We’ve all seen the numbers time and time again.
- There are over 1.9 million property investors in Australia
- Approximately 70 per cent of the investment properties are negatively geared
- Approximately 75 per cent of these investors with negatively geared properties have a taxable income of $80,000 or less
- 80 per cent of property investors own only one or two investment properties and stop there
It’s very evident in the above data alone, that the bulk of these median income investors are buying investment properties that are taking too long to appreciate in value while not providing positive cash flow to enable them to reinvest in the market, thus forcing them to stop at one or two properties.
A quick example of how the wrong investment can affect your cash flow:
Option one: (low-growth outlook and negative cash flow)
Western Sydney four-bedroom investment property purchased today $750,000
- $150,000 deposit (20 per cent)
- $600,000 loan
- $30,000 per year loan repayments (5.0 per cent interest only)
- $550 per week rent (minus 7.0 per cent management fee)
- $26,000 total rent per year
- $5,000 per year in additional expenses
- Grand total of $9,000 negative per year (not factoring in depreciation)
Option two: (medium- or high-growth outlook and neutral cash flow)
Western Brisbane four-bedroom investment property purchased today for $300,000 x2
- Total investment of $600,000
- $120,000 deposit (20 per cent)
- $480,000 loan
- $24,000 per year loan repayments (5.0 per cent interest only)
- Rent $360 per week x2 (minus 7.0 per cent management fee)
- $34,820 total rent per year
- $7000 in additional expenses
- Grand total of $3,820 positive per year (not factoring in depreciation)
Taking into account the most recent three-year growth projections for both Sydney (1-3 per cent annually) Brisbane (3-5 per cent annually) this is what an investor could expect from both examples.
Option one: Western Sydney investment
- 2018 value $784,000 (1.5 per cent average 3-year annual growth)
- $27,000 in negative cash flow
- 2018 total net position including capital appreciation: $7,000
Option two: Western Brisbane investments x2
- 2018 value 674,000 (4 per cent average 3-year annual growth)
- $11,460 in positive cash flow
- 2018 total net position including capital appreciation: $85,460
That is a difference of $78,000 in three years!
I have intentionally not touched on negative gearing in the examples above, as I always like to consider negative gearing as a sweetener or a bonus rather than a ‘sure thing’.
The fact of the matter is that negative gearing only applies to your relevant taxable income. Investors’ circumstances change more regularly than one may think. Investors change/lose jobs, family dynamics change, people retire, people invest in different types of trusts that incur different tax deductions etc. and all of these factors have an impact on your depreciation options.
I know that we continually read that you should always invest for capital growth rather than neutral or positive cash flow, but in my humble opinion, this is merely ‘lazy investing’.
Don’t get me wrong, there are plenty of investors out there including myself that have made significant capital gains by investing in high-growth areas that only offer yields of 4-5 per cent resulting in negative cash flow… But these types of properties have a much more appropriate place in one’s portfolio once they have built a solid foundation of growth and cash flow. The main factor in this equation is ensuring investors don’t ‘invest themselves out of the market’ through negative cash-flow properties.
You should always consider your current portfolio, position, income, dependants and financial and investment goals to determine what the next investment should be – whether that is a high-growth property or cash flow positive property or a blend of both. The type of investment property you choose should ALWAYS serve a purpose to achieving your investment goals.