Investing is a choice many people make at one point or another, in the hope of bringing wealth to their lives. Whilst there are many investment alternatives such as stocks, bonds and cash, property investment tends to be viewed as one of the safest and easiest options.
However, property investment isn’t for everyone. Thus if you are considering investing in property, it is important to weigh up the pros and cons.
Note: it is important to consult your financial advisor to seek advice
What is negative gearing?
Negative gearing is a form of financial leverage where an investor borrows money to invest but the gross income generated by the investment is less than the cost of owning and managing the investment, including interest charged on the borrowings.
Guide to Investment Loans
The types of loans available for investment properties are generally the same as the ones available for owner occupied properties – you can avail yourself of the same interest rates, options and flexibility. The key to determining which loan is best for your investment property comes down to your investment strategy.
As with any large financial decision you make, it’s always wise to seek investment advice from a professional before entering into any property investment. There are plenty of people in the financial services and mortgage industries who can help you with this, your accountant, financial planner and MFAA accredited member.
The two primary ways in which investors build wealth through real estate:
- Capital Gain
This relies on the increase in value of the property to be more than the initial price of the property plus your repayments and buying and selling one-off costs. For example, if you purchased for $200,000, you sold it for $300,000 and your repayments and additional costs were $60,000 the gross capital gain is $40,000.
- Building Equity
- This relies on an increase in value of the property and bringing down the loan. For example, if you purchased a property for $200,000, and your loan was for $150,000 you would have $50,000 equity in the property. A few years later if the property was valued at $225,000 and you had $100,000 remaining on the loan you have $125,000 equity in the property. Plus you benefit from the rental return on the investment property.