Cash Flow Versus Capital Growth
Everyone who invests into property is aiming for positive results financially. Whether this is on a week by week basis or in the long term when the property is sold. Often investors use one of two methods to achieve results that benefit them financially. Either a positive cash flow method or a capital growth method.
Of course, using both at the same time is possible, however, each method is all about setting solid financial goals to measure the success of your investment.
Positive cash flow
In a positive cash flow scenario, the goal is to receive a higher income than outgoing expenses. Generally, this method requires you to find a property that has a high rental yield. For this method you want your property’s rent to be higher than monthly repayments on the loan, interest rates, property management fees, repairs and maintenance costs.
The key to this method is to optimise your expenses. A great property manager and accountant will be able to assist you with this.
With this method, you will not be left out of pocket each month allowing you to use the extra money you gain immediately. You could pay off your loan faster, save for future properties or put the money away for personal savings or other uses.
Investors who choose the capital growth method are taking a longer-term approach. They aim to buy a property in an area that property prices are expected to grow. The goal is to wait until the property value increases to the point where any money lost is easily covered and a nice profit is reached. Then these investors sell the property.
Often these properties receive lower rent yields, which results in a short-term loss as outgoing expenses overtakes income. However, if the value of the property increases enough then this loss will be made up for in future gains.
This method does require knowledge of locations that are projected to receive great property price growth over the coming years, with many things affecting those prices. Including, infrastructure developments like public transport or highways, or new development plans. Ensure that you have an ear to the ground to find the opportune moment to sell.
Each method has its own tax implications that it is important to be aware of. These could influence your decision in terms of which method to take. Before looking at investing in property, talk to your accountant, they will advise you on the best method for you to use and on the direction you should take.
For the positive cash flow method, there are some tax implications to be aware of. You must declare any additional income earned when preparing your annual tax return. This additional income will add to your assessable income, potentially pushing you into a higher tax bracket. Talk to your accountant about the implications of this and discuss a strategy you can take. Some deductions you can claim from the property could bring your taxable income back down.
For the capital growth method, you will need to be aware of the capital gains tax. When you sell your investment property you must report any capital gains or losses in your annual tax return. The gains you make will be added to your assessable income and could increase the tax you may need to pay. Despite being referred to as the capital gains tax, this tax is actually a part of your income tax and is not a separate tax.
It is critical that you talk to your accountant before investing to ensure that you are receiving the highest gains possible from your investment.
There are some great gains to be held from property investment. The key to finding this success is discussing your finances and investment plans with your accountant, and to have a great property manager at your side.
A property manager is there to ensure that you gain the most from your property. That it is well looked after, requiring minimal maintenance, and that it is rarely empty, having secured tenants at the best rent for you.
If you need a property manager that works to get you the highest returns you should have a chat with Link Living and see what we can do for you.