At Power of Property, our philosophy is that any property investment advice we provide is tailored to your needs, which means we aim to provide our clients with a range of options that reflect your goals. This is why our approach is always to begin with a free, one-to-one strategy session to take you through the variety of options that are open to you, and examine the short- and long-term returns that are potentially available.
In broad terms, most property investment strategies will be based around one of three approaches: positive cash flow, long-term growth, or a balanced property investment portfolio.
Investing in positive cash flow property
A positive cash flow property is one where the rental income you receive is greater than the holding costs associated with the property, such as mortgage and insurance, maintenance, rates, the cost of tenanting the property, etc. Also referred to a high cash flow, positive income or positively geared properties, this sort of investment essentially means that you make cash each month from your property.
For anyone looking for immediate returns, investing in a positive cash flow property is an effective way of achieving this. The amount of profit you earn each month will likely not be huge, but the advantage is that your investment is not costing you anything, is relatively low risk, and can help you to generate cash that you can use to pay down the mortgage more quickly. A positively geared investment property can also make it easier to get finance so that you can invest further in the growth of your property portfolio.
For an investor who doesn’t want to wait until selling a property to realise a profit on their investment, a high cash flow strategy is highly recommended.
Drawbacks to a positively geared investment property
However, it also needs to be kept in mind that a positively geared investment strategy is not right for everyone, and it may not necessarily be the best way for you to achieve your property investment goals.
For instance, you will be required to pay tax on the profit you derive from your investment property (once associated expensed have been taken into account), and you may find that the holding costs change, so that the income you receive does not remain at a consistent level.
Another potential drawback to following this strategy is that this sort of property investment tends to produce slower capital growth than some other approaches. This could mean that over the long term your net worth does not grow to the extent that it might otherwise.
Negatively geared property investment
If your financial goals are more focussed on the longer term and retirement, then investing in a negative gearing property where there is the potential for long term capital growth could be the right strategy to pursue. In such an approach, the aim is to buy a property that appreciates significantly in value over the period in which you own it, enabling you to make a substantial profit when the time comes to sell.
A negatively geared property purchased as part of a high growth investment strategy will generally bring in less income than the costs associated with owning it. In simple terms, this will mean that your investment will cost you money every month (although in most cases, a negatively geared property will become cash positive over time).
However, it needs to be kept in mind that the net rental loss after holding costs and deprecation have been accounted for can be claimed as a tax deduction when set against your other income. Losses can also be carried forward to the next financial year.
Likewise, it is also important to know that it is still possible for a property that is negatively geared to return a positive cash flow. If you make a PAYG withholding variation application to the ATO, you do not have to wait until the end of the financial year in order to claim back your expenses. Instead, your weekly, fortnightly or monthly PAYG is adjusted to take into account the ongoing holding costs associated with your investment property, which essentially means you are paying less tax each pay period. The net result of this can actually be cash in your pocket after all of your costs have been taken into consideration.
A further benefit of this type of property investment strategy is that any initial losses that accrue during the early stages of owning your property will ultimately be more than compensated for by the extent to which its value appreciates over time (this is because the length of time you own a property is generally more important than the time at which you buy it).
Similarly, owning a high growth property may mean that your property portfolio does not need to be overly large in order to provide you with sufficient income for your retirement.
When negative gearing may not be the right strategy
The fact that you are not likely to receive any short term returns on your investment may mean that owning a negatively geared investment property is not the right strategy for you. It could also be that a lack of income being generated limits your access to additional finance, which could prevent you from further investing in property.
There is also a greater element of risk attached to this sort of investment, in that you are depending on your property appreciating in value sufficiently over time to cover any initial losses.
Growing a balanced property portfolio
Property investing can be done in different ways in order to achieve different goals, and so for some investors building a more balanced property portfolio may be the best approach.
Such a strategy would ideally combine the approaches outlined above, namely investing in both positive cash flow and negative gearing properties, and which are located in different areas of the country.
Having a balanced investment strategy means that you are gaining some returns on your investment in the short to medium term, while also potentially growing capital for the future. This also means that you’re equipped to pursue different investment strategies at different times, depending on your needs.
At the same time, a balanced property portfolio does not mean constantly acquiring property. Instead, it is about having a structure in place that enables you to ride out changes in the market by becoming more resistant to the inevitable fluctuations that occur in the value of property. In short, a balanced property portfolio is about the quality and value of your investment properties much more than it is about quantity.
The Power of Property approach to property investment
No matter what sort of property investment strategy you think is best suited to your needs, Power of Property can help you to achieve your financial goals, both now and into the future.
For instance, if you are looking to invest in positive cash flow property, our extensive research based on the most up-to-date industry data means that we can identify the regions of the country where there is likely to be both current and growing demand, and which provide the highest rental yields.
Alternatively, we utilise information on an area’s stock of housing supply, the historic and current vacancy rates, the rental returns available, as well as the current and planned infrastructure in the district, in order to determine the potential for growth over the long term for investors looking to buy a negatively geared property.
If you already have an idea about what sort of property investment strategies you want to pursue, or you want to talk to an expert to find out more about the range of options available to you, our specialist property advisers are here to help.