The two most obvious benefits associated with investing in residential property are cash flow and capital gain.
Often a property will lean towards one of these benefits at the expense of the other.
EXAMPLE Good Growth, Low Rental
A beach front home close to a major city may have large increases in value due to water views, and the low supply of waterfront property such that rental return may not keep up with capital gains.
EXAMPLE Low Growth, High Rental
Rental increases on apartments near universities may be high relative to their value as re-sales would attract the investor market, excluding premium prices often paid by owners, yet strong rental yields remain due to the student rental market.
CAPITAL GAIN VS CASH FLOW PROPERTY
It depends on your goals and financial situation, which you could discuss with your financial planner, however some general points are given below.
WHY CASH FLOW POSITIVE PROPERTY?
- It pays for itself, rental received pays for expenses such as the mortgage
- No need to draw upon your personal income
- Improved serviceability when looking to banks to buy another property
- Lower risk if your employment situation changes for the worse
PITFALLS WITH CASH FLOW POSITIVE PROPERTY?
- Slow growth may mean limited equity is available for a deposit on another property
- Negative gearing tax benefits may not apply - check with an accountant
- Often a trade-off with future expected gain, in a hot market it may move slower than typical higher growth properties
WHY HIGH GROWTH PROPERTY?
- Equity can be unleashed by refinancing to use as a deposit to buy another property
- Negative gearing tax benefits may apply, check with an accountant
- Significant equity created on a property could be realised once sold
PITFALLS WITH HIGH GROWTH PROPERTY?
- High growth potential usually means a property is cash flow negative - you must regularly draw on other income, such as salary to help cover costs
- Higher risk if there is an adverse change in your employment as you may find you need to sell quickly, not good if the market has dipped
- Reduced serviceability when looking to banks to buy another property
WHAT ABOUT BOTH?
- A portfolio of properties with some of each type, may help reduce financial risk, like an insurance portfolio!
- Consider ways (below) you may increase rental yield on cash flow negative properties or add value to slow-growing, cash flow positive properties.
TO INCREASE RENTAL YIELD:
- Fully furnish, do your research first and talk to us at 1800 LETS GET for further information.
- If there is a market for it, rent out by the room
- Get your FREE online rental appraisal now!
TO INCREASE YOUR PROPERTY'S VALUE:
There are benefits and pitfalls to investing in property predominantly for cash flow and likewise for capital gain.
It is a challenge to find one which has both in abundance, so you may need to be creative if you want both by creating a portfolio of properties, renovating to increase value or finding ways to increase yield.