is, the answer to this query requires an in-depth analysis of each term in order to comprehend the concept and value.
In this article, we’ll discuss cash flow, capital growth, and the knowledge that experienced property investors have regarding these terms that make them so successful.
What Is Cash Flow?
Cash flow is extremely important to investors and business owners since it is the lifeblood of any business or organisation. The difference between a property’s income and expenses is its cash flow. When your property’s expenses are subtracted from its income and you are left with a profit, you are said to have “positive cash flow.” Negative cash flow occurs when operating
expenses exceed profits. The majority of real estate investors seek to buy properties with positive cash flow.
Why Is A Positive Cash Flow Desirable?
Obviously, you want your monthly income to exceed your monthly expenses.
Why Else You Should Leverage The Power Of Cash Flow:
- Cash flow increases opportunities. Reinvesting income from an investment property into another venture is an excellent strategy to expand your wealth enormously.
- Cash flow provides security. The additional income you receive each month can help you build a larger emergency fund to cover unforeseen life expenses (like medical bills, car maintenance, etc.).
Advantages Of Cash Flow Positive Real Estate
You have immediate access to cash to pay off debts or cover unforeseen expenses. This is beneficial for novice investors. You can utilise the funds to pay down the mortgage in a shorter amount of time, thereby expanding your property portfolio more quickly. Always know that you must invest in a cash flow-positive property to create a valuable asset rather than a liability that drains money out of your pocket.
What Is Capital Growth?
Simply said, capital growth is the increase in the value of your property over time. You can compute capital growth by determining the difference between the current market value of your investment and the purchase price.
There are numerous reasons why capital growth appeals to real estate investors. In a growing real estate market, such as the one we’ve witnessed in recent years, your property’s value may increase even if you do nothing. Smart investors who do their homework and invest in up-and-coming suburbs or places with continuously high demand can occasionally realise substantial wealth appreciation within a few years.
Capital growth is also desirable since it protects against inflation. Thus, the money you get from your property’s appreciation will increase with inflation. Alternatively, if you had £100,000 in a savings account, although you would collect nominal interest on this amount, it’s worth would not change and its purchasing power would instead decrease over time due to inflation.
Advantages Of Capital Growth
Creating Money In Thin Air
When it comes to property investments, capital growth is a huge benefit for the investor. Once you’ve purchased a property and rented it out, you’re not only earning rental income all the way, but you also benefit from capital appreciation.
For example, you purchased the property at £100K, rented it for 10 years at £1000 per month, your annual rental income will be £120,000 and your property value will be £200,000.
Now, you can go back to the bank, refinance at the new value and release the equity! Isn’t that incredible?
Using Home Equity to Construct Your Investment Portfolio
Additionally, a capital growth property investing plan allows you to produce positive equity and grow your portfolio more quickly. This means that if the value of your initial investment property rises, you may be able to use it as collateral to purchase additional investments and grow wealth.
Where to Locate Highly Effective Properties
Typically, properties ideal for a capital expansion strategy are located in capital cities and areas undergoing development.
Real estate is one of the most popular, profitable, and reliable investment options that can yield a high return on investment when executed properly. The benefits of real estate investment include the opportunity to grow wealth, use equity as leverage, and hedge against inflation. It’s important to understand that cash flow and capital growth are equally important. Cash Flow creates the lifestyle you desire to live and capital growth is the wealth magnifier. If you require more understanding you can always contact a property investment firm like Star Sterling and get the help you need!