TRADING VERSUS LONG-TERM CAPITAL GROWTH
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Articles by John Rowe
There is a lot of talk about the current property boom in Auckland and how prices will continue to rise due to the high demand for housing. There are two ways investors can benefit from those capital gains, one less risky than the other.
Strategy 1
The first strategy, which we've seen a lot of people doing, is to buy a property in a high capital growth area, with the idea of holding on to it long-term in the hopes of making a financial gain. The trouble is, most high capital growth properties generate negative cash flow due to their low yields. In other words, the rental income doesn't cover the cost of owning them.
At the end of the day, a profit will be made if and when the value increases, but this poses three risks:
• Pressure on cash flow, having to contribute to the costs of owning the property from your own pocket. If something happens to reduce your personal income, you may not be able to hold on to the property.
• Possibility that the increase in value will not be as great as expected.
• Chance that the market will correct and the bubble will burst before you decide to sell, reducing or eliminating gains.
Strategy 2
The second option is to trade - buy property and on-sell quickly for a profit. Yes, you have to pay tax and the profit will be smaller, but your exposure to risk is greatly reduced.
If you buy for the right price and/or add value in some way (e.g. with cosmetic renovations), you'll be able to sell for more than you bought the property for and make a tidy profit. You are not relying on long-term growth, nor do you have to cope with a drain in cash flow.
What's more, you can repeat this strategy multiple times, so at the end of the day your total profit will be as much as, if not greater than, the capital gains you would have made from a long-term hold property.
We believe that in this market, trading is a superior strategy to holding a low yielding property long-term.
John Rowe
Director
Business Accounting Services
© Gilligan Rowe & Associates LP
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Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.
Comments
Testimonials
This letter is to express my appreciation for the assistance and encouragement of both Anthony Lipscombe and particularly John Heaslip over the last financial year. The period since activating my trading trust has been one of considerable stress, as well as personal development, as I embarked on this as a relative business neophyte with virtually no awareness of the contemporary requirements of running a business, particularly the financial records aspect. During much of this period I have therefore felt considerable out of my depth. However I have been lucky enough to have had the benefit of the advice and support of John Heaslip in rationalizing what was a fairly chaotic set of records of the first year property trading. I am able to say that John in particular, has been unstinting in his attention to my needs and has done so in a manner which has never alluded to my extremely rudimentary grasp of managing a business, or even of being unable to set out a spread sheet properly. The result of the above guidance is that now, although my trading trust would still not be able to operate without the advice of GRA, I do least feel a sense of satisfaction that I have got to my present point without major disaster and that my property trust does now have some kind of firmer basis for any future activities - Name withheld by request
Gilligan Rowe and Associates is a chartered accounting firm specialising in property, asset planning, legal structures, taxation and compliance.
We help new, small and medium property investors become long-term successful investors through our education programmes and property portfolio planning advice. With our deep knowledge and experience, we have assisted hundreds of clients build wealth through property investment.
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