Passionate, energetic and extremely focused, Amber Werchon is one of Australia’s highest sales achievers. She has sold over $54 million dollars worth of property, was the youngest person to ever receive the REIQ Salesperson of the Year from 2005 to 2007, and has recently established her own agency, Amber Werchon Property.

What makes a good investment?

July 29 | Amber Werchon

When purchasing real estate, there are two types of returns that people look for.

The first is known as capital growth. This is the amount by which the property’s total value grows, since the day you purchased it.

So if you purchased a property for $550,000 and you sold it for $650,000, the property had a capital growth of $100,000. You must remember here to take off the purchasing costs (stamp duty) and the selling costs (real estate agent’s fees, marketing, conveyancing), to work out your net profit (before tax).

The second area is rental return, known as capitalisation rate. This is the amount that the property returns, given the rental figure on a yearly basis over the total cost of the property – ie purchase price plus any improvements.

So if you purchased a property for $400,000 and it was returning $350 per week, you would simply multiply $350 x 52 weeks = $18,200, then divide it by $400,000 to equal a return of 4.5%.

The cost of money is the current rate of interest that the bank is charging, should you borrow funds. If the cost of money is, say, 7% and the property is returning 4.5%, then there is a difference of 2.5%.

As the difference is negative – ie you would need to inject cash to pay the loan – then it is known as negative gearing. Many people use this as an effective taxation strategy, but it is best to seek the advice of your accountant to see if it suits your circumstances.

In some cases, the capital growth potential of a property far outweighs the rental return. For example, a block of land close to the beach would escalate in value, yet the return would be non-existent without any improvements such as buildings.

Other properties may have a very strong return, such as newer high-density accommodation in a less sought-after location, but the capital growth may be restricted because of the lack of land content, land appreciation, or the fact that there is limited improvement opportunity, hence this is factored in by the consumer at time of purchase.

No matter what your desire, whether it be cashflow (rental return) or end profit (capital growth), an investment property can provide not only a great investment but an effective tool to assist in minimising your tax.