It has long been debated which is better for real estate investing, cash flow or capital growth. The reality is the answer is different for individual investors based on their particular objective.
Establishing what you want most from an investment is the first step in answering that question. Personally, I believe cash flow is paramount to have in any investment. Even when your number one criteria is capital growth, you should always have a positive cash flow. This is the safe haven should you suddenly experience market shifts or obstacles along your way to the capital growth.
Capital growth can be found both by:
- Manufacturing it (check out our next post)
- Location: By investing purposefully in the right product in the right area
Capital Growth or Cash Flow
In markets like we have today you can invest in most cities in the U.S.A. to find cash flow. Identifying the right city to obtain maximum capital growth potential, you want to look at acquisition cost (at time of purchase) with the cost to build the same size property at that same time.
Example: a home cost $50 per sq. ft. to purchase today and the cost to build the same property today would be $100 per sq. ft. You can easily identify that there is plenty of room for capital growth. As current inventory gets absorbed and builders begin to build to meet the demand for housing the current inventory rises to match or very closely match that of the cost to build (depending on condition of the house of course). This has always happened and will continue to happen, simple economics.
So if you can acquire a property for 50% of the cost to build in one area compare that to the cost to buy versus build in another area. Let’s suppose the other area you choose has a 70% cost to buy versus cost to build ratio, which would give you the best capital growth potential. The area that has the largest spread will obviously be the investment that has the best capital growth potential. Other factors should be considered to identify at what speed this growth will take place. I could go into many ideologies here, but the shortcut to the information would be found by seeing what the builders are doing.
Builders spend a fortune to study the ideologies needed to determine whether an area is ready to accommodate more building. They will only start building when the market indicators dictate them to do so. So when building permit activity starts to rise and more permits are continually being pulled you have a pretty good understanding that these areas have accelerated there building which in turn will accelerate that area’s capital growth potential.
This is how seasoned investors stay ahead of the game and build incredible wealth. Anyone can gain cash flow. Most seasoned investors agree that the real wealth building principals come from capital growth and when being purposeful you can acquire great capital growth by remembering the number one aspect of real estate (especially for the investors) is Location, Location, and Location.
The investors who do their diligence and stay informed will always gain capital growth as well as cash flow and win bigger! If you want to talk about some of our targeted Capital Growth AND Cash Flow recommended markets, give me a call today! 941-718-7761 Larry Arth
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