Should I buy a negatively geared investment property?

A negatively geared investment property is commonly considered a tried-and-tested approach to property investing, however this strategy certainly isn’t suitable for everyone. Here’s why.

Although negative gearing can be beneficial as it allows property investors to reduce their taxable income, it shouldn’t be viewed as a standalone investment strategy.

If an investor buys a property purely for its negative gearing benefits, they’re likely to be left with an under-performing investment that doesn’t align to their wealth creation strategy.

Cash flow or capital growth?

Typically, the goals of any given property investor fall under two broad groups – that is they either want additional cash flow through rental income, or they want to increase their wealth via capital growth of the property.

Negative gearing is not suitable for investors who want additional cash flow. That’s because it actually costs money for investors to hold a negatively geared property because the rental income doesn’t fully cover the repayments for the loan (and therefore the investor has to use their own money to meet the balance of the repayments).

Investors who want additional cash flow need to target positively geared properties – these are typically newer residential properties but commercial properties generally make the best cash-flow positive assets because they offer higher rental yields than residential.

So what about investors who want capital growth – should these people seek a negatively geared property? In short, no.

Understanding your priorities

For investors who want to increase their wealth via capital growth, negative gearing should not be a priority.

Instead, the priority should be on finding investment properties that will record superior capital growth. By doing so, investors will be better positioned to grow their personal wealth.

Put simply, negative gearing should only be viewed as a by-product of properties that offer high capital growth prospects. So it’s important to stress that negative gearing should not be used as a standalone strategy.

In summary, for investors wanting to increase their personal wealth, choosing a property should always be based on its capital growth potential and not its negative or positive gearing benefits.

What about properties with high capital growth and high rental yields?

Typically, residential properties will either offer high capital growth prospects or high rental yields.

There can be rare instances when properties do offer both, but these are generally for only a short period of time. For example, take some rural towns in Western Australia and Queensland that experienced double-digit capital growth and yields of 10%+ during the resources boom.

Therefore, investors who want to increase their personal wealth should focus on properties that are set to achieve high capital growth over the long term.

Simply seeking properties with the best negative gearing benefits could lead investors to acquiring an under-performing asset that will fail to optimise their returns.

Top 6 considerations when subdividing the family home

If you’re contemplating subdividing the family home there are numerous issues you need to weigh up to ensure you’re making the right decision. Here are the top 6 things you need to consider when deciding to subdivide your property.

Owner occupiers are increasingly deciding to subdivide their family home as areas in our capital cities are rezoned for higher-density development to make way for our growing populations.

Carving up the family block isn’t a step to be taken lightly as there are many issues that need due consideration. Here are the top 6 points you need to weigh up before making a decision to subdivide your own home.

1        It could inhibit the future sale price of your home.

Subdividing your family home impacts its value. To which extent will depend on the size and type of your home as well as the way it’s subdivided. For example, you may have a large 4-bedroom, 2-bathroom property suitable for a larger family, however if you subdivide the property and sell the backyard, this may deter prospective buyers in the future and impact the sales price of your home if you wanted to put it on the market.

2        Can you use the equity in your home instead?

When subdividing a family home with the goal of realising the value of the property, another option would be to use the equity in the home instead. This way you’re able to keep the property as is, but you can then draw the equity to use as desired.

3        Will you make a profit?

After you have subdivided your property and taken all costs into consideration, will you make a profit? This includes costs of a land surveyor, selling agents fees as well as any negative impact on the value of your existing home.

4        What are the tax implications?

A common mistake made by those who subdivide their family home is a lack of understanding about the tax implications. Make sure to speak to a qualified accountant so you’re aware of what you’ll need to pay the tax man.

5        It allows you to downsize without moving

If you’re an empty-nester and your children have grown up and moved out of the family home, you might be considering downsizing, particularly if you have a big backyard that requires considerable upkeep. If you can keep the existing dwelling, subdividing the backyard off from your family home can be a good way to downsize without the headaches of moving. You may also prefer to subdivide the land, build on the new lot and move into the new dwelling before selling or holding the old house.

6        Is it better to sell or hold?

While subdividing the family home and selling a vacant parcel of land can provide a financial boost, it may be better to build on the new parcel of land and lease the new property. By doing so, you will receive rental income and can take advantage of future capital growth.

Everyone’s situation and goals will be different when it comes to subdividing the family home, but it’s important to weigh up these considerations to determine what’s right for you.

Case study: Knowing motivations key to good deals

When it comes to buying or leasing commercial property, it can be highly advantageous to understand the motivations of the seller or lessor.

Once you understand these motivations, you can use this knowledge to negotiate harder on these specific points to secure a better outcome.

This worked particularly well in one instance with a Momentum Wealth client, who was seeking a commercial space to lease.

The client, a financial services firm, had been leasing in East Perth for several years but with their lease due to expire, and an unreasonable landlord who was unrealistic during new contract negotiations, the client engaged us to find them a new space.

The brief included:

• Circa 1,500sqm of open-plan office space with 30-50 car bays
• Ready to go with existing systems (such as AV, high-speed internet, furniture in breakout rooms, desk and chairs etc.)
• Preferably in West Perth (or close to but not in the Perth CBD)
• Scalable floor plan allowing room for expansion

Armed with the brief and a 6-month deadline, our commercial property consultant began the search and issued a request for proposals.

After shortlisting several properties and showing them to the client, our consultant began initial negotiations with a handful of potential landlords and leasing agents.

During the process our commercial consultant learned that one of the shortlisted premises would be negotiated under a sublease agreement.

