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The Pros and Cons of Investing for Capital Growth

Having a plan is one of the real estate investment basics. You have a choice between creating a rental property investment strategy and investing for growth. Here are the pros and cons of the latter.

You have a few choices to make when investing in rental property. For beginners, the main one lies in deciding on your investment strategy.

Buying an investment property to rent means you get a regular income over a sustained period of time. However, it’s also a lot of work. You have to find tenants and maintain the property to ensure it keeps earning money.

Investing for capital growth means that you’re looking to sell the property for a profit later on. Here are the pros and cons of this strategy.

The Pros

When you buy for capital growth, you’re making the assumption that the property’s value will increase over time. This approach has several advantages.

Pro #1 – It’s Simpler

You have to carry out the real estate investing basics, regardless of which strategy you choose. There’s a lot of research involved, particularly when it comes to finding the right location. You also have to consider who would show interest in the property. This applies whether you’re considering taking on tenants or figuring out what buyers want.

But it’s after this process that investing for capital growth becomes simpler. Once you’ve done the legwork and purchased the property, you don’t have to do much else. You may renovate to improve its value. However, you’re not dealing with tenants or advertising the property. Plus, you don’t have to carry out continued maintenance. For the most part, you’re waiting for the right opportunity to sell.

Pro #2 – More Options

When renting a property out, you’re dedicating yourself to a long-term strategy. You’ll earn money, but won’t get huge sums in a short period of time.

Investing for capital growth gives you the option of going long or short term. If you choose the long route, you’re just waiting for the property to gain value in-line with a changing market. Given that Australia’s average house price tends to rise each year, you’ll make money eventually.

However, you can also invest for a short-term profit. This is a tactic that house flippers use. They’ll buy a property and renovate, thus making it more attractive to buyers. Within a year or two, they’ll have added so much value that they can sell the property and turn a tidy profit.

The point is that you have options when investing for growth that you don’t have when investing for yield.

Pro #3 – Possible Negative Gearing

Negative gearing is a complex tax strategy. It involves making losses on your investment that you can claim as tax deductions.

Investing for capital growth opens up the opportunity for negative gearing. You can purchase a property that makes a loss and use it to alter your tax bill. Investors with large portfolios often use this strategy to manage their cashflows.

It’s a complex technique that stretches beyond the real estate investing basics. As a result, it’s best to work with a professional if you want to take advantage of negative gearing.

The Cons

Investing for capital growth does come with its disadvantages. Here are some reasons why you may prefer a rental property investment strategy.

Con #1 – Cashflow Issues

When investing for yield, you have a consistent income. The rent your tenants pay can go towards your home loans and the maintenance of the property.

You don’t get that when investing for capital growth. As a result, any expenses related to the property usually come out of your own pocket.

Con #2 – Timing the Market

The property market often runs in cycles. If you time the sale poorly, you can cost yourself thousands of dollars.

Furthermore, you have to trust that the market will allow for growth in the location you choose. If that doesn’t happen, you could end up losing money too.

It’s all about buying low and selling high. However, that’s much harder than it sounds because mistiming a decision can ruin the investment.

Con #3 – It’s Harder to Borrow Money

When borrowing for a rental property, you have the advantage of a rental income that can boost your borrowing power.

You don’t have that when investing for capital growth. Adding negative gearing into the mix can make getting financing even harder.

The Final Word

There’s no flat right or wrong answer when it comes to choosing an investment strategy. It’s all about choosing what’s right for you.

These are the things to consider for a capital growth strategy. Talk to a professional to find out if this strategy suits your investment aims.

About Tyron Hyde

Tyron Hyde is the CEO of Washington Brown Quantity Surveyors. He is regarded as one of the industry's leading experts in property tax depreciation, is regularly quoted in the media & asked to speak at conferences.

Learn why more Property Investors Choose Washington Brown to prepare their depreciation reports.