As an investor, deciding what type of investment property to buy depends on your overall goals. Generally speaking, you can opt for a property offering immediate cash flow or one that, though negatively geared, has good long-term growth prospects.
Positive cash flow versus negative gearing
Positive cash flow in property means your investment property’s rental income exceeds its holding costs. This includes mortgage repayments, interest, maintenance costs, insurance and property management fees.
Negative gearing occurs when the rental income doesn’t cover all the property expenses, resulting in a loss. With current high interest rates and mortgage repayments, more landlords are declaring losses on their investment properties.
Positive cash flow
Landlords aiming for positive cash flow generally do so because they prefer the benefit of a stable income. A consistently high income could mean you are earning additional income to reduce current debts, invest or contribute towards your retirement nest egg.
On the other hand, income generated from an investment property is taxable. While a negatively-geared landlord can deduct this loss from their other incomes such as salary or wages, those with positive cash flow will get taxed on their earnings.
The location of your investment property also plays a role in determining your overall growth. A property in a low capital growth area makes it more likely that the value of your property won’t increase by a large amount when it’s time to sell.
High capital growth
Your capital gain is determined by the value of your property if you decide to sell it.
High capital growth areas are regions where property values are expected to rise significantly over time. Some investors accept short-term losses in cash flow for the promise of long-term gains when they sell the property.
Combining cash flow with capital growth
It is entirely possible to invest in property that offers both positive cash flow and capital growth. This can be done by thoroughly researching areas with strong rental demand and future potential growth. Factors like proximity to schools, transport links and employment hubs can indicate high capital growth areas. Large-scale construction projects, such as shopping centres or office parks, may also signal potential for both positive cash flow and capital growth.