News

Pros and cons of negative gearing v's positive cashflow

I recently read this article on realestate.info and thought it was a good one to share.. please note a few of my comments in italics !

As an investor, firstly determine what is your key goal – what do you want to achieve? Then.. how will either cash flow or capital growth assist you the best?

Traditionally, there are two common strategies an investor can choose when it comes to property investing – gaining positive cash flows or high capital growth. We are not here to say one method is better than the other; ultimately it comes down to each investor’s individual choice, circumstances, buying motives, end goals and their overall financial position.

To help shed some light we have highlighted the significant aspects for both strategies:

Cash Flow - Positive

A positive cash flow strategy is very simple; acquiring properties with a rental income higher than the total amount of your expenses, interest repayments and holding costs etc. Once your desired level of passive cash flow has been reached, you can supplement your daily workforce income.

Pros

A positive cash flow strategy is ideal if you want to hold an investment over any time period without dipping into your own personal pocket. This strategy is also great for serviceability for all current and future loans, which financial lenders favour.

Cons

The big negative with this strategy is the amount of cash injection that is required in today’s property market to establish such a cash flow positive driven portfolio. This aside, the main issue when considering a strategy to build genuine wealth is that real wealth comes from growing your asset worth over the long term (10+ years).

Insider Tips

This kind of investment strategy is becoming harder and harder to source today. Positive cash flow properties tend to be more common in regional areas, those offering student accommodation ​(which can be very difficult to adminstrate), or are in higher-risk regions – eg. dependent on only one key economic driver (mining/tourism).

A popular low risk cash flow strategy that is gaining momentum is to purchase a Dual Income Property. This involves two income producing properties on the one title where each residence can still be let separately, offering investors a higher rental return relative to the property cost.  If you are considering this option, it is critical to factor in costs of ensuring seperate access points, power and gas meters.

CAPITAL GROWTH

A capital growth strategy refers to the focusing of increasing the value of your properties within your portfolio over time.

Pros

One of the big thumbs up for capital growth is that it allows for equity-driven growth, which will enable the investor to continue to add multiple properties to the portfolio, by simply drawing upon the equity gained to use towards the purchasing of additional properties. Many experts consider capital growth the true wealth creator.

Cons

This type of strategy is a much longer term based strategy which relies on market growth and is both variable and dependent primarily upon the property’s location. In most cases, the investor needs to use a small proportion of their own money to pay for expenses as the rental income does not cover it in full (negatively geared) and is therefore reliant upon government tax incentives offered.

Location is of key importance for the success of any capital growth strategy! Choose the right location and your finances will thank you for it.

More Useful Tips

• Be clear on your desired end position when comparing and considering these two strategies
• Growth in properties historically doubles every 7 to 10 years
• Ideally balance your portfolio with a combination of both

Below you can see the statistics showing the capital growth on properties through the decades.1 As you can see from the data below, property has roughly doubled in value every 10 years. On average property has delivered a 9.5% growth rate per year over the last 50 years.

Being successful is not so much a matter of 'timing of the market' but 'time in the market'.  This is why it is important to get started as soon as you can.

Capital Growth prices in Australia over the decades

I will be very keen to see the results in 2020!

Article sourced from realestateinfo.