Investing in property – capital gain or cash flow?

Property investors looking to invest in property in 2015 are faced with the age-old question of whether to invest for cash flow reasons – to receive the rental income generated by the property – or for capital gain in the hope that the property can be sold for a higher price in future.

According to David Rebe, chief executive of Sandak-Lewin Property Trust, this depends entirely on the investor and what the objective of investing in the property is.

“In the long-term, buying a property for capital growth if it grows at 5 to 6 percent each year, for example, is likely to provide a similar return to a property bought with more of a focus on rental income. However, investing for cash flow purposes can often provide a greater degree of certainty and security. This is because rentals, by virtue of being contractual obligations, are more stable and predictable than a speculative prospect of capital gain.”

Rebe says that when investing for cash flow, the return can be calculated and projections can be fairly accurate by working out the rental less the management fee, maintenance, repairs and annual rent increase.

“When investing in property for cash flow it is easier to understand the downside, manage it accordingly and still have prospective capital growth. Investors need to ask themselves what the calculated return is and how to minimise the risk?”

He says that, in comparison to cash flow, it is more speculative to invest in property bought for potential capital growth, as it can only be assumed that actual growth will be attained. He says investing for cash flow reasons often helps to avoid short-term market movement speculation, which could lead to panicking.

“Investing in properties in Cape Town now, while the property market is in an upward cycle, can certainly offer high cash flow and rental returns. This is as a result of investors realising that if they can lock in a return of 8 to 10 percent, this will grow annually due to rental increases, along with the capital value of that property.”

Rebe says that finding the right recipe to invest in property for either cash flow or capital return is simple. – select a discounted property in areas with high tenant demand. Aspects to consider when investing in property include defining where the return will come from, in other words, who the occupier of the property will be, as well as the desirability of the area.

“This can be determined by the property’s proximity to schools or universities, as well as by assessing the vacancies, rental demand and growth potential of the area. Investors should also analyse the structural integrity of the property, and consider features such as views, or the size of the plot.

“If investors want to increase their portfolios extensively, they should invest for cash flow and capital return, as diversification is key to any investment portfolio. Success in property investment is not derived from income, but through long-term appreciation and the ability to leverage off each asset to buy further assets, providing there is enough cash flow to do so,” he says.

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