Investing in property comes with some learning curves, from understanding terms such as negative gearing to capital growth. For someone just starting out in the property world some of these terms are daunting. If you have borrowed money to invest in bricks and mortar this is a must read article. We talk about not only negative gearing but capital growth and positive geared property.
What is Negative Gearing?
Negative gearing is when a property investment has an income (rental) lower than the mortgage repayments. Australian Taxation Office in this case allows investors to offset the loss against their income.
Why would any investor want that?
As an investor normally the goal is to have the rent cover the mortgage payments and more but what if it doesn’t? Some investors invest purposefully in negatively geared property for other purposes. This can be for the belief that in the long term the re-sale or even land value will make holding onto the property more valuable. An example might be a farm in the Margaret River, as a rentable property it may be low in rent but in Land value has increased drastically over the last 10 years.
Capital Growth VRS Positive Geared Property
Although a positively geared property (rent covers mortgage payments and more) is every investors dream and a good goal in the long term in needs to also gain capital growth. For example if you buy when the market is strong you may not see strong capital growth for a longer period of time. However if the investment is paying for itself then perhaps this is not a concern. To find a property that receives both positive gearing aswell as strong capital growth is every investors goal. To find properties like these you need to look at statistics in the area you are looking to invest such as rent vrs buy, current market conditions and demand to supply – just to name a few.
Equity can be manufactured in a few different ways. Equity in a property is the difference between the value of the property and the property value of the mortgage. In order to take the next step to purchase another investment it is your goal to increase the equity. There are a few options here; option one is pay the mortgage down – increase the repayments and reduce the mortgage. This can be a less efficient way and can be hard and slow process. Option two, this is the most popular choice, wait for capital growth to take place. This can be the easiest as it involves zero effort however more often than not it takes time. Another option is to manufacture equity which means renovate, subdivide or even develop land.
When investing it is a good idea to understand what your obligations are. As a Landlord you must factor in cost of repairs required, council rates, strata rates. These are all part of the running cost of the property. It is important to know your demographic, do the research and ensure you are investing in a viable area. Do the calculations on how this can lead you to your next step, how will this property lead you to the next investment and how long will that take? You need to financially plan and set out your future.