Top 10 Property Investment Strategies
There are plenty of different ways to build wealth through property. Unfortunately, choosing the right strategy to suit you can be overwhelming, especially if you’ve been receiving conflicting advice or spoken to different experts about your options.
For example, a property developer may suggest an off-the-plan property is your best option, while accountants may suggest building a new property to maximize depreciation options. Well-meaning friends and family may also suggest other strategies that worked well for them in the past.
The key to choosing the right property investment strategy to suit your financial goals is to remember that your personal financial situation is different to anyone else’s. What worked for them may not be suitable for your financial goals.
To determine which bricks and mortar option suits you an analysis is needed to match the property to your needs. