Capital growth v cash flow: How to grow your portfolio

Here are his tips on leveraging cash flow and capital growth to keep your investment engine running:

1. Cash flow is king, but yield alone is not enough

The ultimate goal of many investors is to eventually leave their nine-to-five jobs. Hence, cash flow comes in handy to cover living expenses when that time comes.

However, Mr Gupta said focusing on a property’s yield is not enough.

For example, he said, if you bought a $400,000 property with a 6 per cent yield, it could generate a $5,000 cash flow. 

If your goal is to earn $100,000 in passive income, to hit that target, you will need 20 of those properties – a challenge to achieve in this day and age. 

“Unless you get the capital growth, rental growth doesn’t occur. If rental growth is weak, there is no rise in income,” he explained – before adding that cash flow is good for increasing borrowing power.

2. Growth is the engine, cash flow is the oil of your investment

Repeating a simple rule of property investment, Mr Gupta noted: “Hold a property if it’s growing in value, let go if it’s costing you thousands of dollars to hold.”

Holding on to a negatively geared property with just 2 to 3 per cent yield, even if it’s in a popular location, could cost you a huge amount, according to Mr Gupta.

He argued that building wealth by “losing a dollar in tax, only to get half of it back” is not a good property strategy because losing money will not help you earn income to buy your next investment property.

And this is where cash flow comes in.

“Growth is the engine. You want a really strong engine. But without oil, your engine’s not going to work. Cash flow is the oil,” stressed Mr Gupta.

Explaining further the synergy of cash flow and growth, he used a $2 million portfolio example composed of four properties valued at $500,000 each. If the portfolio hypothetically doubles in value ($4 million) in 10 to 15 years, he suggested that you can sell two properties to pay off the two remaining properties.

“By liquidating some of your assets to pay for the rest, you can build your portfolio,” Mr Gupta stated.

Initially, cash flow can help your portfolio run by increasing your borrowing capacity through well-managed debt. But over time, “growth allows you to have an income from a debt-free portfolio”, he claimed.

Mr Gupta flagged the practice of “pairing properties” touted by some agents. This refers to buying one property for cash flow and another for capital growth.

“Don’t settle for half a benefit to be paired with another half benefit because it will not work,” he warned new investors, claiming that such a strategy could lead to less borrowing capacity.

Sharing his own strategy for quick growth when he first ventured into real estate, Mr Gupta underscored the importance of data (up to 30-35 data factors) “for consistently, predictably short-term growth”.

He touted the formula of cash flow with capital growth and short-term growth was vital for his success and, though some may be sceptical, he claimed there are still plenty of locations where you can implement this.

“Look for locations with 6 per cent yield and double-digit growth,” Mr Gupta concluded.