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Perfect property plays

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If you’re someone who is very suspicious of investing in shares, here’s my Property Manifesto, which outlines what you should know about trying to build your wealth by speculating on bricks and mortar. Of course, I think both shares and property are great ways to get richer but I understand why many normal people simply don’t trust shares.

I will convert those on another day but for now let’s talk property.

Standout strategies

There are two standout strategies to build your wealth. Both cash in on the nice parts of the tax system, but there are few fine details that every investor should understand before laying their hard earned income down.

The first strategy involves buying a home you live in, which can be improved and which has lots of potential for capital gain. The second strategy is to buy investment properties, which also will bring capital gain.

(There’s a third, which involves properties that might not bring great capital gain, but still can be a nice wealth building strategy.)

Keep these in mind

Before we look to the strategies, let’s get a few property maxims or rules of thumb in your head:

  • Buy the worst house in the best street
  • Buy where rents are solid and where tenants want to live
  • Research the price and rent history of the suburb
  • Buy the kind of property expected in the area
  • Remember sometimes the suburb next to a really popular suburb might have great potential
  • Buy the best books on property investment.
Don’t forget these.
The first strategy

Let’s start with a favourite of mine: this is where you buy the worst house in the best street in a suburb that has real potential. If you see a trend of people moving in and renovating and house prices are rising, that’s a good sign the suburb has potential.

You renovate wisely, tastefully but economically. You have room to expand and capital gain grows on your house and this is tax free.

Over time, you can trade up and eventually you have a great home that you live in until you retire. Along the way you bank your leftover income into your home loan but have a redraw facility in case you need the money.

This is a tax effective strategy that will save you tens to hundreds of thousands off your total home loan repayments.

The beauty of this play is that you could easily end up with a home worth $2 million, which then could be sold and used to have a nice retirement. Some smarties actually have an investment property, which they rent out but eventually move into as their retirement abode. While capital gains tax applies to this property, as it’s a second home that’s rented out, if you live in this place until you die, then it will be your kids who will have to pay the capital gains tax bill. 

The second strategy

The second strategy can be good for a young person who can’t afford to buy a home or apartment where they want to live but could if they could use the tax system by becoming a landlord.

Imagine someone wanted a two-bedroom apartment at Bondi for $650,000, but couldn’t make the repayment as an owner-occupier. They could buy it as an investor and rent it out for five years and in that time their income grows and/or they might get married, which not only brings love but also a second income. The landlord could then move into the rented home.

Investment properties

Some people simply acquire investment properties and this is how they do it. The first place is bought for $500,000. They use interest only money to reduce the repayments and the tax deductions also help. After five years, the apartment is worth $600,000 and the bank will give you a loan on that $100,000 equity and so the investor buys a second apartment for $400,000.

Each time the income has to support the repayments. They might have income only and a fixed rate of interest. Also their income is growing and they expand their portfolio of properties accordingly.

As long as the properties are in well sought after areas, you don’t lose your job or a great recession doesn’t come along, then you can do this get-wealthy strategy really effectively.

The third strategy

The third method is a variation on the one above. While the latter home accumulation relies on negative gearing, this one relies on positive gearing.

Here you buy cheaper properties where the monthly repayments and other costs are less than the rent you collect. These properties generally are slow to rise in value but sometimes their prices can rise a lot faster than many experts predict. 

Get experts in

I work on the idea that good properties can rise by 10 per cent a year over five- to 10-year periods, just like good shares. Always be careful about overcapitalising on renovations and make sure you get an expert to work out all of your deductions you can claim as a landlord. Great accountants and better still quantity surveyors can stagger you with the deductions they can legally claim.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Thursday, June 30, 2011

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