If you're new to the world of real estate investment, you may be doing your research in order to figure out your particular strategy. You may understand that there are risks involved, but there are also considerable benefits if you handle your portfolio well. What are some of the key strategies you need to be aware of so that you can plot your path ahead?
The traditional, time-tested approach to property investment is to purchase a certain type of property, make it suitable for the rental market, introduce tenants and generate revenue. The principal goal is to ensure that the money that comes in is greater than the expenses paid, in order to operate the project.
This is generally known as a "positive cash flow" approach. It has worked for generations, although in these increasingly sophisticated times, there are other approaches to look at. Maybe you need to consider an approach that is called "negative gearing."
This type of operation is carefully controlled by the tax authorities but is perfectly legal and above board. It's very dependent on the vagaries of the market, but it is worth considering for at least part of your property portfolio.
How Does This Work?
Here, you initiate a deal at a loss which can be applied to your taxable income, so that you pay less to the revenue authorities. The big key here is that the property has to increase in capital value for you to make sense of it in the long term. This will make the money that you lose in the short-term okay, as it can be offset by the cash that you earn when you sell the property in the future.
There are other things to consider, as well. Firstly, you might be liable to pay capital gains tax based on the "profit" you make during appreciation. You will also have to watch out for cash flow issues during the tax year, as you may not be able to apply any losses made until you can reconcile your taxes.
Questions to Ask Yourself
The method that you choose will depend on your particular objectives. You'll also have to look into a crystal ball, to a certain extent. While the property price value in Australia may be high now, will it always remain like that? Conversely, will monthly rentals increase from their market point now and make the "positive cash flow" method more attractive than negative gearing?
Many people choose to diversify their approach and make some money from each of these methods. As you are new to the whole industry, it's probably best for you to have a word with a real estate expert first to get their advice.