Wed 24 Oct, 2018
How An Investment Property Makes Money For You
Learning how an investment property makes money is the first step to using property as a way to build your wealth. Whether you’re interested in making property investment your sole income, or you’re looking to diversify your portfolio, it’s crucial to learn exactly how property can help you grow your nuts for retirement!
So our savvy little Squirrels are here to help! In this article, we’ll explain exactly how an investment property makes money for you, the things you should be aware of, and how you can get started today.
What is an Investment Property?
An investment property is an asset that is purchased with the purpose of either growing in value or generating income. It’s important to remember that an investment property should not be used as a first home, especially if you’ve used your super to purchase it. An investment property makes money for you only if you use it as a property investment, not a home.
How to Profit From an Investment Property
An investment property makes money in two ways: through cash flow investing or capital growth investing. Cash flow investing means the property is generating rental income that exceeds the costs of maintaining the property. Capital growth investing means the property increases in value over time, and is sold for a profit.
Cash Flow Investing
An investment property makes money through the cash flow strategy by generating substantial rental income. As a result, if you’re interested in cash flow investing, the location of your property is crucial. Cash flow investors seek properties in areas of high rental demand. In other words, areas where tenants will regularly lease the property and generate monthly income for the investor. This may appeal to retirees wishing to increase their retirement income, or high net worth investors that are able to buy properties outright without the cost of a mortgage. It’s also valuable to those who are able to source properties with a rental yield higher than the costs associated with holding the asset. Essentially, you want to have income left over at the end of the month after you’ve paid off all expenses.
Cash flow investments also assist in building your overall portfolio. When you apply for finance, lenders will first ask details on your capacity to repay the loan. If you have income from multiple positive cash flow properties, you may be able to obtain further finance for other investments.
Example: Sally buys an apartment for $500,000 and rents it out to a family for $4,000 a month. It only costs Sally $2,500 per month to pay back her loan, pay her property manager and finance the owners’ corporation fees. Sally pockets the left over $1,500 as monthly cash flow. Cash flow investment for the win!
Capital Growth Investing
An investment property makes money through the capital growth strategy by, theoretically, growing in value over time. As a result, capital growth investors seek bargain properties forecasted to grow in value over time. While all assets are expected to increase in value – excluding the possibility of economical downturns – capital growth investors pay closer attention to the likelihood of value changes. Capital growth investors then use this to inform their purchase decisions. They’ll pay attention to trends and follow the demand. For example, capital growth investors will look for things like the building of a new railway line that connects a suburb to the CBD, or gentrification that is driving young people to an area that’s up and coming. The aim of the game is to buy low, and sell high later.
Example: Peter buys a unit for $190,000 in 2008. He sells the property in 2018 for $400,000 because the suburb has boomed and is now trendy. Capital growth investment win!
Investing in Property With Your Superfund
It’s true that an investment property makes money for you, but what if it could also make money for your superfund? Investing in property with your superfund allows you to use an investment property to grow your super for your retirement. As long as the sole purpose of your investment is to grow your retirement savings, you can implement either strategy. However, the strategy you choose should depend on your personal and financial circumstances, as well as the state of your fund.
For example, if you’re close to retirement age and are looking for additional income to fund your lifestyle in retirement, a positive cash flow property could be the path for you.
If you’re relatively young and don’t plan to retire for a couple of decades, you may consider capital growth investing. However, consider whether your fund can handle a negative or neutral cash flow. This is important to consider especially if the reward of capital gains is a long way off.
Ideally, you should look for a balance of capital growth and cash flow to mitigate the risk. If you’re interested in learning more on how you can use your super to invest in property, contact us today!
Remember, there are no guarantees that any investment property makes money. In fact, there are no guarantees in any investment strategy, not just with property. Past performance offers no solid indication on future performance. If you are unsure, speak to an expert on whether your superfund can take on an investment property. A balanced portfolio of diverse asset classes is the most recommended way to grow your superfund with stable risk. Remember, don’t put all your acorns under one tree!