The nationwide obsession with property investing has led more Australians than ever before to start their own journey towards financial freedom through property investing. Although some may still feel property investing is only for the super-rich or those earning very high incomes, statistics reveal the largest proportion of property investors are Mums and Dads, police men and women, teachers, and small business people – ordinary people just like the rest of us.Thanks to low interest rates and an abundance of development opportunities around the country, it has never been easier to start your own property portfolio than it is right now. The best thing is, success in property investing isn’t always time-bound or location-dependent. In fact, people all around the country are experiencing success with property today. It all depends on what kind of strategy you are using.
Choosing a strategy that work so for you
There are two types of investment strategies popular with real estate investors. Whether you choose one strategy or the other strategy depends on your goals and your personal circumstances. It’s also important to look to the future and some of the possible ways the property investing landscape could change.
How a negative geared strategy works
A negative gearing investment strategy would see you buy and hold property that earns you less in rental income than it costs to own the property. The types of costs you will experience as a property investor include things like; rates, part of the water bill, repairs and maintenance, mortgage repayments, and other holding costs like strata fees, legal fees, and accounting and tax preparation charges.
Sometimes the excess of costs over the property’s income can be small, and in this case the small amount of loss you may incur may not be a problem; especially if your property is in an area which has high capital growth and you’re planning on selling your property when its capital growth has reached its peak.
It also may not be a concern if you’re earning a high income and can absorb any losses on your investment property. After all, as it currently stands, your accountant may be able to help you use any property losses as a tax deduction.
However, if your property is not in an area of high growth, and you don’t have a high income to handle any property investment losses, you can find the excess costs of owning an investment property a problem.
The last things you want to experience, especially if you are a new property investor, are any problems with either the property itself or with the financial dynamics of owning an investment property.
Fortunately, there is another strategy you can use for real estate investing. This strategy is used by so many of those ordinary, everyday people, just like you, who are succeeding with property today.
How you can use a positive gearing investment strategy
The strategy they are using is called positive gearing. This strategy works by acquiring and holding real estate investments that make more money in rental income than the costs involved with owning them. It is also known as an income strategy rather than a growth strategy. With this approach, you’re aiming to have your property investments generate as much income over and above your holding costs as possible.
Getting set with a positive gearing strategy
Positively geared real estate investing requires a different mindset than one you might have if you were pursuing a negative gearing strategy. You need to be very particular about the kinds of properties you purchase.
With a positive gearing approach, everything from the location of your investment property, the condition it’s in, the purchase price of the property, the finance you use to buy the property and the amount of rent you can charge is all very important.
So, let’s go through the key things you need to consider in order to succeed with a positively geared property strategy…
1. Location, location, location!
When it comes to location, a positive gearing strategy is different because it is concerned mainly with how much income your real estate investments can generate. With a positively geared strategy, you want an investment property to earn high rental income relative to how much you have paid to own it.
This is called its yield, and prior to buying any property, you can find out the kind of yields properties in the area are achieving. Before you invest in a property, you can shortlist properties located in areas where the yields are strong and trending upwards, and select the best ones from among these.
The other kinds of things you might be looking for in the area include; growth prospects, access to public transport and shopping centres, as well as new developments and infrastructure projects.
Areas that are going ahead in leaps and bounds, with lots of investment in development and infrastructure projects, will often drive demand for rental properties. Their yields may not yet be at the peak but will likely be on an upwards trajectory, as more people flood into the area attracted by new facilities. In the long-term, this can be good for capital growth too!
Good research about where your investment property should be located is one of the cornerstones of real estate investing success. A good real estate agent can be a great help with this too, as they will usually know the area the best.
2. Buying a good property
Keeping to a positive geared strategy not only means buying in a location that can give you high rental income. You also need to think about the property; what it will cost you to buy and its holding costs. Positive gearing your real estate investments is as much about controlling costs as it is about generating high income. This means purchasing a property that doesn’t have any significant damage, or issues which will require major renovations, as these could quickly become a drain on your available funds.
3. The right price is so important
When considering a property, you want to make sure that you’re buying it for the right price. Paying too much can set you back from the very start. It affects how much you need to pay back to the bank, as well as how much you can afford to rent your property out for. Tenants are price sensitive and won’t pay more for properties they want to rent, in the suburbs and areas they want to live in. This means you need to stick to your budget and pay no more because getting emotionally attached to a property could be your downfall.
4. Control ongoing costs of owning an investment property
Another important cost factor is the ongoing cost of owning a property. You can’t do much about council and water rates, and you may not be able to influence things like strata fees, for example. However, you can choose a property that is in good condition and not likely to experience high repairs and maintenance costs anytime soon. You can find this out by having a property thoroughly inspected by both building and pest inspectors before you buy it. This can save you a lot of trouble and money!
Throughout your property ownership, it’s also a good idea to set-up a schedule of repairs and maintenance, and set aside a “Cap-ex” or Capital Expenditure budget. This way, you can avoid even more costly problems coming up in the future. It will also give you some certainty about when you will need to spend money on repairs and maintenance, which is an unavoidable cost of owning an investment property. This will also keep the property in the best condition for any likely future sale.
5. Boosting your property’s income earning potential
There are also strategies available to increase the income your investment property is generating. One of the key ways you can do this is by finding out what your tenants need around the house and asking if they would be prepared to pay a little more rent to have you provide it.
For example, in a country like Australia which has hot summers you’d be surprised how many residential buildings don’t have air conditioning. Would your tenants be happy to pay more rent for you to fit it? Perhaps, they’d be happy to pay you more rent to fit solar panels to help them avoid high power bills. So often, you’ll find people are more than happy to pay a bit extra if you can save them time, money, or provide a bit more comfort.
Expanding your portfolio quicker
These are just some of the ways you can use a positive gearing strategy to your advantage. Not only can this strategy help you to generate income from your property investments, but it also may be able to help you expand your property portfolio quicker since often lenders are concerned with how much capacity you have available to pay back your loan.
If you’re pursuing a positive gearing strategy you may be able to prove you have a higher capacity to lenders because your property portfolio is generating an income, and as a result, you might find you are able to be approved for your next property investment purchase.
More properties mean greater income generating possibilities, and this is how so many people around the country are succeeding with property today and of course to reach financial freedom sooner than they ever thought possible.
Are you considering to positive gear an investment property?