First-time investors will frequently encounter the phrase “capital growth” during their research. Some investing publications will say it’s the most important consideration when buying a property, and others will argue that positive cash flow reigns supreme.

What they won’t all tell you is exactly what capital growth is, and what it means for first-time investors.

In this article, we outline all you should know about capital growth when you prepare to invest in your first property.

What is Capital Growth?

Capital growth is the increase in your property’s value over time. For example, if you invest $500,000 into a property that grows at a reasonable 5% per annum, you would see a capital growth of $25,000 per year.

Purchasing a property with high capital growth potential is a fundamental objective of any investor. However, properties with a high capital growth potential may not always be viable for your financial situation. For example, markets that demonstrate steady growth potential are generally more expensive and established, with a lower rental yield.

If you buy a high-value property expecting steady capital growth, it’s likely that the cost of your loan repayments, maintenance and rates will outweigh rental yield, meaning your property is negatively geared.

What is Cash Flow in Property?

On the other side of the investment strategy coin is cash flow. A cash flow positive property is one where rent or income generated from the property is enough to cover loan interest, maintenance and other costs, with money to spare. An investment like this is said to be positively geared.

Generally speaking, an investment where rental returns cover all out-of-pocket expenses will be a lower value property. These may be in regional areas, smaller towns, or higher-risk properties like student apartments. The capital growth of these types of properties will be lower than those in higher-value, well-established markets.

Investing for Capital Growth vs. Cash Flow

Whether you should focus your investment goals on capital growth or positive cash flow is an important discussion to have with your property adviser.

On the one hand, a property with sustained and significant capital growth can be a boon to your long-term wealth, but often demand higher repayments and yield lower rental income. When you consider interest rate rises, these high-value initial investments may not a viable strategy for many first-time investors.

On the other hand, a lower-value property that provides positive cash flow may not see the same capital growth in the long-term. However, in the short term, the positive cash flow could free up income to add to your property portfolio. A higher-risk strategy could be to seek markets with a high demand to supply ratio, where first-time investors can use immediate capital growth to fund further investments.

Strategies for First-Time Property Investors

The ideal first property investment will depend on your unique financial situation, your risk tolerance and your long-term wealth creation goals. Again, a good property adviser will be able to design an investment strategy that works for you.

The high holding cost of cash flow positive properties may inhibit your ability to build your investment portfolio in the immediate term. Alternatively, a cash flow positive property may yield lower returns in the longer-term. For many first-time investors, the best strategy is often a balance of both; a reasonably-priced property that provides both a positive cash flow and great potential for capital growth.

Remember, using real estate to create sustainable wealth for yourself and your family doesn’t come from immediate income. Rather, it comes from the ability to use your assets to fuel further investments, building a diverse portfolio to achieve your financial goals.

For a free one-to-one investment strategy session with an experienced Property Adviser, get in touch with us at Full Financial Services today.