These days buying property is a big step for Young Professionals that are looking to get ahead with their money, and everyone has an opinion about what is the best strategy and how to set yourself up for success.
If you don’t know how to set up your property strategy properly you can run into hidden traps that will hold you back from making the progress you should getting ahead with your money.
But what’s the best strategy? If you invest, should you go for a positive cashflow property to build passive income, or do you take a hit on a negative cashflow property to get some extra tax deductions?
When it comes to buying an investment property, one of your biggest decisions is whether to buy a property with positive cashflow or negative cashflow.
At face value, it seems like a no brainer. Do you buy a property that makes you positive cashflow from day one, or a different property that costs you money?
If you had the choice to buy two identical properties, one that gave you positive cashflow, and one that cost you money, of course you would choose the positive cashflow property.
But is it this simple?
The thing is, when you invest in property there are two parts to the return. The first is the cashflow component, which is how much the property makes or costs you on a day-to-day basis. The second, and just as important component, is the growth you get on the property.
When you’re looking at investing in property, you need to think about both of these parts of your return or you can run into some serious issues.
What we find is that different types of properties give you different cashflow outcomes. These days, it’s almost impossible to find positive cashflow properties in Australian metropolitan areas. Positive cashflow properties are more commonly found in regional and rural areas, where properties are relatively cheaper and you can get more for your money.
So the decision generally comes down to whether the growth on a negative cashflow property will compensate you for the hit on your cashflow, or if buying a regional property with positive cashflow be better for you in the long run?
We see lots of people get caught up in the hype around cashflow, but don’t make the mistake of looking at cashflow alone!
One of the most fundamental drivers of property prices is population growth. It’s fairly simple that when there are more people living in one place, there is more demand for property, which in turn generally has a positive impact on house prices.
In Australia, our population is growing and expected to grow more in the coming years and decades. But, it’s growing more in some places than others. The population of Australia metro areas close to major cities is expected to grow at a much faster rate than our regional and rural areas into the future.
But what does this mean for your property investment?
Looking at these fundamentals, it seems likely that the price growth in regional areas will be slower than similar areas closer to major cities. This can mean that if you choose to invest in positive cashflow properties in more regional areas, you experience slower growth in your property price going forward.
If you’re just getting started with property investment, it can also mean that you end up having one or more slow growing properties in your investment mix. Because the banks will only lend so much money, this can mean that holding these slower growth properties can stop you from being able to buy other property where you want to live.
If your cashflow is good, you should think about whether buying a positive cashflow property is necessary. We say many people that have good cashflow but get caught up in the hype of buying a property with positive cashflow.
Sure, it sounds great, but if you have the cashflow to support buying a good quality property in a good area with strong growth prospects, ask yourself whether you’re prepared to sacrifice growth for cashflow that you don’t potentially need.
Think about the different areas of your property purchase so you get your strategy right from the start.