With the clearance rate at 63% again this week, we can see ourselves settling in for the winter sales season. This tends to be a time where volumes become lower, and negotiations become far more intense. If supply drops off whilst demand stays level, then pressure occurs in certain segments of the market.
Investors have well and truly come into the market place as there are more distressed sales of property. Your choice regarding style and location of property will be paramount in your success as a property investor.
There is much talk of the government trying to coax institutional investors in to offering low cost, affordable housing to those people who need assistance. This is not being offered to the average Mum and Dad investor, who by the way own 80% of the rental properties. We also read everyday from the “property advisors” spruiking positive geared property is selling well.
I am not a financial advisor; I only assist people once they have made the decision to have some direct property in their investment portfolio. Personally, I agree with this, but each person should seek the advice of a reputable financial planning professional. There are two main ingredients in any investment; Yield and Capital Growth. In layman’s terms yield is the rent you receive each week from the tenant and Capital Growth is the difference between what you purchased the property for and what you sold it for. (Or what the property is worth today).
For the purposes of this comment, I will be very simplistic. The average property is seen as “negatively geared” if your interest on the mortgage and other costs (rates, insurance, body corp. etc, called outgoings) is greater than the income you receive from the tenants. Because the government sees this as a net loss, it is treated like any business loss and you can reduce your taxable income because of this. When the tenants’ rent outweighs the interest and outgoings it is deemed positively geared and these funds will be added to whatever other earnings you have and taxed accordingly.
Most areas where the capital growth rates tend to be at the higher levels (the more established suburbs of major cities, where there is good infrastructure) unfortunately usually have the lowest yield (%return). The opposite is also true. Where the capital growth is limited because of distance to infrastructure and not as many people wanting to live there, the rental return tends to be higher.
So which is better? Higher yield and lower capital growth or vice versa? If you can afford to negatively gear (where you will need to contribute out of your own pocket each month to make up the shortfall in interest) and you achieve good capital growth, I believe this will offer the greatest benefit if you wish to grow your property portfolio. If you have limited capital growth then the only way to get the deposit for your next property is to save, rather than use the equity (capital growth) from your current investment property.
Go to our “how to” series on our website to read more about Yield vs. Capital Growth in the coming weeks.
Ian James
