You may have heard the terms 'Capital Growth' and 'Cash Flow' thrown around a lot within the property investor space. However, if you're new to the scene, let us explain what these terms mean and how to compare which option best fits your financial and property goals.
What is Capital Growth?
When purchasing a property, a common goal amongst many investors is to hold onto the property and let the property increase in value overtime, which is what we call 'capital growth'. Capital growth is measured by the difference between the current market value of an investment and its initial purchase price.
For example, if five years ago you had purchased an apartment for $500,000 and now it is worth $700,000 in the current market, your property has reached capital growth of $200,000.
The idea behind capital growth is to purchase properties with high growth potential, take higher levels of risks in efforts to capitalise when selling down the track. Some risks can include:
- Buying the worst house on the best street
- Renovations and additions
- Buying in highly sought-after suburbs (even when properties are generally more expensive)
It is important to consider that not everything is guaranteed, and the value of your property might not continuously rise as the market could drop off or other factors may come into play.
What is Positive Cash Flow
Cash flow refers the net amount of cash being transferred in and out of a bank account. Having a long-term inflow of cash from rental payments that is greater than the outflow of money from expenses such as loan repayments, strata fees and other ownership expenses is what you would call a positive cash flow.
A positive geared investment property refers to the overall yearly outcome of rental income alone exceeds expenses- this is without taking depreciation and tax deductions into account. Positive cash flow also means the rental income exceeds the investment expenses but can also rely on depreciation and tax deductions to make the net amount of income exceed the amount in expenses.
Cashflow positive property investments basically pay for themselves whilst the capital gains increase. Any surplus of income will also allow you to reinvest to buy subsequent properties, provide you that bit more of income to better your lifestyle and provides a buffer to protect you financially.
Properties fit for investing that are worth looking for usually are positioned in a low supply/high demand rental and housing market, be located where future developments are being planned which creates jobs and attracts more people to the area, and suburbs located near neighbourhoods experiencing sharp upward growth.
Have more questions about your Newcastle investment property? Want to ensure you are maximising your returns? Why not see for yourselves the difference a dedicated team of property managers makes? For a free copy of our Property Investors Guide or for an obligation-free chat, email our Director, Casey Healey on casey@c21newcastle.com.au or phone 02 4928 7400 today.