When it comes to property investment, many investors wrestle with a common dilemma: should they prioritise cashflow vs capital growth property?
While chasing high rental yields may seem like the safer option—helping to cover holding costs or even generating passive income—it often comes at the expense of long-term capital appreciation.
In fact, the opportunity cost of focusing on a cashflow vs capital growth property could exceed $1.1 million in wealth over 30 years.
This article will show you why capital growth should be the ultimate focus—and how chasing cashflow could be quietly sabotaging your financial future.
Understanding the Total Investment Return
Every property’s total return has two components:
– Rental Income (Yield): The cashflow from tenants, which helps to cover mortgage repayments and holding costs.
– Capital Growth: The increase in the property’s value over time, leading to equity growth and long-term wealth accumulation.
The catch? These two factors often work in opposite directions. Properties with high rental yields typically achieve lower capital growth, whereas high-growth properties tend to have lower yields.
This trade-off matters, especially when you’re looking at the bigger picture. A focus on cashflow may help in the short term, but it’s capital growth that drives true wealth creation.
The Numbers: Cashflow vs Capital Growth Property
To illustrate the financial impact of prioritising capital growth properties, let’s compare two hypothetical investors who each purchase a $950,000 investment property, but with different strategies:
– Investor A (Cashflow Focus): Buys a property with a 5% rental yield but achieves only 5% annual capital growth.
– Investor B (Growth Focus): Buys a property with a 3% rental yield but achieves 7% annual capital growth.
Where They End Up After 30 Years:
The result? Investor B is $1,165,159 wealthier than Investor A in today’s dollars, despite their lower rental yield. That’s over $1.1 million lost by prioritising cashflow vs capital growth property.
Why Does Growth Outperform Cashflow in the Long Run?
- Land Value Drives Capital Growth
The core driver of capital growth property performance is land value appreciation. While buildings depreciate over time, land appreciates, leading to higher property values.
High-yield properties (e.g., new apartments or houses with fancy fixtures) often have a higher proportion of their value tied to the building rather than the land. While these properties can generate solid rental income, they typically lag in capital growth because of their lower land value.
- The Limits of Total Returns
Over the long term, properties rarely deliver more than 10% per year in combined returns (capital growth and rental yield). If a property delivers high rental yield, it typically experiences lower capital growth—capping its long-term return on investment.
Markets like Perth in 2024 and now 2025 occasionally defy the usual trade-off between rental yield and capital growth, delivering total returns exceeding 10% per annum. However, these periods of exceptional growth typically follow prolonged consolidation phases, where prices had remained stagnant or underperformed relative to national trends. What we’re seeing now is Perth “playing catch-up” to its long-term average growth rate. While it’s a great opportunity for investors in the short term, it’s important to recognize that such high returns are not sustainable indefinitely. Smart investors take advantage of these cycles but plan their portfolios based on realistic, long-term expectations rather than assuming today’s boom will continue forever.
- The Power of Compound Growth
A capital growth property benefits from compound growth, where equity increases exponentially over time. A cashflow-focused investment, on the other hand, grows much slower—even when adjusted for inflation.
By prioritising capital growth, you’re taking advantage of the exponential nature of wealth creation.
The Cashflow Trap: Why Investors Make This Mistake
Focusing on cashflow can seem like the “smart” choice for several reasons:
– Immediate Relief: Covering holding costs feels safe and manageable in the short term.
– Tax Benefits: Negative gearing or depreciation on high-yield properties may seem attractive.
– Fear of Being Stretched: Some investors worry about affordability, pushing them toward properties with higher rental income.
But this short-term mindset often blinds investors to the much larger opportunity cost of sacrificing growth. It’s not about what feels safe today—it’s about what creates financial security tomorrow.
Managing Negative Cashflow in Investment Property
When an investor finances a property, rental income may not initially cover all expenses, resulting in negative cashflow. However, smart investors understand that:
- Negative gearing can provide tax benefits that offset initial losses.
- Over time, rental income rises, reducing the cashflow shortfall.
- Capital growth eventually outweighs holding costs, leading to substantial equity gains.
Since property investment is a long-term strategy, investors should plan their finances to sustain initial cashflow challenges while maximising long-term appreciation.
Improving Cashflow Without Sacrificing Growth
If cashflow is a concern, there are smart ways to manage it without giving up on long-term growth potential.
- Renovate to Boost Rental Yield
Strategic renovations can increase rental income while maintaining a focus on high-growth properties. For example:
– A $50,000 – 100,000 cosmetic renovation might raise your rental yield from 3% p.a. to 4% p.a.
– At the same time, you may be able to claim depreciation on the improvements.
- Debt Reduction Strategies
Paying down your loan balance can improve cashflow faster:
– Putting $1,000/month into an offset account could accelerate positive cashflow by up to 5 years.
- Start Small and Scale
If high-growth properties feel out of reach, consider scaling back your budget. Instead of aiming for a house, target a villa unit or townhouse with strong growth potential.
- Leverage Equity
Use savings or equity from other properties to cover short-term cashflow gaps. Over time, capital growth will more than compensate for the upfront effort.
The Wrong Move: Chasing Cashflow Properties
Some investors believe cashflow-positive properties will help them to expand their investment portfolio faster, but this often backfires:
– Limited Borrowing Power: Lenders don’t consider all rental income when assessing serviceability.
– Missed Growth: High-yield properties often underperform in capital growth, limiting long-term wealth creation.
Instead of chasing cashflow-positive properties, aim to boost the yield of high-growth assets through value-adding strategies, like subdividing a backyard to sell, paying down debt, adding a granny flat, renovation opportunities, short-term letting or offering furnished rentals, etc.
The Big Picture: Growth First, Cashflow Later
Property investment is primarily a growth strategy. While rental income plays a supporting role, it’s the capital growth that builds lasting wealth.
By the time you reach retirement, your portfolio should ideally be cashflow neutral, meaning the rental income covers holding costs. From there, you can:
- Sell Properties to Fund Retirement: Replenish your superannuation or cover major expenses by cashing out on significant capital gains.
- Leverage Growth Assets: Use equity from high-growth properties to access funds without selling. (This may involve drawing on cash buffers already held in offset accounts, or refinancing your loans prior to retirement).
Final Thoughts: Don’t Leave $1.1M on the Table
The numbers don’t lie: focusing on a cashflow vs capital growth property can cost you over $1.1 million in long-term wealth.
By investing in high-growth properties and managing cashflow through strategies like renovations or debt reduction, you can create a portfolio that delivers both short-term equity gain and long-term financial success.
At Buyers Advocate Perth, we specialise in helping investors identify properties with the highest growth potential, ensuring your investments align with your financial goals.
Ready to secure your future? Contact us today to start building a property portfolio that works as hard as you do.
