A breakdown of whether investment property makes sense, weighing negative gearing against capital growth and how to build equity through development. Focused on the Australian market with practical examples.
Investment properties are one of those things we all strive to. For some reason, us Australians just want to have that investment property. It sounds good. At the family barbecue, everyone seems to feel that the tax benefits that the government gives are very worthwhile. There may be some changes in that space. So it is very, very important you keep your eye on that. Because they're looking at rolling back negative gearing. They haven't done that yet, but it could certainly affect the cash flow. When you're buying investment property, you're really buying for two reasons. Either one is capital growth or the second reason is cash flow. When clients have bought negatively geared properties, that means the rent doesn't cover the mortgage, there's a shortfall of a few hundred dollars per week and they've got two or three of these. Two things happen. One, the bank stops lending to them because their shortfalls consistently add up and it chooses away their serviceability so their income cannot afford any more investment properties. The other fact there is that if they lose their job, all those properties then are at risk of having to be sold because they don't have the cash flow to keep topping up the difference between the rent and the mortgage. So those negatively geared properties are very, very finite. They're based on your income. And a lot of people are buying negatively geared properties with a mindset of it's going to help them retire earlier. It actually does the opposite, buying an equally geared property. Choose your cash flow up and you're sitting there hoping for capital growth. I really feel that capital growth around Australia for the next few years is going to be pretty limited, if any at all. Just the way that the market is, especially once rates start rising, it's going to really, really cool off a bit. So if you're buying for capital growth and you're sitting hoping it's going to grow in value over the next two to three years, I think you'll be sadly disappointed. There's nothing worse than paying two $300 per week shortfall between the rent and a mortgage. If the property is not growing in value, what's the point? And so you're just draining your cash flow there. Buying for cash flow is a different story. When you're buying a property which puts more money in your pocket than what it takes out, that's the name of the game. You're being paid to own Australian real estate. There's nothing better in life than actually waking up and knowing whether or not you do or don't go to work. That property is going to pay for itself. And some there's only one factor which determines when you can retire, that is when you have enough and assets producing a passive income that's going to cover all your living expenses and give you that lifestyle there. Positive cash flow. Properties consistently build that cash flow so you can retire faster. Negatively geared properties diminish your cash flow. So you should be buying for cash flow over capital growth, because capital growth you can't control the cash flow. You can. Rents are usually trending upwards year after year. The third option there when you're buying for investment, is to actually look at manufacturing the equity or manufacturing the capital growth. An example I've just done is I bought a property in Adelaide. It was a corner block. I paid $350,000 for that property. That property is on 880 square meters. We've just got council approval to then subdivide that into three lots. So we've got one house at the moment. We've knocked that house over and. And We've actually built three units on that block. Each unit costs $200,000 to build, so that's $600,000 for the three units plus the 350 for the purchase price. So it owes me around about 950. That valuation today on those three units is at 1.35 million. So, as you can see, I didn't wait for any capital growth. I hole in, solely bought, subdivided the land three times and now I've got three parcels of land giving me three rental incomes, three sets of depreciation, and as a result, I've created or manufactured the equity. And so that's something you should definitely be looking at. After you bought a few properties, you've sort of dipped your toe in the water. That's a great way to build your wealth and create equity.
