With investors making a recent return to the market, as first home buyer demand subsides, I feel it is good timing to look at investment strategy in relation to purchasing an investment property.

The first question you should ask yourself is 'What is my motivation for investing?'

Is your driving force to create long term wealth for retirement OR simply a way to reduce tax without forking out too many hard earned dollars at the end of the day?

This is one of the first questions I ask clients and to be honest it is something some people have never even contemplated: why would I want to invest?

Determining your reason for investment is important because the two strategies mentioned above cater for different investment markets. Are you looking for long term capital growth or are you seeking to minimise your after tax contributions to the investment and hope it takes care of itself with little input or direction from you?

If its the latter then you are likely to be seeking a newer property, probably a strata titled unit with very good rental return (high yield) requiring little maintenance and easily tenanted. Being a new property you can depreciate the building and most of the fixtures and fittings within its walls (e.g. air conditioner, dishwasher, alarm system etc) creating a decent tax deduction in the first few years. Savvy software programs can map out your initial tax savings based on the estimated rent, depreciation write offs, etc and, depending on interest rates at the time, it may even be cash flow positive so effectively the investment is paying for itself.

For long term capital growth a different approach is wise. An investment property has two components: a land component and a building component. Over time, the land appreciates in value whilst the building, like any capital item, depreciates in value. So those who take a longer term investment approach are best to look at property with a higher land component than say a strata-titled unit which has very little land component to it.

So from a long term investment perspective, older homes on bigger blocks which allow for future subdivision may look more attractive. Of course the downside to this approach is the rental yield from an old property will not be as high and property upkeep will be more expensive as things need repairing and replacing in order to keep it tenantable.

It will come down to choice and your investment time frame. If you are in a high tax investment to help save tax and possibly make a small profit over a few years then perhaps the newer, low maintenance unit is your preferable option.

If the aim is to accumulate a property portfolio over time, hold the real estate for as long as possible with likely higher holding costs, then you will bear the fruit of long term capital gain which would outweigh the tax benefits of the other investment option. Over time, properties with a higher land content proportionate to the total property value, will see the land content become close to the entire property value, allowing you options to redevelop the property without having to write off a loss from the value of any building remaining on the property. With an apartment in a block of 100 you cannot just knock down the walls and redevelop. You are bound within those four walls to make your mark on the property thus leaving you with fewer options in the long term. I have seen some very savvy investors over the years who have built a property portfolio, bought in the right locations for the right price, with rents climbing to the point where they are almost cash flow positive based on their purchase price, while retaining a high land content assuring good capital growth.

Your Catalyst broker can assist you in determining your property investment goals and how best to structure your debt to obtain the highest tax deductibility and ensure long term affordability.