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What’s the best investment strategy: positively or negatively geared property? Mark Armstrong

By Mark Armstrong
Wednesday, 11 September 2013

The federal election has be run and won and with the Liberals getting a clear majority the uncertain political outlook has been put to bed. Property investors are timid beasts by nature and they want to know everything is safe before they make a move and a stable government will help with this psychology.

Also helping investors feel comfortable is the fact ME Bank announced yesterday their three year fixed rate has been cut to 4.69%, the lowest level for 23 years.

Property investors have already begun to re-enter the property market but these two events are only going to add to the momentum. They will begin to change their thinking from ‘if’ they should buy property to ‘what’ they should buy and will be torn between the logic of two radically different investment strategies.

One says it’s always best to buy property that’s positively geared. This means that holding costs like council rates, insurance, maintenance and interest on the loan are less than the rental income received.

The second argument says it’s better to buy property that’s negatively geared, meaning that holding costs are greater than the rental income received. You fund the shortfall from your own pocket, giving you a negative income which you then claim as a tax deduction.

In reality, these arguments are doomed to go around in circles. There’s no one right or wrong answer that applies to every investor. Each purchasing strategy has its upside and downside; both of which should be considered before making a decision.

Let’s start by looking at positively geared property. Generally speaking, the high-buy in price of most properties in capital cities means that to buy a positively geared asset, you must purchase in a regional or rural area where prices are lower. This may leave you with a relatively modest mortgage, making it easier to enter the property market, and easier to fund the holding costs from rental income alone.

The downside, however, is that positively geared property may have a lower capital growth rate. Every property’s value is determined by the ratio of two components: the land and the building. Land appreciates, or grows in value, whilst buildings depreciate or fall in value.

In regional and rural areas, land values per square metre tend to be low because there’s plenty of land available compared with the level of buyer demand. This means the building accounts for most of the asset’s value. The building may lose value faster than the land can gain value—hampering long-term capital growth.

Let’s compare this with buying negatively geared property. When the buy in price is high, the land value probably is. This is the upside of negative gearing; you’re more likely to have purchased in an area with a limited supply of land relative to buyer demand. The land component makes up a higher proportion of the property’s overall value, giving the asset strong capital growth potential.

On the downside, buying a negatively geared asset means that whilst your long-term risk may be lower, your short-term risk may be higher because you have to find a way to fund the difference between holding costs and rental income from your own pocket. This can create cash flow pressure, particularly if you incur an unexpected expense such as an interest rate rise or urgent repair.

In short, it’s a case of short-term gain and possible long-term pain (positively geared property) versus short-term pain for possible long-term gain (negatively geared property). To decide which is right for you, it’s important to assess your financial circumstances.

First, consider your level of disposable income. If you have spare cash to cover the difference between your holding costs and rental income, buying a negatively geared property may be appropriate. On the other hand, if your budget is tight, negative gearing may be too hard an ask and a positively geared property may be a better way to go. The capital growth won’t be as strong, but at least you’ll be in the market.

Second, consider how long you’ll be earning a good income. To ride out market fluctuations and recoup purchasing costs, property should be viewed as a long-term investment; at least seven to 10 years. If you’re close to retirement and a substantial drop in income isn’t far away, adopting a negatively geared strategy may not be viable. In this case, you should consider investment options that don’t require you to contribute funds from your own pocket. By contrast, if you’re many years away from retirement, you may have enough income over the long-term to fund the shortfall from your wage or salary.

Whichever gearing strategy you choose, go into it with your eyes open.

Read more: http://www.propertyobserver.com.au/negative-gearing/whats-the-best-investment-strategy-positive-or-negative-geared-property-mark-armstrong

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John McGrath’s seven point investment strategy

By Property Observer
Monday, 09 September 2013

Real estate guru John McGrath has given seven tips which he says will give investors a licence to print money.

He revealed the strategy at the Property Millionaires Tour in Melbourne on Friday which Property Observer attended.

Have a plan and be disciplined in your approach

“If you get this right this is a license to print money for savvy property investors.

“The difference between a great property investment and poor one can be an enormous amount of money over 5 years. So really be disciplined.”

Research, research, research

“Make sure you know more information than anyone else on the planet about properties that fall into your plan.”

