John McGrath: Property Investment Strategy

Building wealth through property investment is a skill that can be learned by anyone. Once you understand the basic principles, learn the rules, develop a plan and take action, you’ll be well on your way to building a profitable portfolio.

by John McGrath 

 

Successful property investment is more about good management than good luck. You need a simple and effective strategy to guide you.

 

I’m a fairly conservative and risk-averse investor and I don’t think you need to be a huge risk taker or to borrow beyond your means to create a profitable portfolio. My preferred strategy focuses on maximising capital growth while keeping risk to a minimum: Buy well-located property and hold for the long term using the incentives of the tax system to help you pay for it.

 

This strategy enables you to build wealth quickly and manage your risks so you can sleep at night.

 

Location is key

This is especially true for investment property. There’s a direct relationship between location and demand, and demand is the biggest driver of capital growth. People will always prefer to live close to the CBD and they’d prefer to have the beach at their door rather than 10 blocks away.

 

Stick with it

I recommend holding your investment for five years, preferably longer. Many people sell prematurely because they get bored or they stop seeing immediate results. If the market flattens out, don’t despair. Just ride with it, because in two or three years’ time the market will probably not only have caught up, but it will have delivered you a handsome profit. You need to be patient while the magic of capital growth takes effect.

 

Tax incentives

All the rent you collect is assessable for income tax and all the expenses you incur are tax-deductible. The major expenses are interest on your loan, the property manager’s fees, insurance, maintenance, advertising and accountants’ fees.

 

If you buy a newer property, you’re also entitled to claim deductions for non-cash expenses, namely depreciation. Buildings are depreciable over 40 years, so you’re entitled to claim 2.5% of the cost of the building as a tax deduction every year. You can claim a depreciation allowance on renovations as well.

 

You’re also allowed to claim a deduction for negatively geared properties – where your costs exceed the rental income you receive. For taxation purposes, you can deduct this loss against other income but you still have to contribute cash to your property as long as it is negatively geared. Why would you want to invest and make a loss? Because the capital growth of your property is greater than the cash you’re putting in.

 

The other side of the coin is positive gearing. The essence of this strategy is that the return you make from the property exceeds the amount you pay in interest and expenses. Positively geared properties are easier to find in regional areas where rental yields are high and capital growth is relatively low.

 

Though I do recommend that you always consult your tax advisor before you make any investments.

 

My first investment experience

To be a successful investor, you might need to think outside the box to get started. The first property I bought was a run-down inner city terrace for $96,000. I cleaned it up and rented it out for $100 per week. Even though it wasn’t a palace, it was a lot nicer than the $40 per week studio I was living in. But I chose to stay there for another two years to maximise my cash flow so I could get a foothold in the market. Looking back, I’m glad I made that sacrifice. A few years later, I sold it for $260,000. The lesson here is that most markets are growing faster than you’ll ever be able to save. So the question is not ‘Should I get in?’ but ‘How can I get in?’

 

I hope this helps you in putting together your own investment strategy for future wealth through property. And whatever your strategy, make sure you get your finance pre-approved before you start looking to buy. 

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