Been thinking about ways to grow your wealth? Then you’ve probably considered the merits of property investment.
As one of the most urbanised countries in the world, our familiarity with ‘bricks-n-mortar’ offers a sense of security compared to other investment types.
Record low interest rates and existing home equity have added to the attractiveness of property investment.
Still, it’s likely you’ll need to borrow most of the money to do it.
Borrowing money to invest is called gearing. In other words, it’s a type of financial leverage. An investment property is a leveraged investment.
A seemingly simple thing to do on the surface, property investment is actually a sophisticated financial strategy.
With further understanding, it’s about here peoples’ sense of security can start to wane – especially if intending to speculate the property market.
Related Reading: 'Borrowing to invest'
Gearing.
In rising markets, gearing can work wonderfully well. When markets fall or correct themselves, gearing can cause financial distress – in particular, highly-geared investment strategies such as negative gearing.
Excessive use of interest-only credit to fund negatively-geared property investment in Australia has raised the attention of policy makers and regulators alike.
Whether your leveraged property investment is positively-geared or negatively-geared, you still need the financial depth to service the investment strategy either way.
This can be a key sticking point for property investors, as their investments mature and markets change or their own personal situation changes.
Negative gearing (capital gains).
Negative gearing is borrowing money to buy an investment property, with the expectation that income received (e.g. rent) won’t cover the costs of owning and maintaining the property (e.g. interest).
The borrower is willing to fund the shortfall, in return for capital gains. The size of the shortfall is determined by income yield, which is a key consideration prior to purchase.
There are also potential tax benefits an investor may consider, such as reducing your personal taxable income by offsetting some of the loss and treatment of capital gains tax if the property is sold.
You will need to have enough cash from other sources to survive this type of property investment, especially during the first several years, whilst waiting for capital gains (equity) or until the strategy becomes positively geared.
Ultimately, negative gearing means losing money and what might be saved in tax is only a portion of the total loss incurred. Further, capital gains tax may also need to be paid if the property is sold.
Advantages
- Short-term tax deductions
- Long-term capital growth
- Increased affordability attracts tenants
- Less location risk
Disadvantages
- Long-term investment horizon
- Demands spare cash is available
- Higher financial risk
Positive gearing (cash flow).
Positive gearing occurs when the investment income received is higher (e.g. high yield) than the cost of borrowing and expenses, and the loan-to-value ratio is low enough to have high reserves of equity.
Positive gearing creates passive income and reduces exposure to risk – unless investing in a region that is industry specific. These types of properties are harder to find at the outset, until the investor can quickly improve the property, increase income or pay down core debt – all of which require a source of additional funds.
Tax is paid on any additional income received and so cash reserves are needed to meet this requirement. Once again, capital gains tax will also need to be paid if the property is sold.
Advantages
- Increased income
- Less financial risk
- Borrowing power
Disadvantages
- Increased tax
- Slower growth
- Volatility
Property investment depends highly on your ability to afford the strategy over a period of time, the likelihood of interruptions to affordability and your ability to be patient.
Related Reading: 'SMSF residential property investment strategy explained'
Let’s talk
When it comes to property investment, there’s no such thing as one size fits all.
It pays to talk to people that want to hear your story and run through some examples with you. Why not incorporate a discussion about property investment as part of our free, no obligation financial review with one of our experienced and accredited professionals by organising an appointment today.
That’s right. In a refreshing twist you’ll actually talk to a real person.
It’s just one of the many features and benefits included in a tailored property investment solution from Loan Avenue – affordable loan solutions for everyday Australians like you.
Let us show you. To take advantage and make an appointment call 1300 56 26 28 or leave a message here.
Disclaimer
The information contained in the above article is general in nature and provided for information and education purposes only. Loan Avenue is not making specific investment recommendations.
We recommend readers obtain professional financial and taxation advice that relates to their individual circumstances, by consulting a professional licensed or authorised financial adviser or accounting and tax professional.
