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Posts Tagged ‘Building’

Building an Investment Property Foundation

Sunday, July 18th, 2010

Many seasoned property investors with more income or capital are able to invest in more speculative growth areas. Often these properties are negatively geared providing relief on personal income taxes. It is important to remember that tax savings from incurring a loss is not a sustainable or growth promoting strategy. When a property portfolio is built on highly yielding or positively geared properties, the borrowing potential and capital balances will increase over time allowing the portfolio to grow. Even when property prices fluctuate, with the current banking systems in Australia, Canada, and US the values of properties are not re-valued daily like the stock/security market.

The property price fluctuations will not impact the property portfolio’s cashflow. When started the property portfolio, preserving capital by using a low down payment provides the investor with a larger safer net/buffer in case of required repairs or vacancies. Other investors may argue that the insurance on non-conventional mortgages or mortgages with greater than 80% loan to value ratios offsets the benefit of using a small down payment. It is a much safer approach to have a supply of cash to be prepared for unforeseen circumstances than to have it all invested in the market. If a down payment of 20% to avoid insurance is available with spare cash for contingency, the large capital investment still locks up a large amount of cash from other opportunities.

Once a foundation of positively geared/positive cashflow properties is created, more neutrally geared properties can be purchased. Often in areas close to growing populations have neutrally geared property and provide potential capital appreciation. Areas with high cashflow often are in areas where capital appreciation has not occurred and my not. The cashflow provided by the foundation will enable the investor to seek properties with more potential growth.

One of the keys to success in building a property portfolio is to understand that the property is an investment and not a personal home. The areas that are great investments may not have the aesthetics associated with an investor’s lifestyle, but an investment that gains value and provides income is an asset while an aesthetically pleasing property which drains the investor’s income is a liability. It is critical to decide on a strategy and then research the opportunities that satisfy the strategy requirements. If you are a cashflow investor, look for opportunities and analyse them for cashflow. Often investors are emotionally attached after reviewing a property and try to make the property into an investment.