As with other forms of investing there are two main approaches to property investing. These are investing for cash flow and investing for growth. Here we’ll look at investing for cash flow in property and why you might consider this approach.
First of all, what is investing for cash flow? Investing for cash flow is essentially quite simple: The idea is that after you have deducted your expenses from your property rental income you have cash left over.
Investing for growth is quite different: When you invest for growth the idea is that your property will be worth more when you sell it than when you bought it. There isn’t necessarily positive cash flow along the way.
So why should you invest for cash flow?
Here a few advantages:
* It’s predictable. It’s easy to calculate your return based on real figures like purchase price, rental value and yield. You aren’t reliant on estimates of future price trends (in other words speculating) as with investing for growth.
If you’re buying off plan you can calculate your return before you actually buy.
* Certainty. You’re guaranteed a return. You don’t have to rely on property prices going up to produce a return.
Remember that many investors have invested for growth on the back of rising property prices over the last couple of decades. But there’s no guarantee this will happen in future. By investing on a cash flow basis you can even make a return in the event prices go down!
* Regular income. You generate an income each and every month from month one. You build your wealth steadily year in, year out. You don’t have to wait 20 years or more to realise a return.
You can use this cash flow as you wish either to, for example, invest in more property or supplement your income. Some investors generate enough cash flow to live on comfortably, or even retire.
And – you don’t have to sell your property to produce an income as you would with investing for growth.
* You have a much wider choice of investment properties to choose from when investing for cash flow. You aren’t just restricted to buying in prime areas, or trying to spot those illusive ‘up and coming areas’ to make money.
In fact cheaper properties in cheaper areas – which other investors often overlook – often offer high yields and strong cash flow.
* Investing for cash flow doesn’t rely on timing the market, which can be notoriously tricky. You don’t have to ‘buy cheap and sell dear’ as with investing for growth. Rather than timing your entry and exit you can buy whenever and wherever cash flow is positive.
These factors make investing for cash flow an especially good strategy for hands off investors.
* The positive cash flow provides you with a useful safety net. Strong cash flow can protect against unexpected voids, maintenance costs, taxes or interest rate rises. You shouldn’t need to subsidise your property from your own pocket.
* There could be tax advantages, depending on your individual situation. You can set off your expenses against your income year by year in the most tax efficient way. Investing for growth on the other hand could land you with a big capital gains tax bill when you sell to realise your profit.
It’s important to point out that neither investing for cash flow nor investing for growth are right or wrong. It all depends on your circumstances and what you are looking for from your property investing. Some investors focus on one or the other approach. Equally, some investors combine both approaches within their portfolio.
Think of it this way however: If you invest in property on the basis of investing for cash flow then any capital growth comes as a bonus …. but you’ve still made money on your investment in any case.