Is capital gain the be all and end all of property investment?

If you notice, the more successful property investors are not regular headline makers banking significant capital gains on their investments. This is because the key to long-term success in the property investment market is cash flow, rental income with a sprinkling of capital gains. To those starting out on their property investment journey this may sound a little bizarre because everybody likes to bank profit and realise a significant gain. So, should capital gain be your target or should this be mixed with long-term rental income?

Nice to bank a capital gain!

It would be foolish to suggest there is not a special feeling when you bank a significant capital gain. The opportunity to transfer money back into your bank account, crystallise a gain then sit back and appreciate that your investment decisions of years gone by came to fruition. It is unfortunate that some people become obsessed with capital gains on their property investments because ultimately the markets will dictate it is not always possible to play the capital gain card.

Horses for courses

In troubled economic times we have seen property valuations come under pressure, buyers retreat to the sidelines and sellers look to dispose of assets at any price. When you appreciate these types of market conditions it is nigh on impossible to bank regular short-term capital gains although you may have some longer term profits to take. Therefore we come to a situation where it is literally horses for courses….

Long-term income sprinkled with capital gains

For longevity there is no doubt that long-term rental income sprinkled with periodic capital gains is the way forward for property investors. Long-term rental income will ensure your cash flow is positive with the opportunity to bank profits on individual assets and use funds to acquire better value for money assets. You will appreciate the value of rental income in difficult markets because while it may be challenging to increase rents you will not normally see a reduction.

There are some individuals who target capital gains as the long-term goal of their investment strategy. This is all good and well but, as we touched on above, there will be markets and situations where it is difficult to crystallise a capital gain. What would you do in these markets? Withdraw your funds from the property sector and sit on the sidelines?

Should you ever go 100% cash?

In a perfect world we would all invest fully into the property market, crystallise a profit as the market tops out, wait for the market to fall back and then buy back in. This is all good and well in hindsight, looking back and seeing “the obvious signs”, but it is not feasible. Even if you were to call the top of the market and go 100% cash, when would you start to trickle your money back in? What if the markets rebounded quickly and you were on the wrong side?

This is why you very rarely see investors going 100% cash as it would be difficult to call the top of the market as it would be difficult to call the bottom. There may be an argument for banking profits on more speculative investments as the market starts to turn downwards while leaving long-term rental income streams intact. Capital gain is obviously the ultimate target but it is not as easy as many would have you believe. Mixing capital gain with long-term rental income, to maintain positive cash flow, has worked well for many high profile property investors in years gone by. Therefore it should work perfectly well for you….


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