Adopt a capital growth strategy

“I recommend you focus more on capital growth. The yield is important, it needs to pay the mortgage but for me the capital growth is where you’re going to get the best bang for buck.”

Location, position, aspect

“It’s not only location but position and aspect. It’s very important. North-facing, light, best street best side of the best street is really what we need to be focussing on.”

Don’t focus on bargains – they rarely have a future

“Things that no one else wants, probably in five years no one else will want then. Don’t confuse that with a good opportunity for genuine reasons.

“Sometimes you find a vendor that’s bought another property, for some reason it’s passed in at auction, the buyer didn’t get their finance ready, but you can buy it today.

“You’ve researched it, it’s in your plan and it ticks your boxes and you are absolutely sure that this is 10% under market value then that’s fine.

“But I get scared when a friend calls up and says ‘I bought this great bargain today’. I say ‘my god where is it’. I’d much rather you said ‘I went to an auction and I bid against 12 other people and I paid a little bit more than I thought I might have to but I bought a great home in a great street.’

“That makes me a lot happier.”

Utilise the power of leverage but never overstretch

“Once you’ve bought and the prices have gone up then look at the opportunity to extend and build on your investment portfolio. But never overstretch yourself.”

Buy hold and keep buying

“This is terrible for an estate agent to say because I won’t make more money. But I think this is this strategy is to build a portfolio. In 10, 15, 20 years you can buy several properties by leveraging, adding value, putting the right tenants in place and growing it from there.”

Read more: http://www.propertyobserver.com.au/news/john-mcgraths-seven-point-investment-strategy/2013090864845

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John McGrath's top six investor pitfalls

By Alistair Walsh
Thursday, 12 September 2013

John McGrath warned investors of six common pitfalls. He was speaking at the Property Millionaires Tour in Melbourne on Friday which Property Observer attended.

1. Avoiding buying in partnership and don’t overstretch

“I don’t like buiying in partnership if you can avoid it. If it’s the only way you can do it then. I’m not talking about if you’re with your defacto or husband and wife. I’m talking about going in with your friends. Invariably they get a life change after a year or two one wants to sell, one doesn’t you can end with all sorts of issues and having to sell too early.

2. Avoid serviced apartments and recycling commercial buildings

I don’t like serviced apartments. They cut out the majority of the capital growth because you’re only ever talking to investors. You as an investor might say John I’m getting 6.5% yield. The problem is if there’s no capital growth that 6.5% after your costs and so forth is not as good as getting 3.5% plus a 10% annual capital gain.

We know a lot of developers, because residential in some areas is much stronger than commercial, are recycling. I like buildings that were either once upon a time built as residential or a building that was demolished and built specifically today as residential. It’s very hard, you tend to find building problems down the track with buildings which were built as one thing and recycled into another.

3. You shouldn’t need rental guarantees

I don’t like rental guarantees. The reason is a lot of developers put them on. They’re unsustainable rents. Your property should not need a rental guarantee. Invariably I’ve seen after two or three years when the guarantee runs out the rents go down. Which is crazy. After three years rents should be going up and up.

4. Don’t fall in love with the styling

You’ve got to be careful. Obviously agents and developers, their job is to maximise the outcome for the vendor and the way they do that is to make the house look as pretty as possible. Professional stylists are now commonplace in the real estate industry. If you’re selling you should be looking at that because that’s what you’re there to do is to ensure the best outcome for yourself. If you’re buying make sure you look beyond the pretty furniture and the nice music and things. Tell me about the street, tell me about the position. Tell me about the aspect, tell me aboiut the architecture. They’re the things that really matter.

5. Inspect on different days and different times

Have a look at the property on different days at different times. It’s in the agent and the vendor’s best interest on days where it’s going to be most popular – at times it looks the best. I would go on Sundays, after hours, before work, if you’re going to buy a property check it out at different times of the day.

6. Buy properties you can drive past if possible

Preferably buy something that’s in your city as opposed to something that’s not.

Read more: http://www.propertyobserver.com.au/news/john-mcgrath-s-top-six-investor-pitfalls/2013091164843

Blondie girl

12 Sep 2013, 01:05 PM

Yes ok, BUT be very careful what areas is chosen. Some rural & regional areas don't appreciate easily.

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You can potentially get your fingers burnt.