Capital growth properties are typically those with a higher growth profile of 7–10% and a lower rental yield profile of 3–5%. Investors buy them hoping for maximum increases in market value so they can be sold for a significant profit or used as equity to buy more properties.
Those in favour of capital growth argue that it provides a direct strategy for building a ‘nest egg’ because it allows an individual’s personal net wealth to increase in line with the property value’s growth.
What are the advantages?
The main advantage of these types of properties is the fact that they tend to be located in inner-city suburbs with high population growth that are not affected as much by economic cycles and interest rates.
They therefore usually have higher and consistent capital growth over a longer term than you will get from cash flow properties. This means investors can generate more equity in a shorter period of time, which can then allow them to invest further.
The government also makes it attractive for investors to purchase these types of properties by offering tax benefits via negative gearing and delayed capital gains tax.
Given the areas these properties may be found in, it can be significantly easier for an investor to obtain finance because of their better socio-economic conditions, lower risk of tenancy issues, and higher number of buyers.
What are the cons?
One of the main disadvantages of this strategy is that the properties tend to be negatively geared, meaning investors may need to contribute some of their own funds to hold the properties. These properties also usually attract a higher purchase price because of the desirable nature of their neighbourhoods.
However, negatively gearing a property does have its benefits in that it allows for the losses incurred to be offset through various taxation concessions.
It’s important to remember that the performance of individual properties can vary widely based on a suburb’s average growth rate, depending on the quality of the house itself, its location within the suburb, the timing of the sale and numerous other elements.
CASH FLOW STRATEGY
Who it suits
• Young investors with high income
• Investors seeking to build portfolio quickly
Benefits
• Better total gains over long term
• Reduced cash available to service additional loans
Risks
• Requires significant cash buffer to service loan, interest rate rises and property maintenance
• Subject to more capital gains tax
• Speculation on the next high growth means more exposure to risk
What to look for
• Strong long-term performers with average annual growth of over 8%
• Markets in growth phase of cycle
• Growing towns with strong employment
• Proximity to infrastructure
• Evidence of gentrification/change
Also see:
Low-Income Earners Can Invest In Property
Cash Is King: What you need to know about investing in cash flow properties
