Investing in your future
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.”