The existing tenant in the premise had several years remaining on their contract but had recently consolidated their office premises to another location amid financial pressures. The tenant was also dealing with some major and very public disruptions to their operations, which proved to be a large distraction to the company as a whole.

In short, the existing tenant wanted a quick resolution to subleasing the office space that they had recently vacated. Understanding this, our commercial property consultant was able to negotiate hard on price and incentives.

The A-grade office space was a perfect fit for our client and included 40+ car bays, circa 1,800sqm of space and included a high-specification fitout, including reception space, tables and chairs, AV equipment and breakout amenities.

Although negotiations for the space proved complicated, having to deal with the existing lessee and the lessor, our commercial property consultant knew the outcome would be very beneficial for the client.

Understanding that the existing lessee was motivated to sublease the space immediately, our consultant was able to secure a highly favourable agreement at a significant market discount with favourable incentives for up to a 9-year term.

Subsequently, the client was able to move into a larger, more modern office space on much more competitive terms.

Every commercial property seller or lessor has a problem to solve, and by gaining a more in-depth understanding of this problem, you can help resolve the issue faster and secure a more favourable deal.

Young Perth suburb offers major potential to investors

Padbury offers some major benefits to property investors, following the recent rezoning for higher density development and a soon-to-be finished $80 million shopping centre upgrade.

Padbury is located within the City of Joondalup and is approximately 17 kilometres north-west of the Perth CBD.

The suburb is well serviced by public transport with bus services running through all main arterial roads as well as offering the Whitfords train station and Greenwood train station along the Joondalup train line.

Neighbouring suburbs include Craigie and Kallaroo to the north, Hillarys to the west, Kingsley to the east and Sorrento and Duncraig to the south.

Padbury is a relatively young residential suburb, only being named in 1971 after the Western Australian settler Walter Padbury followed by the start of residential development of the area in the late 1970s.

It wasn’t until the late 1990s that the area was fully built out, fuelled by the development of the Whitford City Shopping Centre and Hillarys Boat Harbour.

Padbury is predominantly low-density residential, with the majority of the suburb zoned R20.

However, in early 2016 the City of Joondalup implemented an R20/40 split zoning for certain pockets of the suburb to encourage higher-density development.

This will help diversify the composition of dwelling types in the suburb, which currently stands at 92.6% houses, 7.4% semi-detached, row or terrace houses and townhouses and 0% flats, units or apartments.

79% of properties are either owned outright or being purchased, while 19% of properties are being rented. The median house price is $540,000.

Padbury has a population of 8,183 residents with a median age of 37 years. 21.2% of the suburbs residents identify as professionals (19.9% WA and 21.3% national averages), while 19.1% are technician and trades workers and 16.8% clerical and admin.

Features of the suburb include Gibson Park, Macdonald Park, Hepburn Heights Conservation Area, Padbury Primary School and Padbury Shopping Centre.

There is also Whitford City Shopping Centre (1km) and the Hillarys Boat Harbour (3km).

The $80 million redevelopment of Westfield Whitford City Shopping Centre is now nearing completion with less than 70 days to go on its construction calendar.

Residents of Padbury are set to benefit from the increased vibrancy the upgrades will bring with plans including a casual dining piazza with 10 new restaurants as well as an entertainment precinct with an eight-screen Event Cinema complex.

The suburb is bound by Whitfords Avenue in the north, Marmion Avenue in the west, Hepburn Avenue in the south and Mitchell Freeway in the east.

The main arterial roads nearby are Giles Avenue, Gibson Avenue, Hepburn Avenue and Whitfords Avenue.

Deals and Don’ts – Woodvale, Leederville, Belmont

Here we take a look at just some of the different properties on the market and explain why they’re either deals (that represent a good investment) or don’ts (that should be carefully avoided by investors).

Deals

Woodvale

Purchase price: $581,000

Purchase date: May 2017

Block size: 729sqm

Specification: 4 bedroom, 2 bathroom, single garage, below ground pool, built in 1979, zoned R20/60.

Deal: This green-title property represents a deal because its split zoning means it has good development potential, and it is located just 500m to Whitfords train station. The property is also highly presentable with a good fit-out, meaning that it’s highly rentable and would attract quality tenants.

Leederville

Purchase price: $776,800

Purchase date: June 2017

Block size: 243sqm

Specification: 4 bedroom, 2 bathroom townhouse, built in 2002, high specification finish.

Deal: This townhouse on a strata lot represents a deal because of its location and specification. Tucked away in a quiet street of a blue-chip suburb, it is situated within 3km of the CBD, 100m to the vibrant Leederville café strips and 600m from Leederville train station. The high-quality build, which features 3 living spaces, means the property should be easily leased at a yield close to 4%.

Belmont

Purchase price: $491,000

Purchase date: May 2017

Block size: 713sqm

Specification: 3 bedroom, 1 bathroom, single garage, below ground pool, built in 1974, zoned R20/50/100.

Deal: This green-title property represents a deal because of its significant development potential. Located within 7km of the Perth CBD and within 2km of the Swan River, the property has good growth drivers for the future as well. Over 90% of the value exists in the land component yet the property is still in good rentable condition. It is also located within 500m of Belmont Forum Shopping Centre.

Don’ts

Thornlie

For sale price: $355,000

Block size: 680sqm

Specification: 3 bedroom, 1 bathroom house built in 1987, zoned R17.5.

Don’t: This property doesn’t represent a good investment because it’s located on a busy road (Forest Lakes Drive), which is a high frequency route for public transport buses. Although good for overall amenity, the bus and car traffic would frequently disrupt the property with noise and traffic pollution, restricting demand from tenants and buyers, and lowering its overall capital growth potential.