How to build a balanced property portfolio: cashflow vs capital growth

If you’re considering investing in property as a means of growing your wealth, it can be tricky to know where to start. There are so many different property investment options available and each one has its own pros and cons.

Fortunately, as an investor, you don’t need to choose between growth or income – with some careful planning, you can achieve both with your property portfolio over time. In this article, we explain how to build a balanced property portfolio that offers both capital growth and cash flow.

What is Cash Flow?

Cash flow is a measure of how much income a property generates each month. It’s a useful metric to track, even if you’re not planning to actively manage the property.

Typically, the more cash flow an asset earns, the more valuable it will be to you as an investor. That’s because you have the option to either use the cash flow to fund your own lifestyle or use it as a source for investing in other assets.

If you choose to manage the properties yourself, then the cash flow after all expenses is the metric for you to track that matters. If you’re planning to hire a property manager to handle the day-to-day management, then they may send you a monthly statement detailing the income and expenses (including their management fees).

What is Capital Growth?

Capital growth is the amount by which the value of your property increases over time. Capital growth is often measured in percentage terms, and it’s often referred to as “appreciation”.

You can think of capital growth as one part or element of a property’s total return. The other element is the cash flow – the rental income less financing costs, repair costs, and fees. Capital growth is a long-term metric.

It’s not something you’ll always see within the first couple of years of owning a property. But if you buy well, over time capital growth can create very significant wealth.

For example, a property that appreciates at, say, 6% per annum, will double in value in around 12 years, thanks to compounding capital growth. Since capital gains aren’t taxed until you sell, owning and appreciating properties for a long period of time can be a very powerful way to grow your wealth over the long run.

Why Should You Care About Cash Flow?

As we discussed above, cash flow is an important metric to track, even if you’re not managing the property yourself. A high-yield property provides a consistent monthly income stream to help you secure your long-term financial health.

Unfortunately, when most people think about investing in property, they imagine the “dream scenario” where they buy a property that more than doubles in value over the first few years of ownership.

While this can happen, it’s far from always the case. That’s why it’s also important to remember the importance of cash flow.

You don’t know how much a property will increase in value over the long term. You do know, however, that you need a predictable monthly income stream to pay for your day-to-day expenses.

2 Strategies to Achieve Both Capital Growth and Cash Flow

Purpose-Built Capital Growth Properties

We’ve already established that capital growth is a long-term metric. That means you likely won’t see significant growth in your first few years as an owner. As a result, you may want to consider buying a property that is designed to generate cash flow from day one.

Generally speaking, most commercial properties have a higher risk of vacancy and require a large amount of financing due to their long-term leases. These types of properties can be great investments if you find the right one. A commercial property with high cash flow is a good way to start seeing returns early in your investment timeline.

Buying Low-Risk Residential Properties

When looking for properties designed to provide capital growth, residential properties tend to be the safest option, on average. If you buy well, well-located residential properties are much less likely to experience long periods of vacancy, and you don’t need to worry about long-term leases.

Once you’ve identified the right residential property, you’ll want to make sure that it’s been well-maintained over the years.

In other words, you want to find a low-risk property with relatively low repair costs.

Contrary to popular belief, you can achieve both capital growth and high cash flow from residential properties. This is especially true if you buy your properties in landlocked areas that are experiencing strong population growth, and therefore growing demand for housing.

Conclusion

If you’re interested in growing your wealth through property investment, then you’re probably wondering how to build a balanced property portfolio that offers both capital growth and cash flow. Better still, you want to know how to achieve both of these things without taking on unreasonable levels of risk.

A balanced property portfolio might typically consist of a mixture of residential properties and commercial properties.

As a general rule, commercial properties are best suited to provide cash flow from day one, while residential properties are better suited to provide capital growth over the long term.

For most people starting out, the residential property carries a lower risk and is easier to finance and understand. It’s the best place to start building wealth, for most investors.

Later, when you have more experience and wealth, you may look to diversify into commercial properties to balance your portfolio and start generating more cash flow and income. That way, you will get the best of both worlds… cash flow and capital growth!