Having a clear strategy is essential for selecting the right investment property.
Successful property investing involves a lot more than simply choosing a property and putting up the ‘To Let’ sign.
Like any other asset in your investment portfolio, a rental property should support your long term goals. That means matching the property to your preferred investment strategy.
A well chosen residential property is generally considered a pretty safe option when it comes to long term capital growth. Landlords can also look forward to a steady stream of rental income from the moment the property is tenanted.
The thing is, strong capital growth doesn’t always go hand in hand with high rental returns.
Properties most likely to generate strong capital growth are often located in sought after, but pricey, inner city and beachside areas. By contrast, properties with a higher rental yield are generally found in cheaper regional and suburban areas.
Knowing which is more important to you – capital growth or regular rent, can help you select a suitable property.
A capital growth strategy
There’s no doubt capital growth can deliver big gains over time. In the ‘hot’ market we saw in many parts of Australia in 2013, the gains can be impressive even over short periods.
Figures from research group RP Data show that last calendar year home values across the nation’s combined capital cities increased by 9.8%. The Sydney market topped the national league table with house values rising 15.2% over the year.
The downside of a capital growth strategy is that unlike rental income, the gains aren’t set in cement. If you’re focusing on capital growth it pays to be very selective about the area you buy into.
Look for features that will support long term price appreciation such as:
- a rising population,
- limited opportunities to increase the supply of new homes, and
- an increase in values in neighbouring suburbs.
As the rental yield may be low, it’s worth considering how your personal cashflow will be impacted by the possible shortfall between rental income and the costs of owning the place (including loan repayments).
This is a situation known as ‘negative gearing’, and the ongoing loss the property generates can usually be claimed as a tax deduction though this is always something worth checking with your tax adviser.
A rental income strategy
A rental strategy involves focusing on properties delivering strong rental yields. It can appeal to investors who rely on regular rent returns especially to help meet the property’s loan repayments.
This type of strategy doesn’t mean having to give up capital gains altogether though any profit on the sale of the place may not be as great as if you opt for a growth strategy.
A rental income strategy can work well if you don’t have to borrow heavily and you want to keep your repayments low. It’s sometimes called ‘positive’ gearing because unlike negative gearing, you won’t be left out of pocket each week after paying all the property’s outgoings.
Here too it’s worth speaking with your accountant as you may need to set aside funds to cover any income tax that may apply to the profit on rental income.
For more on money making strategies, take a look at Aussie’s Property Investing Guide – it’s free to download.
Have you taken the big leap and bought an investment property? Or are you curious and thinking about taking the plunge this year?
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