Capital growth? Or income? Which is the winner when it comes to property investments?

Of the two ways to make money in property investing, i.e. capital growth (your property increases in value) and income (positive cash flow, when your investment income is higher than your expenses) – which is the best?

In my opinion, both are valuable and can occur independently of each other.

You can have a positive income return and no or even negative capital appreciation, or you can have no capital appreciation and no positive income either. You can have a negative income return with positive capital appreciation, or capital appreciation and positive income too!

So here are the possibilities …

income + capital -
income - capital -
income - capital +
income + capital +

Let’s look at + capital appreciation and - income

You can go for capital appreciation without positive income returns – in this situation you are using what we call negative gearing, which means you’re prepared to accept less income than your expenses, and make up the difference out of your pocket.

Why would you do this?

You’d do this if you had the expectation of the market continuing to rise so that you could sell and recoup your losses as well as make some profit; or alternatively If you expected rentals to increase and gradually overtake your monthly bond amount and other costs.

This has been the situation for most investors (but not most Wealth
Creators!) for a few years since capital growth shot up, beginning in 2002. But it’s risky – you are assuming two big things:

Risk x 2

1. you’re assuming your capital growth will be so quick and so big that it will more than cover your out of pocket expenses; and

2. you will be able to afford to subsidize this investment, even if interest rates go up.

In my property workshops (now on DVD) I teach my students not to guess about the future but to do two sets of calculations using my unique Property Pro Program - one based on the average scenario, and the other based on the worst case scenario.

This is because, contrary to what is popularly believed, Wealth Creators do not take risks … they minimize risks to the point where they are so small they are no threat at all.

I’m concerned to see the way people talk about “investments” when sometimes, even by the developer’s own calculations, you will not get a positive cashflow in the first 12 or 13 years! Take care of yourself, don’t believe everything you hear, and most of all, do the calculations!