WHY CAPITAL GROWTH IS AN ESSENTIAL PART OF AN INVESTMENT STRATEGY

Residential real estate in Australian capital cities and large regional centres has been an attractive and relatively secure option for investors for many years. Steady and continuous economic growth for 29 consecutive years was reversed only by the pandemic. Tax incentives such as negative gearing opened up investment in real estate to people who might not otherwise get the opportunity.

There are two factors that need considering when investing in real estate. The first is the rental income that can be gained from sound property management and good tenants. The second is capital growth which occurs as the value of the property increases over time. Choosing one over the other is not a simple decision and often depends on individual circumstances.

Regular rental income is important to investors who are relying on the net income to assist with the mortgage repayments on their investment property. Any shortfall would usually be made up by the owners out of their own funds, so the longer the property remained without a paying tenant, the more difficult their financial position could become unless they had considerable alternative resources.

Capital growth is a long-term proposition as it is something that occurs largely due to market forces. Economic conditions, fluctuations in supply and demand, an increase or decrease in the population of a certain area and other demographic shifts are events which are out of the control of the investor. The only thing they can control is the condition of the investment property. Regular maintenance, improvements and renovations keep it in good condition, allowing it to increase in value.

Prudent investors enter the property market on the understanding that they are embarking on a long-term strategy. Historical data shows that the capital growth to be had by holding a property for as long a time frame as possible will far outweigh the value of the rental income over a corresponding period of time. However, for some investors, an immediate injection of rental income may be part of their own, albeit short-term, strategy.

Property investment is a popular wealth-creating strategy, not only among the general population but also for the trustees of SMSFs (self-managed superannuation funds). While they are also looking for rental returns, their focus is long-term as they build sound foundations on behalf of their fund members.

Fund trustees also carry the responsibility of the reporting requirements necessary to keep their funds compliant with ATO (Australian Taxation Office) requirements. This is in addition to managing the fund investment portfolio. However, many fund trustees are now turning to companies like SMSF Assure that specialise in managing the administration tasks on behalf of their clients, allowing the trustees to keep their focus on fund investments.