Investing in property is like driving a car, finding the right gear to suit your conditions makes for a smoother journey and a faster arrival at your destination.
According to Steve Bayly, the Managing Director of Properties 4U, it is imperative to work out where you want to go and what you want to achieve before jumping on the property investment ‘band wagon’.
“To get the most out of investing in property, people really need to think about what it is they’re trying to achieve. This will help them decide the kind of property or properties they will buy and the kind of loan product they need,” Steve said.
“There are an enormous range of options for investors. Understanding the basic principles of investing and visiting a good mortgage broker for sound borrowing advice is a good start for anyone who wants to invest in property.”
The two main avenues for investing in property are positive and negative gearing, with each of these having pros and cons.
“The major difference between these two forms of investment is the cash flow, one puts money into your pocket and the other takes it out of your pocket. If your primary objective is additional cash-flow then positive gearing is likely to be your best option,” Steve said.
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“To get the maximum benefit out of negative gearing you really need to keep the property for the longer-term and purchase in an area that will give you good capital growth.”
Positive gearing means that after paying the loan and all expenses each month, there will be some money left over as a profit. If you are borrowing the full purchase price and fees, such properties are generally in the lower price bracket and can command much higher weekly rent. Steve said this type of investment was favoured by a range of investors including young people, lower income earners seeking additional cash-flow and those who wanted a portfolio of properties that could replace an income in the future.
“Although the rise in the value of the property is likely to be relatively modest, investors are making money from the property from the time they buy it, gaining regular income from their investment,” he said.
Negative-gearing generally refers to an investment that requires investors to pay the gap between money received for rent and the costs of running the property, along with the interest cost of the loan repayments. According to the Australian Tax office, a rental property is negatively geared if it is purchased with the assistance of borrowed funds and the net rental income, after deducting other expenses (including depreciation), is less than the interest on the borrowings. If a net rental loss arises, you may be able to claim a deduction for the full amount of rental expenses against your rental and other income (such as salary, wages or business income). By negatively gearing a rental property, the rental expenses you claim in your tax return may result in a tax refund and could therefore make the property positive geared after tax.
Although this loss can be offset against annual income, the focus of on investment is the capital gain of the house, hence the need to select the right location and keep the home for a longer period to make a profit in its growth.
“Investments that are negatively-geared are usually more expensive properties to begin with in areas that are highly desirable that have a history of consistent gains in property value or in areas that are becoming more popular and will give a good return on long-term investment,” he said.
“Investors will have a much better experience of the property market if they decide what they want – increased cash flow from day one or being prepared to pay the shortfall gap for a long-term investment,” he said.
“Choosing the right properties and loan structure can increase your returns and help purchase more properties” Steve said.
“Using an investment property specialist like Properties 4U will ensure you get professional advice on your property strategy, purchasing structures and the most effective properties that suits your financial position and your chosen type of investment.”
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