Many property enthusiasts and investors consider negative gearing to be a tried-and-tested, ‘no brainer’ strategy that is perfect for anyone.
While negative gearing has its benefits, it shouldn’t be viewed as a standalone property investment strategy – doing so may leave you with a sub-par property investment. Here’s why.
Capital growth or cash flow?
The wants of property investors typically fall into two broad categories – that is investors either want to increase their wealth via capital growth, or they want additional cash flow through rental income.
For those who want additional cash flow, negative gearing is not suited for obvious reasons (i.e. it actually costs you money to hold a negatively geared property).
But what about those who want capital growth – should these investors seek a negatively geared property?
In short, no.
Get your priorities right
Negative gearing should not be a priority for investors who want to grow their wealth. The priority should be on properties that are poised to experience superior capital growth.
In many instances, negative gearing is simply a by-product of properties that offer high capital growth prospects. But negative gearing should not be used as a standalone property investment strategy.
In reality, investors should aim to have all their investment properties positively geared. However, for investors wanting to increase their personal wealth, choosing a property should always be based on its capital growth potential and not its negative or positive gearing benefits.
Having the best of both worlds
So why can’t investors simply buy high-growth properties that also offer high rental yields?
Unfortunately, it’s extremely rare to find such assets because residential properties will either offer one or the other.
There are some very rare instances when properties do offer both high capital growth and high rental yields, but these are generally a short-lived phenomenon, and they can carry more risk. For example, think of some of the regional towns in Western Australia and Queensland that experienced double-digit capital growth and yields of 10%+ during the mining boom.
Therefore, investors who want to increase their personal wealth should focus on properties that are set to record high capital growth.
Simply seeking properties with the best negative gearing benefits could lead you to acquiring a sub-par asset that will fail to optimise your returns.