Pros and cons of 3 investment strategies

Whichever way you look at it, unless you are exceedingly lucky, property is a long-term investment, and there are three main types of investment strategies property investors use: capital growth, cash flow, and compound growth.

Some people use one strategy, and others use a mixture in their property portfolios.

Here are the pros and cons of each strategy:

Capital Growth

This strategy works on the principle the property will increase in value over time. This maybe from renovating or extending a home, or buying an investment in a suburb which is expected to be a desirable place to live in the future.

Pros

  • While you may have to dig your hand in your pocket initially, these losses could be offset against tax.
  • There is the potential for a better Loan to Value Ratio; banks tend to lend to properties in high growth areas.
  • Generally, the long-term increase in value outweighs short-term cash flow benefits.

Cons

  • You may need to use your own resources to cover property-related expenses.

Cash Flow

Investors who use this strategy are looking for an income – ie the rent more than covers the ongoing property costs and any loan repayments. This is known as positive cash flow.

Pros

  • You get an income.
  • There are no additional costs to find.

Cons

  • Earning an income means you will have to pay tax
  • High rental yields property often have little or no capital growth.

Compound Growth

Investor Warren Buffett, the world’s second-richest man, apparently said compound growth was one of the key forces that had grown his wealth. This strategy is where you reinvest the equity from one property into another and works on the principle, the more properties you have, the faster your growth compounds.

Pros

  • Your assets generate growth upon growth upon growth.
  • There is the potential to see substantial wealth in the long-term.

Cons

  • This strategy does take several years.
  • You often need to use your own resources at the beginning.

Once you’ve worked out your short, mid and long-term goals, we suggest talking to a financial specialist who can talk you through which strategy or strategies could be best for your situation.

For instance, you may want to start with one property that is positively geared to give you more cash (cash flow strategy). Once that property has increased in value, you may decide to refinance so you’re now negatively gearing that property (and offsetting this against tax). The released equity will give you a deposit for a second investment property (compound growth strategy).

We can’t advise on which strategy is best for you as each investor has different motives and different goals. However, we can give you information on what has worked for other investors and we can tell you how to get the best out of your property investment.

Over the 40 plus years we’ve been in business, we’ve helped hundreds of people realise their financial dreams through property investment.

Come on in to our Cardiff office for a chat or give us a call on 02 4956 9777.