I will quickly define these two concepts of cash flow and capital growth as they apply to property investing.
This is the difference between how much money it costs you to own the investment and how much money you get from it.
Case Study: negative or positive?
So if you pay $20,000 a year on the investment home loan, rates, and property maintenance and receive $14,800 a year in rent, your cash flow is minus $5,200 each year, meaning that it costs you $100 per week to own this investment.
You are said to be ‘negatively geared’ in this situation because you can reduce your taxable income by $5,200 when doing your tax and get a tax refund. Whereas, if you were making $100 a week, you would be ‘positively geared, and you would pay tax on the extra $5,200 each year.
This is the value by which the investment increases. In a perfect world, your investments make you money while you own them (are positively geared) and are also increasing in value. With property investing, the goal is to minimise your expenses while the rental return increases over time, slowly moving you from being negatively geared to being positively geared, so you can then afford another investment property.
Case Study: working out your return
If you bought an investment property for $400,000 and sold it 10 years later for $600,000, you would have made $200,000 in Capital Growth. In this example, you have spent $52,000 over ten years to own the property ($5,200 per year x 10 years) and made $200,000 when you sold it. So your return has been $148,000.