Positive Cash Flow vs Capital Gains Shakedown (Ep179)
Positive cash flow vs capital gains. Will positive cash flow win with it’s passive income or will capital gains win with it’s growth opportunities?
This is a fight to the death and something that I am excited to go through with you today.
Hi, I am Ryan your ring master for this evening’s event.
In the blue corner we have positive cash flow property. With a chance to generate financial freedom for you through passive income?
In the red corner we have capital gains with the opportunity for you get rich quick and to generate massive growth by choosing the market correctly.
There are many benefits to both sides and today I want to look at the benefits of each so you can decide which contender you want to align yourself with and which one you think is going to be a winner for yourself.
Before you place your bets I just want to say that you should always always set your financial goals first before choosing who is go into battle for you and who is going to generate your future wealth. Sit down have a think about what is important to you and where you want to be.
For me personally financial freedom is more important than having large sums of money. Having that time and freedom to be able to spend with my family and do the work that I love is what is important to me. So I love positive cash flow property.
But for other people they have much larger ambitions and want to grow wealth and grow equity quicker and so they are on the side of capital growth. Knowing exactly what you want to achieve how much passive income per year or how much equity is an important step to take because then you can analyse properties based on those criteria .
Positive Cash Flow Strengths and Weaknesses
First we are going to look at our friend positive cash flow. We are going to in a look at his benefits and his weaknesses.
Benefit #1 is that you can make money from day one.
That’s right. The day you purchase your property and get a tenant in there you can be making money. You don’t need that property to go up in value in order for you to see a return. You are getting a return from the rental income that’s coming in.
Benefit #2 of positive cash flow property is that you can still make money in market declines
People who are negatively geared are relying on market growth in order to make money. Even when the market’s going down you can be getting a return through rental income which allows you to sit tight until the market recovers.
Benefit #3 is that positive cash flow generates a passive income for you
Which you can use to even invest pay down debt or fund your lifestyle. So it can help you become fully financially free or even partially financial free along the road to financial freedom.
Benefit #4 is that positive cash flow properties tend to put less financial pressure on yourself.
This is because even if you lose your job and you have no income coming in chances are that property is going to pay for itself and still have a little bit left over so you can buy some two minutes noodles and not starve to death.
And the last benefit of positive cash flow property are there still opportunities for growth
Positive cash flow property doesn’t mean you need to sacrifice capital gains completely but you do need to be smart and do your research very well before you buy because you are limited in the amount of properties that are available. So be smart learn how to do research.
This all sounds great but positive cash flow property does have its downside so we do need to look at that. I am sorry all you positive cash flow lovers but he isn’t a completely perfect contender!
Downside #1 is that positive cash flow properties can be extremely hard to find.
You are likely going to have to spend hours and hours on realestate.com.au looking for these properties. For me it took me three years to find my first positive cash flow property.
Downside #2 is that a positively geared property is instantaneously negatively geared as soon as it goes unrented.
No rental income means no positive cash flow because you still have expenses that you need to pay.
Downside #3 is that you have limited investment options.
Because the majority of properties Australia are negatively geared by going after a positively geared property means you limit the different types of properties you can invest in.
Downside #4 is that even though you can still get growth you may not get as good growth.
This comes down to be limited in the areas you can buy or the types of properties you can buy because you need that rental return. In some circumstances that may mean sacrificing growth.
In the blue corner positive cash flow property has five benefits that’s 500 points but has four down sides that’s minus 400 points so we are left with just a hundred points for positive cash flow properties.
Capital Gains Strengths and Weaknesses
Now let’s say how our friend capital growth is going to go.
Benefit #1 of capital growth is that you can get huge growth quickly because you’re using leverage.
As your property goes up in value that growth can be very significant compared to the amount of money that you put in that property because you are borrowing money to buy a larger asset. 10% growth on $100,000 is more money than 10% growth on $10,000.
Benefit #2 is that capital growth can allow you to build your portfolio faster by leveraging against the growth and the equity that you gain.
You can use that as a deposit on another property and build your portfolio faster than if you had to saved a deposit all over again all by yourself or just for the passive income or positive cash flow property.
Benefit #3 is that you can build large sums of equity over time.
You can then access this equity either through borrowing against it or through selling the property. A lot of investors will build up a portfolio of negatively geared properties and then sell off a couple and then throw the equity onto the loans of the properties that they have left making it mortgage free and positive cash flow.
And benefit #4 you can also get a positive cash flow property if you are investing in capital growth
That’s because rental incomes tend to go up overtime as rental demand goes up in inflation goes up which means eventually rental income overtakes the expenses for the property therefore turning it positive cash flow.
Now obviously I can’t guarantee this every situation is different but in most circumstances if you hold the property probably long enough and you manage it well enough then that is going to happen.
All about the downsides to capital growth. Yes there are some downsides.
Downside #1 is that it can be difficult or costly to access the money
in order to access the money either you have to extend your loan putting a further in debt or you have to sell the property and generally pay agent commissions and pay capital gains cess.
Downside #2 is that high growth properties are generally negatively geared
This puts more financial pressure on yourself, tying you to your job and making you pay money just to keep that property alive.
Downside #3 is that a negatively geared capital growth property doesn’t make money in a downwards market
When the value that property is going down you’re not making any money. You need the market to be going up.
Downside #4 is that interest rate increases could make your portfolio unsustainable.
Many investors have experienced this where they earn a certain amount of properties but as interest rates go up all of a sudden because they are negatively geared they now can’t afford to keep those properties. And then need to sell a bunch of them off.
Downside #5 is what happened to Ben who I interviewed in episode 102 and episode 103 where he was equity rich but cash poor.
You can build that great sums of equity in these properties (hundreds and thousands of dollars) but they may still be negatively geared. You may still be paying thousands of dollars per month just to keep them afloat.
The essence you have huge values of wealth tied up in equity but in real life you are not experiencing any of that or the benefits of any of that.
And downside #6 is that it’s hard to predict growth
Even RPData of APM or other professional companies that have access to all the data in the world still can’t necessarily predict whether an area is going to go up and how much it’s going to go up by. There’s never a guarantee that the market is going to go up. You are in a way rolling in a dice hoping that the market will increased so you can make money.
So in the red corner capital gains has four benefits that we listed today that’s 400 points but it also has six downside that’s minus 600 points leaving capital gains at minus 200.
Now obviously today’s battle isn’t a great representation of which investment strategy is going to be better for you. You should always do your own research and speak to a professional before making any financial decisions.
There are benefits and there are negatives to both positive cash flow and capital gains. You need to assess them for yourself and you need to weigh them up against your financial goals and what you want to achieve.
I hope that you enjoyed tonight’s fight and I will see you tomorrow for another episode. So until tomorrow remember that your long-term success is only achieved one day at a time. And if you decided that you love my friends here positive cash flow property and you’re interested in learning more about how to find those properties or see some of the properties that I found and listed go to On Property Plus and sign up today.
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