Good to Great: How to Scale With an Outsourced CFO

Getting rich. Most people want to get there and fast. But when it comes down to it, will it be a positive cash flow or a capital growth strategy that lends you greater financial security? 

Before you lock yourself in, let's look at what chasing a positive cash flow versus property appreciation can offer you.

The Cash Flow Strategy: High Income, Low Growth

A cash flow strategy identifies your sources of income and your level of expenses. Any surplus is allocated toward short, medium and long-term goals. A higher income and lower expenses will increase your cash flow surplus helping you to meet those goals sooner. 

Cash flow management is essential for both financial and retirement planning. A surplus allows you to reduce current debts, invest or contribute towards your superannuation for retirement. And if you're money-savvy, maybe all three.

When it comes to cash flow strategies, property investment is pretty enticing. Suppose your rental income is above the expenses of your cash flow property. In that case, any remaining payment is considered a surplus and, ideally, should be used to pay down the loan to increase the equity in your property.

A consideration to bear in mind: the overall return upon selling the property is often lower.

Sure, It Sounds Like a Great Way to Invest.

Chasing a positive cash flow, especially regarding property, can be a fantastic strategy under the right circumstances and for the right investor. It's important to note that it's 2022, and in today's economy, interest rates are on the lower end, meaning that most investment properties will likely offer a good cash flow.

The question remains whether or not it's a good investment prospect. So there are a few things that you’ll need to consider. One of them being tax. Because investments such as these generate an income, it's a given that you'll be paying tax on that income. And if you're already a high-income earner, building wealth on this type of investment can be difficult.

You'll also want to consider that the success of your investment is somewhat dependent on its location as well as fluctuations in the market and economic cycles. Investment properties are usually regional or on the outskirts of major cities, with values often increasing years apart, making them more susceptible to market volatility.

Most investors that adopt the cash flow strategy are happy to accept that growth rates may be lower. For them, the benefit of their investment is being able to generate an income.

For example, if your goal is to retire and live off the income generated from your property investment, this may be the ideal strategy for you moving forward. 

Suppose, over time. You have acquired a property that delivers a solid weekly return. In that case, once you've reached your desired cash flow, you then have the opportunity to decide on whether or not to keep working or retire and live off the income––the sought-after life goal of many.

Key Takeaway: When you're retired, you can live off the income if you've built up a property portfolio earlier in life. Conversely, you can live off capital growth.

Cash flow is what helps you to multiply your portfolio. When your property is looked after, your tenant pays their rent on time, and you actively use the surplus to bring your mortgage down. You're on to a winning strategy–one you can repeat, building a retirement-ready income.

Capital Growth Investment

Conversely is the capital growth strategy. Others might say this is the ideal strategy to profit from the property market. However, the problem with this strategy is the lack of serviceability and the risk that it generates. 

Is Growth the Only Way to Build Wealth?

While capital growth can build wealth, it is almost always based on speculation. You are assuming that your property will increase in value over time. Gain is calculated by determining the difference between the current market value of your investment and the price you initially purchased it for. If the market takes a downturn, then so does your investment. 

You may also get to the point where you'll inevitably run out of serviceability. This is where the bank says no, simply because the cash flow isn't there. It's a catch twenty-two because you need growth to build your long-term equity.

How Do I Invest Moving Forward?

The Pros and Cons of the Cash Flow Strategy

Pros

• A cash flow strategy means you'll get a regular income, highlighting the value of your investment over the short term.
• Because of this, you'll have accessible cash to cover any regular and unforeseen property expenses.

Cons

• While residential properties may offer a high rental yield, they rarely provide capital growth.
• Since you will be earning a positive income from your investment property, you'll have to consider tax, which will impact your profit.

The Pros and Cons of the Capital Growth Strategy

Pros

• Over the long term, the property's value substantially outweighs the cash flow benefits accumulated in the short term.
• Loan-to-Value Ratios are generally more accommodating––because banks are seemingly more comfortable when a loan is for a property in a desirable growth area, such as a big city.

Cons

• Cash flow in a capital growth strategy is negative––meaning that you may often need to dip into your own pocket to cover property-related expenses.

Concluding Thoughts

Truthfully, when using real estate for investment, there is no wrong or right strategy to follow. It comes down to your situation and the factors surrounding it. And just as your life evolves through various stages, so too may your investment strategy. 

At Altus, you can work with an experienced adviser to determine the level of risk you’re comfortable with and the types of investments that appeal to you. By creating a diversified investment portfolio, you can reduce your risk and take advantage of opportunities in many different sectors.