There are two key strategies in property investment – rental yield and capital growth. A capital growth strategy involves buying property that is expected to produce above-average increases in value over time. With historically low interest rates and property values which are expected to continue rising, this strategy can be the ultimate long term wealth creator.
Property represents a stable, tangible asset that can generate significant wealth over time. Due to large entry and exit costs, you’re more likely to think twice before selling. This encourages you to ride out any price fluctuations unlike shares, where you can be spooked into selling following a large drop in price.
Negative Gearing Benefits
Capital growth investment properties tend to have a higher purchase price and lower rental yield. This makes them negatively geared, meaning the annual cost of your investment is more than the return. As a result, investors often need to subsidise their investment using their income or savings.
However, you can make deductions or claim other tax benefits for these losses and out-of-pocket expenses. Unlike a rental yield property investment strategy, you’re likely to find yourself paying much less income tax.
Using Property Equity to Build Your Investment Portfolio
Another key benefit to a capital growth property investment strategy is that it enables you to generate positive equity and grow a portfolio faster. This means that as your initial investment property value increases, you may be able to borrow against it to purchase further investments and build more wealth.
Where to Find High Performing Properties
Properties suitable for a capital growth strategy are typically found in capital cities and areas in the process of growth and development. Property is booming in Melbourne thanks to our rapidly increasing population, with around 100,000 more people looking for somewhere to live each year.
At Noel Jones, we’re seeing rapid growth in Melbourne’s eastern suburbs for this reason. Both inner and outer suburbs are recording high levels of annual growth, with some of the top contenders including:
- Blackburn North – 12.7%
- Blackburn South – 13.8%
- Camberwell – 9.5%
- Doncaster – 13.1%
- Mitcham – 10.5%
- Wantirna – 10.7%
These new residents consist largely of families who are looking for affordable housing close to schools, shops and transport. Suburbs meeting those demands, like those listed above, are therefore growing at a fast pace.
Is a Capital Growth Strategy Right for You?
For many investors, the choice between a capital growth or rental yield investment strategy is a difficult one to make. You should take your individual circumstances into account and consider factors such as your:
- Tax position
- Marital status
- Financial objectives
- Cash position
- Mortgage options
If you only want one investment property, then a capital growth investment strategy might be appropriate. But some people simply can’t afford to have multiple negatively geared properties, meaning it would be better to target high yield properties in order to grow their portfolio. On the other hand, fluctuating interest rates can threaten returns, making a rental yield strategy more risky.
Remember that the property needs time to accumulate value in a capital growth strategy, meaning any financial return on the property can only be realised when it is eventually sold. The rewards however, are significant, which is why these properties are typically more expensive and in higher demand.