Last week, we talked about the strategy to build your property portfolio via acquiring cash flow properties and its upsides and downsides. In this week’s post, we will look at the opposite side of cash flow properties, namely growth properties.
These are properties with a higher capital growth profile of 7 – 10% (and occasionally over 12% for a short period) and a lower rental return of 3 – 5% rent (occasionally even below 2.5%).
The main advantage of these types of properties is the fact that these areas are usually inne areas and high population areas, which are not affected as much by economic cycles and interest rate. Therefore they usually have higher and consistent capital growth over longer term. This means investors can generate more equity in a quicker period of time, which can allow them to invest further.
The government also makes it attractive for investors to purchase these types of properties by offering tax benefits via negative gearing and delayed Capital Gains Tax (GST).
In terms of finance, most lenders view these types of properties as less “risky” than regional properties, mainly because of the larger populations in these areas. Therefore, there is less risk of tenancy problems because of better socio-economic conditions and the fact that there are more buyers in these areas, in case the property ever needs to be sold quickly.
So from an investor’s perspective, there are more finance options available for these properties.
The big disadvantage with these properties is the negative ash flow if you take on a normal mortgage at high leverage level. Added to this is the fact that these properties are usually more expensive than cash flow properties, in terms of purchase price, stamp duty and land tax. It is harder for beginners to enter the market, simply because there is greater demand for these types of properties than the supply.
Furthermore, in the short-term, there is no guarantee for capital growth every year – you may bet on the wrong horse.
The main disadvantage from a finance perspective is that it gets harder to service the loan as your portfolio get bigger.