STRATEGY: STRONG GROWTH AND AVERAGE YIELD

They are married with one child and both in their early 40s. They have a household income of $200,000 and family home worth $750,000 that is mortgage free. They also have $15,000 in savings as they have focused on paying off their home loan. Currently their yearly spendings on bills and lifestyle are $30,000 and $40,000 respectively.

Given their strong monthly surplus and strong cash flow, they are in a position where they can go for a growth asset, so we are suggesting they purchase a property for $900,000, chasing a 7% capital growth rate and a 3% yield.

They would structure their lending so that they can release equity from their own home to fund the 20% deposit plus 6% costs while getting a standalone loan of 80% for the investment property. This will ensure that they also avoid mortgage insurance and get interest-only lending.

From the table below, you can see that the news is very bright. While they are chasing a growth asset, it does mean that their negative gearing benefits are lasting one year longer than Rachel’s as a result of the lower yield on this type of property. However, in the 10th year it shifts from a negatively geared scenario to a positively geared scenario and this positive cash flow will also help pay down the debt.

For Matt and Jayne, it is clear that the overall contribution to their wealth from investing in this property could be significant. The net cash flow position after 20 years is $19,165 and their wealth has increased significantly (see table).

This too shall pass

From these two case studies you can see that over 20 years you need the negative-gearing benefits in the early stage of accumulation but over time you end up paying tax from the surplus rents, which offsets the negative gearing benefits. That’s why we need to encourage education about the benefits of long-term investing, not short-term speculation.

As a footnote to these two illustrations of real-life property investing, in terms of strategy, with all else being equal, chasing capital growth is our preference over chasing yield. As the fact file on the right demonstrates, ultimately the income from the “growth” property exceeds the income from the “yield” property, and over time the wealth base is significantly higher too. After 30 years Property 1 is worth $2,621,314 more than Property 2. For Rachel, her circumstances dictated that we focus more on yield because cash flow is tight but Matt and Jayne had better cash flow so therefore could chase a growth asset.

So when we ponder the question of whether investing in property and negative gearing are still worthwhile in the current market, it’s important to keep all this in perspective. A quick history lesson will remind us that there have been speed bumps in the past that we have faced and withstood. Negative gearing was abolished in 1985 and reintroduced in 1987, the GST was introduced in 2000 with huge uncertainty for investors following the major change in tax scales, we weathered the Asian financial crisis of 1997 and of course most recently we were faced with the GFC.

It may be winter now but it doesn’t mean that summer will never come again, and if you have an investment-savvy mortgage broker to help you navigate the finance waters as well as a long-term strategy, then it’s simply part of the constant “white water” that is property investing, as it’s never “clear water”. But now could be a terrific opportunity to acquire great assets while the market is uncertain. If anything, hopefully the changing landscape will discourage short-term thinkers and encourage people to have a long-range perspective.

So when faced with the ever-present white noise of the markets, I often find comfort in the words of the greatest long-term investor of our time, Warren Buffett, who tells us to be fearful when others are greedy and greedy when others are fearful.