It all starts with your objective
Some people invest in property to increase their monthly income, where others invest in property to build long-term wealth – one group looks for ‘positive cash flow properties’, the other for ‘negative geared properties’.
Put bluntly, you’re making a huge mistake if you buy an investment property for positive cash flow (where rental income is greater than mortgage payments and expenses). Don’t do it. Instead, buy an investment property that is likely to grow in value – you’ll be far better off for it.
To illustrate, we’ve looked at the historical performance of a typical Brisbane City Unit (QLD), and a Heidelberg West House (VIC) below. You could purchase either right now for about $500,000.
Comparing apples to oranges
This first graph shows how your Brisbane Unit investment would perform over a typical 10-year period. Rental surplus (positive cash flow) plus capital growth would improve your wealth by over $200,000.
This next graph shows how you’d fare investing in a Heidelberg West House. Each year, you’re rental income would be less than your mortgage payments (shown as Rental Shortfall), but, the Capital Growth would more than make up for it. Your wealth would be improved 10 years from now by over $380,000.
These are rough figures, based on some broad generalisations, but the lesson is pretty clear: positive cash flow investments can deliver passive income streams, but over the long-term, investing for capital growth is a much better way to accumulate wealth.
This graph compares the results you could expect from investing in an Apartment (positive geared) versus a House (negative geared). Over a 10-year period, you’d be about $175,000 wealthier investing in House than a Unit.
In simple real estate terms… Invest in a House, not an Apartment.
Yes, investing in a House generally means that the rent won’t cover the mortgage (i.e. you’ll have to tip in your own money each week). But, if you’re able to sacrifice a bit of cashflow, you’d be far better off in the long-term.
And, of course, enlist the help of a good Buyers Advocate like Property Analytics.