Before I begin & get into the details how you can develop your own positive investment property, let me explain the correlation between high growth and low rental yields.
Is your Investment Property really an Asset?
Historically suburbs close to CBD will have the lowest yields, simply because what comes in as an income is far less than the expenses that go out. The difference between income and expense is greater than what can be covered with tax breaks. Tax breaks being the sum of losses you claim against your investment property in your tax return plus the amount you can claim as depreciation. The remaining amount is said to be negative as it comes out from your pocket. This negative investment property is not an asset, according to Robert Kiyosaki, in his book Rich Dad Poor Dad, an asset is an investment that puts money in your pocket. Anything that takes money out of your pocket is a liability. So my fellow property developers and property investors, if you are interested in turbocharging your investment property portfolio, you should be careful when purchasing your next investment property.
Rental Yield Vs Capital Growth
As a thumb rule, but exceptions can always be found, investment properties with high capital growth have lower rental yield and properties with higher rental yield have lower capital growth.
Rental Yield on your investment property depends upon how much you paid for it, which in turn can depend upon the demand in that area, the location etc. Some suburbs are more expensive than others, and this could be a result of proximity to services, perception of people, limited available land, schools etc. Rental yield on the other hand, is linked with the economic performance of the country & although it may cost more to live in an area, rental yields do not fluctuate as much as property prices between suburbs or towns or different states. What this indicates is that some suburbs can fetch greater yield than others. Property investors who aim at suburbs with greater capital growth, despite lower rental yields, are hoping to get a greater reward in capital growth as compared to higher rental yield in low capital growth suburbs.
Negative Vs Positive Investment Property
8 out of 10 investment properties bought off the retail market these days will be negatively geared. Which means that although this shortfall can be claimed against tax that you are paying on your wages, your investment property is not an asset, as you will be putting money in it, in order to sustain it. Here is how it works. If you pay 35% tax, you can only claim 35% of the loss, rest comes straight out of your disposable income. Before you settle on an investment property, make sure you weigh the costs and benefits that you are giving up in terms of lower yield for a greater capital growth. As you could be out of pocket to a level that you cannot sustain.
Developing your own Investment Property
Most property investors assume that there is no way they can get a positive cash flow property in a metropolitan city. I tend to disagree, if your are a property developer, you can manufacture your own equity and capital growth in your property. In a nutshell, when you develop your investment property, you acquire the property below the market value as you added value at each step of the way. For instance, you bought a block for $400,000 & built 4 townhouses on it, with end value of $450,000 each. However, your TDC, total development costs could only be $400,000 for each townhouse. This gives you a total profit of $50,000 per townhouse. Now if you were to sell 2 and retain 2, you will be at least neutrally or positively geared. Do you know what this means, this means, that your investment properties are paying themselves off and are going up in value at the same time.
I wrote an article a while back that may interest you, where I discussed the benefits of developing your own investment properties – click the link to read more.