When investing in property it’s important to choose the right properties for your situation to ensure you don’t get stuck at just one or two properties like most investors.
Blogger: Paul Glossop, director, Pure Property Investment
We've all seen the numbers time and time again.
It's very evident in the above data alone, that the bulk of these median income investors are buying investment properties that are taking too long to appreciate in value while not providing positive cash flow to enable them to reinvest in the market, thus forcing them to stop at one or two properties.
A quick example of how the wrong investment can affect your cash flow:
Option one: (low-growth outlook and negative cash flow)
Western Sydney four-bedroom investment property purchased today $750,000
Option two: (medium- or high-growth outlook and neutral cash flow)
Western Brisbane four-bedroom investment property purchased today for $300,000 x2
Taking into account the most recent three-year growth projections for both Sydney (1-3 per cent annually) Brisbane (3-5 per cent annually) this is what an investor could expect from both examples.
Option one: Western Sydney investment
Option two: Western Brisbane investments x2
That is a difference of $78,000 in three years!
I have intentionally not touched on negative gearing in the examples above, as I always like to consider negative gearing as a sweetener or a bonus rather than a ‘sure thing’.
The fact of the matter is that negative gearing only applies to your relevant taxable income. Investors' circumstances change more regularly than one may think. Investors change/lose jobs, family dynamics change, people retire, people invest in different types of trusts that incur different tax deductions etc. and all of these factors have an impact on your depreciation options.
I know that we continually read that you should always invest for capital growth rather than neutral or positive cash flow, but in my humble opinion, this is merely 'lazy investing'.
Don't get me wrong, there are plenty of investors out there including myself that have made significant capital gains by investing in high-growth areas that only offer yields of 4-5 per cent resulting in negative cash flow... But these types of properties have a much more appropriate place in one’s portfolio once they have built a solid foundation of growth and cash flow. The main factor in this equation is ensuring investors don't 'invest themselves out of the market' through negative cash-flow properties.
You should always consider your current portfolio, position, income, dependants and financial and investment goals to determine what the next investment should be – whether that is a high-growth property or cash flow positive property or a blend of both. The type of investment property you choose should ALWAYS serve a purpose to achieving your investment goals.