Property investment is a careful process that requires a keen eye for both a good deal in the short term, and capital growth in the long term. Whether it’s to generate passive income through positive cashflow or a long term investment that might generate negative cashflow, if you’re just starting to invest in property, a balanced portfolio is very important.
Both positive and negative geared properties have their advantages. To ensure you take full advantage of this I want to take a closer look at the pros and cons of each and how the right approach to your portfolio will ensure a strong return both now and in the future.
Positive Cashflow Properties
If you purchase a positively geared property, you are receiving more each week than you are spending. That means, the total cost of the mortgage interest, property management fees, council rates, and insurance are less than what you take in with rent each week. This ensures you are making a small profit from your investment, but keep in mind it also means you must report and pay taxes on the positive return on your personal tax return.
Negative Cashflow Properties
On the other end of the spectrum is a negatively geared property. This is one that you spend more on each week than you get back in rent. So if you were to purchase a property for $500,000 and spend $600 per week for the assorted fees, insurance, and rates, but receive only $500 per week in rent, your shortfall is $100 per week. While you are spending a large sum of money to finance your investments, you can deduct this loss against your income tax at the end of the year.
Balance within Your Budget
As you can imagine, there are both pros and cons to each type of property investment. Spending less than you make each week will ensure your investment doesn’t cost more than it should, but it can also result in higher taxes and make growing your portfolio harder. Negative cashflow properties on the other hand, can be costly to purchase and make it harder to raise the capital needed for a second investment. But they are often good long term investments if you’ve prospected the location and property.
To ensure you take advantage of both types of investment without unbalancing your portfolio, it is good to start building with both positive and negative cashflows in mind to ensure you don’t spend more money every month than you can afford but that you are building capital in those investments over time.
Steps to Build Your Portfolio
How do you do this? To start, you should be researching constantly. There’s no easy formula for determining when a property will reap positive cashflow each month or when a suburb will boom in value over the next few months. You need to be ahead of the market and constantly researching to know what is growing in value and what is remaining steady or declining.
With that information in mind, you can start building your funds for investment. Balancing every negatively geared investment with a positive cashflow property will ensure no shortfalls in your funds each month and a strong, growing portfolio.
To get started, you’ll need the funds for investment and the credit-worthiness to obtain those first mortgages. Do this effectively and you’ll see the kind of growth needed to turn your fledgling portfolio into a quickly growing source of future wealth.