There are many experts who believe that the only way to achieve real wealth is to employ a capital growth strategy to your investment property. These properties require a larger deposit and are usually negatively geared, but in the longer term they can produce better growth and equity.
Where are these properties located?
Capital growth properties are usually located close to the capital cities of Australia. They appeal to high income earners who like to live in trendy or “lifestyle” suburbs that are close to work, to shopping malls with great access to public transport and community facilities. The capital gains strategy seeks to offset losses through negative gearing.
Negative Gearing
You should try to find a professional accountant who can help you to set up the best tax structure and help you to claim all of your entitlements. Most property purchased for capital gains will cost you to hold, you can claim back the loss through negative gearing.
Unlike cash flow properties where the rental yield is enough to cover mortgage repayments and other outgoing expenses, capital gains property may take several years to hold until the rent catches up and the property becomes positively geared.
Is Capital Growth Strategy right for you?
The other thing to be mindful of is the stage you are in in life.
If you are a young couple, without children and on good incomes, you will find that it will be much easier to get a bank loan.
If you have a young or growing family, the financial commitments to raising up a family might mean that you’re better off to use an entirely different strategy such as buying positive cash flow properties. Usually for these people it's not a good idea to go into too much debt. They should also have an exit plan should things go pear shaped and the bread winner of the family is made redundant or loses his/her job.
Capital Growth Strategy
Pros
Investors with good income can leverage the tax benefits of negative gearing.
Desirable, well located properties may increase in value more quickly over the longer term.
Banks are more willing to lend for properties in desirable growth locations.
Cons
It may take years, and many missed investing opportunities to save up for the required deposit.
If your property strategy relies on tax deductions, you may face serviceability issues if you are made redundant.
Borrowers can quickly reach their limit after purchasing a few high growth properties as they need to be able to service their investments
If you need more information on how we can help to structure and approve your loan, including refinancing, make a free appointment with our mortgage broker.