So, you’ve decided to invest in property? 1) great choice, and 2) welcome! We can’t wait to help you thrive.
There are a range of property investment strategies that deliver different benefits and have their own unique challenges; the key is in understanding them, and ultimately making them work for you.
The strategy you use is dictated by a number of factors, including your financial goals and contextual factors such as life stage, existing property portfolio and location. For example, the strategy most suited to a couple nearing retirement may be vastly different to the one that works for a younger person entering the market.
Here, we’re taking a look at two of the most common property investment strategies; capital growth, and positive cash flow. Additional options include approaches that involve substantial renovations to property, which we’ll explore in a future blog post.
Let’s get into it.
Capital growth strategy
Employing a capital growth strategy in property investment essentially means purchasing a property with the expectation that its value will increase over time; growth in capital is the primary goal.
There are factors you can play around with and tweak in order to make this approach work for you; including the period of time you plan to hold the property before selling (either a short term hold or longer term depending on your research of the area and expectations about market performance).
On the subject of research, expect to do a lot of it before purchasing a property as part of this strategic approach. Your research should give you an understanding of the local market and give you a reasonably solid indication of whether it’s an area on the cusp of high growth, already experiencing it, or likely to experience it in the longer term.
The benefits of a capital growth strategy include:
• Tax benefits: because your property costs will likely be greater than the rental income you can achieve, you can claim the cash flow shortfall against primary income in the form of negative gearing offsets.
• Minimal action required once the purchase has been made: thanks to all of that research effort you put in upfront, there’s not much to do other than wait for your property’s value to grow.
The drawbacks of a capital growth strategy include:
• Limited cash flow: because this strategy bets on long-term property appreciation, there’s no immediate income or cash flow as part of the strategy. Also, you’ll need to be in a position where you can cover out-of-pocket costs such as maintenance issues and mortgage repayments from your other income.
• The mercy of the market: the property market can be notoriously difficult to predict, and timing the sale of your property at the market’s peak isn’t an exact science.
Positive cash flow strategy
A positive cash flow strategy does exactly what it says on the tin; generates a positive cash flow immediately, ie rental income derived from the property is greater than the costs associated with running the property (including mortgage, rates and maintenance costs).
This approach is common among people who have retired and are looking for a source of income that is self-generating as well as among new investors.
The benefits of a positive cash flow strategy include:
• Cash flow: this approach sees more money in your pocket immediately and therefore an increased disposable income, which can mean you’re in a position to borrow more to invest in additional properties.
• Less dependent on market forces: because the property essentially supports itself, if the market dips or you encounter financial issues personally, there’s less pressure to immediately sell your asset.
The drawbacks of this strategy include:
• Lower capital growth: the areas that lend themselves to suit positive cash flow investors tend to be areas where there’s a higher demand for renters than buyers, which means often a lower potential capital growth when compared with areas that encourage property buyers.
• Limited tax benefit: because of the income your property is generating, there’s no room for tax offsets.
While these are two of the most common strategies, there are property opportunities out there that can result in both capital growth while delivering a positive cash flow. The key is talking to credible professionals who can provide reliable advice. If you’d like to chat with one of the Collective’s team about your next step in property investment, reach out to us.