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Cash flow or capital gain

Cash flow or capital gain

The investment property market operates in the same manner as any other market. This means that the investment property market goes through various cycles. As with any other investment decision, it is important to carefully consider and draft an effective strategy. In addition, you need to come up with long-term objectives that will help you decide what investment property type to buy and in which location. There are primarily two property investment goals – capital gain, as well as cashflow. Whilst it is possible to achieve both, we will consider them individually so as to be able to distinguish them. Cash flow or capital gain – what is the best investment goal for you.

Capital gain

We will start with a close examination of capital gain. In essence, there are two different types of capital growth. Firstly, we will look at capital gain as the profit realised by investors after they successfully sell a piece of real estate. Moreover, capital gain is taxable. Capital gain is determined as the sale price less the purchase amount, as well as any costs associated with selling the property.

Secondly, capital value growth is the gradual increase in the property’s value while you still own it. One of the biggest contributors to capital value growth is any home improvement and renovation projects. In addition, area-specific property trends can have a massive impact on the value of your property. Unless you sell your property then you do not have to pay taxes on capital value growth.

Cash flow

In simple terms, cash flow is the money an investor remains after all ongoing costs are deducted from the rental income. To put it another way, cashflow can be viewed as gross rental income minus property expenses and any loan repayments. A cashflow objective works best for investors seeking to generate ongoing rental income. However, during periods the investment property is vacant you may have to use your own resources to service your mortgage.

With time and as your property continues to appreciate in value. Subsequently, this scenario will lead to increased rental income thereby allowing your property to become cash positive. This means the property will be able to deliver a steadily increasing cash reserve. As your cash reserves continue to grow you can use the money to drive down the principal debt. Alternatively, you can channel the resources back into the property and undertake various upgrades and renovations.

The best option for you

The best option for you is one that fully meets all your property investment goals. As such, keep in mind your long-term objectives prior to buying and financing a property investment. Moreover, some properties offer the investor better capital gains, while other investment properties offer the investor higher rental values with the passing of time.

It is equally important for any investor to have a consultation and sit down with a competent and knowledgeable financial advisor. This will give you a better understanding of the various loans and repayment options and structures. This is particularly important as each loan and repayment structure will suit different investment goals. As such, you will be in a position to pick the best option to satisfy your needs.

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Teddy Chibanguza

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