Oftentimes, the first thought for someone who is planning an investment property purchase is usually “how much will this asset grow and in what time frame”. Unfortunately, for many investors, the analysis of the investment stops there. In a flat market, many would-be investors stay out of the game, thinking they won’t get a return on their investment and they wont derive any benefit from the purchase until such time as the asset begins to appreciate in value. However, waiting for the market to heat up and demonstrate some capital gains before you commit to a property means you will miss out on the initial spike of capital growth when the market does start to move – you will be buying in at a higher price thereby directly reducing the profit you could make. While capital growth is most certainly an important aspect of a successful property investment strategy, it is important to note – especially in a flat market – that there are many financial benefits to owning an investment property even if the property does not increase in value. I can hear you saying “yeah, right…” but read on and I will explain how the other aspects of a properly executed investment strategy can improve your financial situation regardless of the asset’s capital growth.
We call the benefits unrelated to capital-growth ‘baseline benefits’, because they are benefits that are applicable regardless of the property market. The good thing about these baseline benefits is they are relatively certain as compared with capital growth, because when assessing the potential for capital growth you are relying on predictions and the past results of the location you intend to invest in to assess the potential for future growth. The problem with these predictors is they are just that – predictors – and there is absolutely no guarantee that past performance of an area will continue on into the future. However, there are a suite of other benefits available to property investors that steadily work to provide financial benefits year after year – which means that just by owning and holding the property you are able to reduce your personal debts and build your wealth.
So, what are the benefits?
- Pay Less Tax – By owning an investment property you can claim not only the costs incurred by you in holding the property but you can also claim depreciation for the decrease in value of the building, fixtures and fittings. By paying less tax, you keep more of your money to use in reducing your debts and building your wealth.
- Your net income will increase every pay – By applying for a Tax Variation from the ATO, you can have the deductions related to your investment property applied each pay cycle, rather than at the end of the financial year. This means that the tax refund you would ordinarily receive at the end of the financial year for the items above will be applied to your pay every single pay cycle, meaning your net income will increase. Not waiting for a year for your tax refund is a huge benefit, because it means more money in your pocket every pay for you to use in your investment strategy. The more funds you have at your disposal, the more effective your debt reduction strategy will be.
- Increased cash flow – By owning an investment property, you’ll also receive rental income. By changing the way your banking and mortgages are set up, you can use your rental income to reduce the interest payable on your own personal home loan. You will be surprised how much difference can be made just by making a few simple changes to the way you do things. If you’re paying less interest on your home loan, it means you can pay more off the principal – reducing your personal debt and getting closer to being mortgage free.
As we always advise our clients, property is a medium-long term proposition. The days of ‘get rich quick’ in property are over, which isn’t altogether a bad thing, considering where there is great reward there is also usually great risk. A carefully planned and implemented investment strategy can work in any market – there is most definitely value to be found in the current market and there is most definitely the potential for capital growth if you know where to find it.
Please remember that this advice is general in nature and may not suit your personal circumstances. Our blog posts aren’t intended to be relied upon for any purpose whatsoever. When it comes to your finances, we always recommend seeking professional advice. If you would like to know more, please get in touch. We are always here to help and our service is free.