What with negative gearing being one of Australia's favorite strategies it keeps investors firmly in the mindset of one of Australia's other favorite things… gambling.
Think about it… we all want to be “Tatts outta here”, we all want to win the lottery. Australians love the idea of the big win regardless of how much of an Aussie Battler we are, having the ‘big win' is still somewhere in our psychology.
The problem is that if you call yourself an investor but you are using negative gearing as a strategy then your only option for growth of your investment is time and luck.
Yes, stats say that the property market doubles every ten years but that's an average and there are many areas that have not increased nearly that amount.
So what do people do?
They try to game the system and speculate on up and coming areas.
And that's that called?
If you place your bet on an area, it's like playing at any game of chance…
Think Carnies at the fair: “Ya Pay Yer Money – Ya Take Yer Chances.”
(do that in a sing-song voice so it seems like risking it all is going to be fun)
Of course there are things you can do to tip the scales of fate in your favor but at the end of the day, growth or not, if you are buying a negatively geared property then what you end up with is a negatively geared property.
Ok so it's pretty clear that Negative Gearing is not my favorite.
But what if we were to make a few tweaks to this strategy?
Tweak 1 – let's not buy a negatively geared property – let's buy a positively geared commercial property.
That way even if the capital growth doesn't go up as much as we prayed for we still have an asset that is making us a passive income.
Tweak 2 – Let's look for a property that has upside potential. Be that room for growth, extra land we can build something else on, the possibility of strata-titling the place…
Something we can use to grow the value of the property regardless of what the market is doing.
Tweak 3 – let's factor in 5 simple things which will greatly improve our overall experience:
1-Location – consider visibility, accessibility to public transport, position within the surrounding suburb, surrounding business that could offer support to lessees, absence of similar properties in the local area. Check out the commercial vacancy rate in the area and whether new young families are moving into the area or out. This may give you an indication of whether an area is on the upswing or the down.
2-Infrastructure – consider current infrastructure but don’t forget to investigate future development that may impact your investment, for example, a new freeway may make the investment easier to access and increase value
3-Tenant quality – look for a strong corporate or government tenant with a long-term lease, consider a property with multiple tenants to diversify and stabilise your income. Consider the financial strength of the tenants – how established is their business? Do they have the ongoing ability to pay the rent?
4-Building quality – how new/old is the construction? Will the building require significant capital expenditure? Is the internal design flexible to allow for a changed layout if required to attract a different type of tenant? Or is the internal design flexible enough to be able to adjust usage such as splitting one shop into 2 or 3 separate small shops?
5-Yield – what is the current yield, is it below or above market, are rental reviews tied to CPI or incremental? How long do the current leases have to go before you can renegotiate? Who handles building maintenance?
Keeping these things in mind when you are looking for an investment is going to provide you with a much stronger case for owning a property that will give you the long term results you are probably looking for.
Couple that with the other tweaks we've made to our strategy and you've changed a property that's costing you money and might have some chance of growth if you can hold it (and continue to pay out) long enough.
You can have a property that has plenty of scope for manufactured growth, is housing a strong tenant, on a long lease and is paying you solid, positive cash flow returns.
That, my friend, is what's called a “No-Brainer.”
While so many people literally hamstring their own income by buying negative, one of my commercial property students took just 45 days to learn my system and lock in a small first property. Straight out of the box he was getting 9% yield, with growth in the lease taking it to almost 12% over the next four years.
That's 3x the yield of most residential and the very things that take it from a burden you've got to carry to wings that take you higher.