What is the difference between investing for cash flow or capital gains? Which should you choose when it comes to industrial property investing?
Cash flow investing involves buying a property for the purpose of generating regular income from that property. On the other hand, the purpose of capital gains investing is to realise an increase in the value of your property.
We believe that while both are important, cash flow should be top of mind. Why? Because cash flow “feeds the baby” and not capital gains. You need cash flow on a monthly basis to survive.
While you can make money with capital gains investing, it is not without risks. Through this method of investing, you are hedging your bets that the property will appreciate in value in the long run. If you are chasing capital gains, this could be, in effect, speculating.
If your intention to flip a property and quickly sell it for profit, or for capital gains, this strategy could be risky during market downturns. During a market crash, buyers will not be willing to fork out a high price – the only buyers out there tend to be bargain basement hunters.
To sell at a price where you will realise a gain, it is important to buy a unit at below market value (BMV). Buying a BMV property also gives you a buffer during times of crisis when economic sentiment is bad. This gives you the flexibility to lower your asking rental to help your tenants ride over the bad economic situation. This gives you an advantage as a landlord against other units in the same building. You are able to keep your tenants by offering competitive rental while at the same time, still enabling you to cover your expenses.
With cash flow investing, the objective is to collect a regular stream of income from the property. So when you purchase an industrial unit to rent out, you are banking on collecting rental income that is enough to not only cover your mortgage and other expenses, but have enough left over so you have positive cash flow.
Unlike the capital gains investor, the cash flow investor does not have to worry about market ups and downs. The advantage of cash flow investing is that money continues to flow into your pocket continuously and regularly. Even in bad times, as long as your tenant continues to be able to pay their rent, you will still receive passive income. That is why a high rental yield is important in cash flow properties.
If you are looking to build a portfolio of properties so you can live off passive income eventually, then cash flow investing would be a better option for you. Positive cash flow properties will also improve the serviceability of your loan.
Ultimately, we believe that cash flow investing is more prudent and helps to ensure that you are able to meet your long-term plans while safeguarding your ability to meet interest payments and other expenses.
Still, you will need to carefully assess your own personal circumstances and pick the strategy that best suits you given your situation and goals. If you are looking find the sweet spot where there is potential for capital appreciation while having a high rental yield property for passive income, it is essential to do your homework properly.