peninsula living 65

property

Richard Sheppard is the managing director

of inSynergy Property and Finance Solutions.

Phone 1300 308 808 or visit insynergy.net.au.

Low rates + high rents = property investment profits

A combination of historically-low interest rates and high rents in some markets has created a rare opportunity for property investors who target the right locations, says Richard Sheppard.

Rarely do the economic fundamentals offer a better opportunity

in property.

With very low interest rates available from lenders and

relatively high rents in some markets, investors have a rare chance to

buy high-growth properties that are positively geared.

In February, the Reserve Bank of Australia cut an already record low

interest rate to a cash rate of 2.25 per cent, and many commentators

are predicting a further cut soon. This has translated to variable

interest rates that are as low as 4.35 per cent in some cases, while

five-year fixed rates are around 4.49 per cent from some lenders.

Factoring in high rents in select markets that deliver returns

exceeding those low interest rate costs, you can see the picture is

bright for smart investors. Now is a great time to buy and, for people

with equity in their home or other investment properties, it makes

sense to use it to invest in the right areas. You still need to be very

selective about where to invest as there are only two capital cities

with strong growth forecasts (neither of them being Sydney).

Most home buyers are familiar with negative gearing, which allows

people to claim a tax deduction for losses incurred on an investment

property at the end of the year, but it only offsets part of the loss.

A positively-geared property on the other hand means your rental

income exceeds the outgoings on the property, including your

mortgage repayments and other expenses. Such a scenario is often

difficult to achieve, but with low rates and high rents in certain cities at

the moment, there is a chance to generate a decent passive income.

Although most typical cash flow-positive properties deliver low

growth, the current interest rate environment has changed the

outlook. Investors have the chance to purchase blue-chip properties

that would normally be negatively geared. Thanks to the low interest

rates and high rents, they can be positively geared for at least five

years through a five-year, fixed-rate loan.

With a conservative growth forecast of 17 per cent over three years

in some markets for an average property – and if the property is well

selected on the back of good advice from an advisor – investors

could hold the property for five years at no cost, while having a

very good chance of achieving 20 per cent to 40 per cent growth

over that period. On a $500,000 property, such growth translates to

$100,000 to $200,000 – a fantastic return, especially if you are using

equity in an existing property.

While this opportunity to take advantage of low interest rates is

significant, even if rates rose to, say, seven per cent in the next two

years or at the end of a fixed-rate loan you have taken out, the after-tax

holding cost is only about $100 a week. So there is a real chance to

use equity in current properties at little cost.

The opportunity to positively gear in the current interest rate

environment underlines the importance of

market research and doing your due diligence

before making an investment decision.