You've probably all heard the question - which came first, the chicken or the egg? And if you're into that sort of thing, you've maybe even spent some time debating the question with other people!
In property circles, there's a similar neverending discussion around which is better - cashflow or capital growth. Funnily enough, if the person answering the question has a course to sell about a strategy that fits one category or the other, their answer might just be a little bit biased! (Okay, I'll take my cynical hat off now).
As people, we like simple, black or white choices and answers. But for this question, the answer really is... *insert drum roll*... BOTH!
By answering both, though, I've opened a can of worms. Because at that point, people often assume they need to go out and find deals where they can find both in the one deal.
Is that possible? Of course it is. But it ignores one essential point in this ongoing debate. It's not about choosing one or the other and that's the end of it. That approach basically assumes both achieve the same goal and it's a matter of which path you pursue to reach your goal.
In fact, cashflow and capital growth achieve two quite different goals. So the question isn't "Which is better", the correct question is "Which is better... for you right now".
Have I got you scratching your head in puzzlement yet? To relieve your confusion, the best place to start is to look at both options in more detail, so you understand what each one achieves.
Capital Growth
Capital growth happens when an asset grows in value. So the house you bought a few years ago for $500k is now worth $600k. It had capital growth of $100k. That's pretty easy to understand.
Now multiply that single house out across a bunch of houses, and suddenly the numbers are much bigger. Ten houses means capital growth of one million dollars. At that point it's clear capital growth can generate some serious chunks of cash.
As an astute Property Developer, you can borrow against that growth to buy more development sites and create more chunks of cash... and so the wheel keeps turning.
All of which is great. Owning a good portfolio of strong assets is generally what most people would consider as wealth. In fact, most wealthy people have that sort of portfolio underpinning their wealth. As the assets grow in value, more wealth is created. That's the beauty of capital growth - it's a wealth creation strategy.
There's one small problem though. You can't eat assets. It's no use being wealthy on paper if you don't have any cash in the bank. And given that many people use negative gearing as a strategy (I definitely don't recommend it!) in some cases owning a lot of assets can actually be taking money out of your pocket.
The other thing about capital growth is that you have no control over it - you can't make it happen. The market might grow, it might drop, or it might stay the same. While you may be able to predict what the market in your area is likely to do longer term, and buy in areas where you expect to see strong capital growth, nothing is guaranteed. Oh, and don't confuse it with manufactured growth, which is what we do as Property Developers - that's very different.
In summary, capital growth is about wealth creation, and relies on assets rising in value over time. But you can't eat capital growth.
Cashflow
When people talk about financial freedom, a lot of the time they're thinking about being able to live life without having to rely on a job for income.
I'm not talking about buying a flashy car or owning multiple holiday homes or anything like that - that comes into the category of lifestyle choices.
I'm simply talking about being in a situation where your passive income (e.g. from rent) is greater than your living expenses. In other words, food on the table, petrol in the car, you can send the kids to school, pay for your mobile phone, and the list goes on. All these regular expenses are "auto-magically" paid.
It's cashflow that supplies the money to pay your expenses. So if you're serious about escaping your job through financial freedom, then it's cashflow you need. If you also want lifestyle choices like expensive cars, then you simply need more cashflow!
Hopefully by now you can see why I say you need BOTH cashflow and capital growth.
Cashflow - financial freedom
Capital growth - wealth creation
And as a Property Developer, you also need both. You need chunks of cash for deposits and costs, and you need cashflow for serviceability to get loans.
That's why you shouldn't be asking the question "Which is better?" The answer is still both. But which one you need to focus on right now changes regularly depending on where you are in your Property Development journey.
The good news is that if you do your research properly to become an Area Expert, and progress into doing larger deals, you will end up in a position where you keep some of the end product you create through property development. That makes it easier to end up with both cashflow immediately from rent, and capital growth over time as the asset grows in value. Win-win!
In property circles, there's a similar neverending discussion around which is better - cashflow or capital growth. Funnily enough, if the person answering the question has a course to sell about a strategy that fits one category or the other, their answer might just be a little bit biased! (Okay, I'll take my cynical hat off now).
As people, we like simple, black or white choices and answers. But for this question, the answer really is... *insert drum roll*... BOTH!
By answering both, though, I've opened a can of worms. Because at that point, people often assume they need to go out and find deals where they can find both in the one deal.
Is that possible? Of course it is. But it ignores one essential point in this ongoing debate. It's not about choosing one or the other and that's the end of it. That approach basically assumes both achieve the same goal and it's a matter of which path you pursue to reach your goal.
In fact, cashflow and capital growth achieve two quite different goals. So the question isn't "Which is better", the correct question is "Which is better... for you right now".
Have I got you scratching your head in puzzlement yet? To relieve your confusion, the best place to start is to look at both options in more detail, so you understand what each one achieves.
Capital Growth
Capital growth happens when an asset grows in value. So the house you bought a few years ago for $500k is now worth $600k. It had capital growth of $100k. That's pretty easy to understand.
Now multiply that single house out across a bunch of houses, and suddenly the numbers are much bigger. Ten houses means capital growth of one million dollars. At that point it's clear capital growth can generate some serious chunks of cash.
As an astute Property Developer, you can borrow against that growth to buy more development sites and create more chunks of cash... and so the wheel keeps turning.
All of which is great. Owning a good portfolio of strong assets is generally what most people would consider as wealth. In fact, most wealthy people have that sort of portfolio underpinning their wealth. As the assets grow in value, more wealth is created. That's the beauty of capital growth - it's a wealth creation strategy.
There's one small problem though. You can't eat assets. It's no use being wealthy on paper if you don't have any cash in the bank. And given that many people use negative gearing as a strategy (I definitely don't recommend it!) in some cases owning a lot of assets can actually be taking money out of your pocket.
The other thing about capital growth is that you have no control over it - you can't make it happen. The market might grow, it might drop, or it might stay the same. While you may be able to predict what the market in your area is likely to do longer term, and buy in areas where you expect to see strong capital growth, nothing is guaranteed. Oh, and don't confuse it with manufactured growth, which is what we do as Property Developers - that's very different.
In summary, capital growth is about wealth creation, and relies on assets rising in value over time. But you can't eat capital growth.
Cashflow
When people talk about financial freedom, a lot of the time they're thinking about being able to live life without having to rely on a job for income.
I'm not talking about buying a flashy car or owning multiple holiday homes or anything like that - that comes into the category of lifestyle choices.I'm simply talking about being in a situation where your passive income (e.g. from rent) is greater than your living expenses. In other words, food on the table, petrol in the car, you can send the kids to school, pay for your mobile phone, and the list goes on. All these regular expenses are "auto-magically" paid.
It's cashflow that supplies the money to pay your expenses. So if you're serious about escaping your job through financial freedom, then it's cashflow you need. If you also want lifestyle choices like expensive cars, then you simply need more cashflow!
Hopefully by now you can see why I say you need BOTH cashflow and capital growth.
Cashflow - financial freedom
Capital growth - wealth creation
And as a Property Developer, you also need both. You need chunks of cash for deposits and costs, and you need cashflow for serviceability to get loans.
That's why you shouldn't be asking the question "Which is better?" The answer is still both. But which one you need to focus on right now changes regularly depending on where you are in your Property Development journey.
The good news is that if you do your research properly to become an Area Expert, and progress into doing larger deals, you will end up in a position where you keep some of the end product you create through property development. That makes it easier to end up with both cashflow immediately from rent, and capital growth over time as the asset grows in value. Win-win!
