In­vest­ing in your fu­ture

Herald Sun - Property - - NEWS - PETER FARAGO

THE rules around the cost of own­ing an in­vest­ment prop­erty will po­ten­tially change as MPs mull over the fu­ture of neg­a­tive gear­ing.

But not all in­vestors are plugged into the fi­nan­cial life­line of neg­a­tive gear­ing, where losses made on a rental prop­erty can be claimed back through their tax re­turns.

There are two schools of thought re­gard­ing prop­erty in­vest­ment strate­gies — wealth cre­ation through cap­i­tal growth or cash flow through rental in­come. How do buy­ers ap­proach buy­ing their next in­vest­ment prop­erty?

WBP Prop­erty’s Gre­ville Pabst said buy­ers should fo­cus wholly on buy­ing qual­ity, well­lo­cated prop­erty with a proven cap­i­tal growth per­for­mance, if they can af­ford it.

“The most im­por­tant thing for in­vestors when buy­ing is to make a prop­erty de­ci­sion, not a tax­a­tion de­ci­sion,” Mr Pabst said. “Se­lect a good prop­erty and hold it for a long time.”

Mr Pabst said fea­tures that made a prop­erty a good in­vest­ment in­cluded the sub­urb, street po­si­tion, home’s ori­en­ta­tion and floor­plan.

“You get wealth from your prop­erty in your se­lec­tion. By choos­ing a good as­set that has all the fun­da­men­tals, we know that drives value,” he said.

How­ever, a con­se­quence of high cap­i­tal growth is that it usu­ally is more ex­pen­sive and re­turns a lower rental yield.

Mr Pabst said the risk-re­turn was higher for prop­er­ties with bet­ter rental yields be­cause their lower cap­i­tal growth po­ten­tial could turn around to bite them if the mar­ket soured.

But he said this strat­egy of­ten suited in­vestors seek­ing ad­di­tional in­come streams, par­tic­u­larly re­tirees.

Buy­ers ad­vo­cate Cate Bakos said rather than re­ly­ing on neg­a­tive gear­ing, buy­ers could en­gi­neer an in­vest­ment strat­egy so the prop­erty they bought was cash­flow neu­tral, (that is, it pays for it­self ) and got some cap­i­tal growth.

Vic­to­ria’s ma­jor re­gional cen­tres like Geelong, Bal­larat and Bendigo were good buys, with prop­er­ties de­liv­er­ing bet­ter than 5 per cent rental re­turns and at­tract­ing strong de­mand from pro­fes­sion­als will­ing to make the com­mute.

But buy­ers needed to find homes with low main­te­nance costs and out­go­ings that would at­tract qual­ity, long-term ten­ants, she said.

Ms Bakos said town­houses pro­vided the best op­por­tu­ni­ties for cash­flow sen­si­tive in­vestors.

“If we go to Bal­larat and tar­get un­der $330,000, which will still get you a qual­ity three or four-bed­room house in a good area, you will be in an area where you get peo­ple who are happy to rent there and re­ally tight va­cancy rates,” she said.

“You will be in a cash­flow neu­tral (po­si­tion) or at worst it might cost the in­vestor $200 or $300 a month, if you don’t count tax ben­e­fits.”

Ms Bakos said it was more dif­fi­cult to en­gi­neer the same strat­egy in Mel­bourne, and avoid neg­a­tive gear­ing, with­out tar­get­ing prop­erty types that re­quired com­mer­cial fi­nance ar­range­ments, like stu­dent apart­ments.

“You’ve got to go for some­thing that is not a house,” she ad­vised. “It might need to be a re­ally high yield­ing town­house that is in­ter­nally re­ally ap­peal­ing and not on a very large al­lot­ment.

“You can re­duce your price point, tak­ing into ac­count a smaller land com­po­nent, but hav­ing a big­ger liv­ing area, in­ter­nally, you can drive up your rental re­turn that way.”

CoreLogic head of re­search Cameron Kusher said Mel­bourne’s outer sub­urbs pro­vided the best chance to avoid neg­a­tive gear­ing, of­fer­ing the top com­bined rental re­turn and value growth for houses.

“House yields in in­ner-city lo­ca­tions are typ­i­cally low. which is high­lighted by Mel­bourne hav­ing the na­tion’s low­est cap­i­tal city rental yields,” he said. “For units there are a hand­ful of in­ner city sub­urbs but again it is largely outer, more af­ford­able sub­urbs that make-up the list due to much higher rental re­turns.’’

Har­courts Car­rum Downs agent Elle Con­nolly said in­vestors fo­cused on outer sub­urbs be­cause they were af­ford­able and de­mand from ten­ants was high.

“You can rent a three or fourbed­room prop­erty on a big block and you are near shops, schools and pub­lic trans­port and you’re not so far out as Pak­en­ham and Cran­bourne,” Ms Con­nolly said. “From an in­vestor point of view, they can buy quite cheaply and the rent is quite good, so it is at­trac­tive to put their money here.”

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