Four reasons why you should consider positive property

GUEST OBSERVATION

Positively geared property investing has become very popular over the last decade, but what exactly is it and how can you benefit from it?

Positive property is an investment vehicle that by definition pays the holding costs of a property and puts profit in the owner’s pocket. That is, it provides a passive income to you, the investor, from the first day of holding. This is called ‘passive income’ and it’s what makes it different from other forms of investing when you’re paying out each month.

When you begin investing, it pays to start with the end in mind if you want to be successful.

This includes two main aspects of planning. The first is being clear about your goals and motivations, and the second is understanding exactly what success looks like to you (for instance, retiring early, travelling more, working part time). The key is to understand exactly what you want your investment outcome to look like, as this will assist you in structuring and shaping a property portfolio that will get you there. Without a clear end, you won’t know the type of property to purchase and the required benchmarks to reach your goal, and it’s entirely likely you will fall short as a result.

A recent in depth study by University of Melbourne and Towers Watson found that only 53% of couples and 22% of single people are on track to achieve a comfortable level of retirement income - a grim prospect.

If you’re like most who look to property investing, you’ll want to continue living on your current household income into retirement, which really should be the minimum standard you consider. Even on $100,000 per year as a household income, 20 years into retirement works out at a requirement of $2,000,000. Sadly, Australians who have not created a stable investment portfolio through their earning lives will have no chance retiring with this sort of money put away.

Even if you are saving, the numbers are against you. Just 1% of Australians are considered “wealthy” in retirement.

It is crucial to prepare for a financially stable life by investing. Which brings us back to positive property.

Here are four reasons that you should consider it:

1. It pays a profit from day one and builds a passive income
   
   
2. As your portfolio grows, your serviceability and passive income also grows
   
   
3. The extra income from positive property improves your lifestyle and future investment choices, providing you a stable base to build a portfolio, a life and a family
   
   
4. You can eventually look to achieve a goal of passive income where you are not controlled by your job, your budget or just “getting by”. Opportunities that didn’t exist beforehand can open up for you.
   
   

Often when I see a new client, I ask them how much of a passive income they are seeking to achieve their goals. A very common figure is $100,000 per annum, which appears to be a pivotal point at which people consider replacing their working life for something else. It’s always exciting to see people cross this threshold and realise their options have changed.

By using the high yielding passive income method, investors can grow and expand their portfolio much more quickly than if they were paying out on a regular basis. It also means it won’t affect your lifestyle, and you’ll see a return far more quickly than if you were to go down a negatively geared path. 

This doesn’t work in every location.

Highly positive properties are not, for instance, located in capital cities – if they were, everyone would be investing there and everyone would be a wealthy investor. They are usually spread between regional coastal and resource towns across the country.  

You must undertake your due diligence when it comes to finding the right town with the right outcome. You cannot find these in the inner city property regions, and you must accept that if you’re chasing positive property then you will likely be looking outside of areas you are familiar with.  Good due diligence will help you feel comfortable investing in these areas.

Picking the right property for now and down the track is also important. You must consider not only the individual property, but how it will affect your future purchases. Each property should be bought with the next in mind.

You need to get that yield and return figure right – you will want to pick a specialist in the area who deals with the corporate leasing market. They can maximise your return and, ultimately, your income.

It’s interesting to note that the property clock applies to all markets across the country, and has done so for as long as property prices have been recorded. When looking at the statistics, in particular the historical performance of Australian properties over the last 50 years, a clear and steady incline is noted.

Generally, every seven to 10 years, our capital cities run from the top of the clock, which you may call the peak, downwards to the bottom of the cycle. This then goes back up to the peak again, each time rising through its highs and lows, but taking strong and substantial steps forward in both capital growth and rental yield in each cycle.

In some of the largest property downturns of this century, investors have simply had to wait until the end of that cycle to receive capital growth.

Despite the long running success for many in property, only 5% of the Australian population own an investment property, with less than 0.2% owning more than four. Considering our access to lending, low interest rates and high wages, this is a staggeringly low number.

Many property investors purchase blindly – without considering their desired income and without having a stable base to invest from. Having a base of positive property will allow you to keep borrowing and not hit the serviceability glass ceiling that many hit when they reach two to three negatively geared properties.

My recommendation? Build a passive income first, with three to four positive properties generating $100,000 or more. Then look to diversifying into the capital cities either with negative gearing or through projects like flips and renovations.

Why? Because positive income acts as a risk buffer that not only allows you to do these active projects, but also allows you to protect yourself in the event that something goes wrong or interest rates increase.

Ryan Crawford is group director of Crawford Property Group.

Ryan is one of Australia’s most successful property investors under 40 and a leading expert in positively geared property investment. In less than a decade, Ryan built a portfolio of more than 40 positively geared properties and is now dedicated to helping others plan and implement successful property investment strategies.