How to combat Australia’s rising cost of living
If, like many Australians, you find your cost of living rising, owning an investment property could help make it easier to meet the bills while also saving for your future. We explore how.
Property’s role in helping you contain your expenses
For many Australians, the cost of living is rising but the amount of pay we’re getting in our pocket simply isn’t keeping pace. In this article, we explore how owning an investment property – or even several – could help you stay on top of your finances while also setting you up for the longer-term.
The power of positive gearing
There are two ways you can own an investment property: negatively geared or positively geared. When you negatively gear a property your outgoings – in the form of mortgage repayments, property maintenance and management fees – are higher than your incomings, or rent. When you positively gear, it’s the other way around, where the rent you receive makes you more money than you spend on the property.
Negative gearing attracts a lot of the headlines at the moment, especially as the government offers tax incentives for investors to use this approach. However, positive gearing is powerful in its own way too – not least because it can help you generate an additional revenue stream you can use to meet your living expenses.
An example of positive gearing for cashflow
Say, for instance, you buy an investment property and your mortgage repayments are $400 a week. If your tenants pay you $500 a week to live in your property, you would be receiving an additional $100 a week to use for your living expenses – minus, of course, any costs associated with managing or owning the property.
Better still, chances are that the rent you can charge will rise over time, meaning that this amount will grow. If you keep adding additional properties to your portfolio, you could over time, generate a reasonable amount of income.
Be careful of looking only at yield
That said, properties that generate a high income, or high yield, are often on city fringes or in regional areas where fewer people purchase their home and demand for rental properties is higher. Investors need to always be careful of investing in these areas for the long term as they often experience lower capital growth than premium areas close to the city centre. This means, in the long-term the rent they provide may not keep pace with your cost of living needs.
A better approach is to focus on areas likely to experience high ongoing demand due to proximity to infrastructure, as well as to lifestyle and employment benefits. For example, this could be a growth area like South East Queensland [LINK to SEQ article]. This offers you the opportunity to experience the best of both worlds – competition for rent, as well as capital growth potential.
Negative gearing property to help meet your future cost of living
While positive gearing may help you directly meet your living expenses, there are other ways property can be used to meet your cost of living indirectly too. For instance, by negatively gearing a property you may be able to reduce your overall tax bill while saving for your future. Because you would reduce the need to then save from your after-tax income, this could potentially leave you with more for the here and now.
Importantly, as time progresses and rent increases, negatively geared properties also tend to become positively geared ones. So, by purchasing a quality property in a quality area you could be setting yourself up to meet your future cost of living needs.
This can make property investing an effective strategy for paying for your retirement outside of your super.And the good news is that unlike your super, you’ll be able to access that income before you reach retirement age.
The cost of living may be rising, but by making the right investment decisions, you may be able to use property to meet any increased expenses both now and in the future.
If you’d like to find out more, get in touch.