Which investment strategy will make you rich faster? Firstly, it is important to decide what one is investing for. Typically, we will determine which “life stage” a client is at and work backwards from there.
What does that mean? For example, an elderly investor who has now lost the ability to earn money may lean towards investing for cash flow as they need to live off the passive income. On the other hand, a youthful investor who has the ability to earn and does not need to rely on rental income to cover living costs, can benefit from building wealth through capital growth.
The Pros and Cons
A capital growth focus has the positive point of your investable asset base increasing over time. With this increase comes the ability to release equity and further invest or expand the portfolio, obtain more property, and ideally build up a nice property pension.
Unfortunately, once retired we cannot live off capital growth. We need an income (cash flow) to sustain us in our later years when we will not be earning and this is where a strictly capital growth focus falls down.
A cash flow focus alternatively has the positive point of paying regular rental income to cover the running costs of the property (mortgage interest, management, maintenance…) which can provide a stable retirement income.
However, in terms of a con, strongly cash flow positive properties are often that way at the expense of capital growth. This means that they do not necessarily make a good strategy for someone who is 10+ years away from retirement age, as their portfolio’s value and the associated income may be outstripped by inflation half way through their retirement.
Creating wealth through real estate can be a confusing situation to navigate, and ultimately, there is no definitive right or wrong answer, as the right investment for you will depend on your situation – and may likely change as your lifestyle evolves.
For instance, a growth strategy may be ideal if you have the income and lower responsibilities to support it while you’re young and relatively unencumbered.
However, when you’re in your thirties, forties and fifties; positive cash flow investments may be the better fit as you may have more responsibilities and lifestyle expenses.
The most important part of the equation is to have clear intentions about what you want to achieve by devising an investment strategy to guide you forward.