Capital growth is about timing the market as it is time in the market.
Generic or manufactured capital growth
There are two ways for a property to have capital growth.
Capital growth can driven by the market (passive property strategy). It can also be manufactured through strategies like renovations and developments.
Capital growth properties located in inner city areas
Generally, negatively geared properties have negative cash flow. They are located in inner city areas, and in high population growth areas. These properties usually have higher and consistent capital growth over the longer term. This is when land availability is generally scarce.
This could be a reasonable strategy if you can guarantee that you can make a profit from capital growth when you sell.
Select capital growth properties carefully
Properties that begin as negatively geared investments may become positive cash flow producing assets in the long run. Rental income increases should be regularly accordingly to market demand.
These properties are usually more expensive than cash flow properties in terms of purchase price, stamp duty and land tax.
Due to the compounding effects of capital growth, you could build wealth far more quickly by investing in high capital growth properties. Depending on your real estate investment strategy, serviceability and financial situation, you may want to focus on high capital growth areas first. Then revert to more neutrally or cash flow positive properties to support further lending.
Government supports capital growth properties
The government also makes it attractive for investors to purchase capital growth properties. They offer tax benefits via negative gearing and delayed capital gains tax.
When there is a capital gain on the sale of the property, capital gains tax is paid. It is calculated by identifying your net gain (after capital expenses). Then dividing the gain by approximately 50 percent as a tax concession. Note however that Government policy change could remove this discount. That figure is applied to your marginal tax bracket. On average it may equal approximately 25 percent.
Rental income increases over time
Over time, your property rental income should increase. While the value of the property appreciate, or increase, in value as well, the purchase price will always be the same. Use the original purchase price to calculate the rental yield. As the rent income increase so does the rental yield. Accepting a small negatively geared property may quickly turn into a positive cash flow property might be better than not buying at all.