Why would an investor buy a property for $$$ and rent it for $ ?

I'm not sure if this is a negative gearing thing or what, but I'm interested in understanding the economics involved when I see a property sell for $1.4m, and then go on the rental market for $500/wk, or similar.

For a "normal" situation with a 20% deposit, mortgage would be like $3800/mo and rent would only take in $2000/mo. Why would someone do this?

My uneducated guesses are:

- Owner has a large portion of the mortgage paid off so their repayments are very low, any rent is bonus, and lets them sit on the property for a few years in hopes of selling for a big windfall

- There is some sort of tax benefit (negative gearing? I'm not really sure how it works)

- Investor wants to own the worst house on the best street

So yeah, how does it work?

 

For a good investor, it will be purely because they have another strategy to make money from the property, that isn't just "rental income".

 

So why would anyone buy shares that dont pay a dividend?

Because the owner thinks property will appreciate by more than they lose. That may or may not happen.

For a 1.4 property, say you lose 10 or 15 or 20k a year. If it goes up 5% a year, it goes up 70k the first year, and by the 14th year it goes up 140k a year.

 

Capital Growth > Cash Flow

 

There are only a few reasons why as an investor I might do this.

1. Is if the land has development ability and it's bought with the short-term NCF in mind as an overall business cost once the development is sold. This way it can be justified.

2. Is if I expect the area to have massive growth over the next few years to justify the NCF. This is pretty much crystal ball stuff which I mostly stay away from.

Many people accept some modest NCF in the hopes their DD works out and their area grows. But once you are talking about massive short falls in cashflow each week, to just hope your area grows is simply high risk and generally not sustainable for most. And it's not something which makes sense to me for the vast majority of investors.

 

This!

There are many ways to make money from Real Estate.