These are properties with a low capital growth profile of 4–6 per cent and a high rental yield (return) profile of around 6–10 per cent. Occasionally the capital growth can be very high for a short while.
Advantages:
Positive or neutral cash flow
Use surplus cash flow to pay down principal and obtain more equity for future investment
Small entry price—easy to get started
Lower stamp duty & land tax
Occasional good equity jump due to demand for high yield properties
You can't lose with money in your pocket (unless you get in too late)
Easier to get a full-doc loan
Disadvantages:
Pay tax along the way (money in the taxman's pocket is not going to create wealth for you)
Slower capital growth over longer period
Usually regional or outer areas which can be quite sensitive to economic cycles
Harder to get low-doc or no-doc loans for some regional properties due to postcode & population
Lower leverage to reduce return
Potential higher maintenance of property
More tenancy problems due to social economics
Growth properties:
These are properties with a higher capital growth profile of 7–10 per cent (and occasionally over 12 per cent for a short while) and a lower rental yield profile of 3–5 per cent (occasionally below 2.5 per cent).
Advantages:
Tax benefit: negative gearing and delayed CGT
Usually consistent capital growth over longer term
Typically inner and high population areas which are not affected as much by economic cycles and interest rate fluctuations
Easier to get low-doc or no-doc loans
High leverage available
Potential lower maintenance of property and less tenancy problems due to better social economics
Equity increase can be available to invest further
Disadvantages:
Negative cash flow if you take on a normal mortgage at a high leverage level
Usually more expensive than cash flow properties—potential entry barrier for beginners
Higher stamp duty and land tax
No guarantee of capital growth every year
Harder to get a full-doc loan to access a cheaper interest rate mortgage as your portfolio grows
