Where should I invest?
I get asked this question quite often, either by clients, friends or family. My answer? Well, it depends where you are in life and what you are trying to achieve? This could easily come across as me trying to deflect the question but there is no ‘one size fits all’ policy when it comes to finding the right investment property.
There are a few factors to consider, such as:
Like most things in life, everything is about timing. If you are a 20-year-old investor, you can purchase in an area that has not yet reached it’s full potential. Meaning that you can buy low, experience strong rental returns and at the same time take advantage of long-term capital growth thanks to future proposed infrastructure, population growth and demand. In addition, you know that your mortgage will be paid off by or before you retire.
On the other hand, if you are in your 40s you might want to invest in a blue-chip suburb where you can experience those desirable outcomes sooner rather than later. These types of suburbs are well established and are usually located within 10km of the CBD. They have all the necessary amenities and tend to attract high caliber tenants. Since most home loan terms span over a 20 to 30-year period, you might find yourself in a situation whereby your loan is paid off and you essentially have an asset that is funding and supporting your lifestyle throughout retirement.
Once you get into your 50’s, it can be much more difficult to access lending as financial institutions might see you as a ‘high risk’ candidate due to your age. However, it is not too late! It is for this reason I always recommend my clients to see a financial planner to work through the best possible retirement strategy. The same principal of investing in a well-established area will apply if you have the cash/finance at your disposal.
Negative vs Positive Gearing:
What is the difference? And why should you take this into consideration when purchasing an investment? Many investors like to take advantage of negative gearing as it minimizes their tax bill come the end of the financial year. This happens when your rental return is less than the outgoings of the property (such as interest repayments, rates and maintenance costs) thus it is seen as a financial loss. It is expected that the property is going to increase in value, so essentially the investor is relying on the overall loss being offset by anticipated capital gains. It is important to remember that when you choose this strategy you have adequate cashflow to cover the outgoings of the investment before tax time.
A positive geared property means that your investment is providing you with an income as the rental return is far exceeding yearly outgoings, these types of investments are referred to as cash-flow properties. It is important to understand that you will have to pay tax on the extra income, and it might bump you into a higher tax bracket.
This can make or break your investment strategy. Unless you have lots of cash stashed up somewhere or get a massive inheritance from a wealthy uncle that you knew nothing about, then there is no question that you will be needing to speak to a bank.
It is important to understand how much your financial institution is willing to lend you, and from there workout if you can really afford to buy in that inner-city suburb that everyone has been telling you about. Remember to borrow within your means and make sure that you do your homework to see which bank is going to provide you with the best rate and structure. Brokers are a great option and I strongly recommend for you to see one.
It is important to recognize that every investor is different and not all investments are the same. Everybody doesn’t share the same goals, and to just simply say “this is the area you should invest in” might not necessarily be the right approach.
At Alfy, we are all about creating your very own property path. If you want to find out what your investment journey could look like and where you currently sit, please feel free to get in touch. We are committed to guiding you towards success.
Until next time.