THE FOUR WAYS TO MAKE PROFITS IN PROPERTY

 

In New Zealand, well located properties tend to have good capital growth but poor cash flow, and those properties offering good cash flow tend to have poor capital growth.

Many beginning investors get involved in positive cash flow properties.  They are much easier to buy and keep because you donít have to put your hand in your pocket every month.

That is all well and good if you want income.  But income alone doesnít make you wealthy, it just provides you spending money and after tax there isnít really that much money to spend. 

Many beginning investors have also purchased property that barely shows positive cash flow.  This possibly will create problems for them in the long term. A  number of other investors have also done this and this has pushed up prices in some areas giving these investors a false impression that they have bought well, that their properties are performing well and they are becoming rich. 

The problem arises as some of these areas are experiencing no growth or negative population growth.  Some of these new property owners are having difficulty finding tenants and their properties remain vacant for many months. They also find that when their properties require repairs it takes a large chunk of money.   

This is not to say that positively geared properties are bad.  A property investor should be well informed about where you buy and why you buy your property.  There are other ways to get money out of property than positively gearing. 

Investors must understand there are four ways to make money out of property investments and most of the time they only look at one or two of these. Letís look at them.

1. Passive Appreciation
Thatís when the property value goes up in line with the general property market, and over time well located properties in New Zealand  in good positions double in value every 7 - 10 years.

2. Active Appreciation
This is when you add value to your property. For example if you buying well, when you buy below market price and revalue at the correct figure, or when you renovate or redevelop your property.

3. Rental Return
Rentals from property provide cash flow, but this is only one component of your overall investment return.

4. Tax Benefits
It has often been said that its not how much money you make that is important, but how much you keep after tax. In their simplest form these are things like depreciation allowances.

To invest in a top performing property you need a balance all four of the above elements. Donít focus too strongly on cash flow. This is because well located residential properties are inherently high growth, low yielding investments. You really canít get high growth, high yielding residential properties without taking a risk.

 

 

 

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