TWO PROPERTIES COMPARED, WHICH IS BETTER?
QUESTION: WHICH PROPERTY SHOULD YOU BUY AND WHY?
Time for a quick quiz (as provided by Facebook user, Leo).
Property A and property B are both for sale.
A is negatively geared by $100 per week and has an estimated annual capital growth of 8%.
B is positively geared by $100 per week and has an estimated annual capital growth of 4%.
PROVEN NUMBERS DON’T LIE, ESTIMATES CAN
The first thing you should do when taking a quiz, is break down the question. “Estimated” capital growth does not offer any guarantees. In fact, you can never guarantee what will happen in the property market, says Nathan.
If you have done your homework and prepared well for this transaction, then the cash flow and taxation considerations for each property should be on the mark (as long as your rental projections are realistic).
So, one property will be positively geared by $100 each week, and the other will be negatively geared by $100 each week.
Which is best to buy? Before you decide on an answer, here is some food for thought:
WHAT NATHAN LOOKS FOR IN A PROPERTY
Nathan says he doesn’t really care if a property has a positive cash flow. For him, it is much more important to buy a property that offers strong growth, makes money on the way in and has a neutral cash flow after tax.
NEGATIVELY GEARING IS NOT SUSTAINABLE
While Nathan has some negatively geared properties in his portfolio, they are balanced by positively geared ones. This enables him to have the best mix while maintaining a portfolio that is neutral overall.
He doesn’t recommend negative gearing for the average investors. Investing to negatively gear will limit your portfolio growth potential. The more money you put into maintaining your properties each week, the less you’ll have to spend on further investing.
In the banks’ eyes, this means your income is less and your expenses are more – giving them good reason to lend you less (if any).
EVERYONE’S POSITION IS DIFFERENT – BALANCE IS THE KEY
Every investor has different financial needs to consider. Everyone’s position is different, and it is important to buy in line with your goals.
Your needs as an investor will change as you progress on your journey. Your tactics should be adjusted as you progress.
Sometimes this means buying a chunky capital deal. It may also mean taking a small hit on cash flow, but only for a short while.
However, never take trends or projections as guaranteed. Make sure to make money on the way in, and have buffers and exit strategies in place.
ALL RIGHT, BACK TO THE QUIZ
For Nathan, it’s really a trick question.
He wouldn’t choose one over the other – he would buy both.
Why? Because the $100 weekly loss incurred from property A would be offset by the $100 weekly gain from property B.
Yep, the numbers don’t lie.
However, if he couldn’t buy both right away, then he would get the one which helps him buy the other.
This is where most investors make mistakes, and buy the very opposite property to what they really need.
How about you, would you choose Property A, B or both?
Please comment below.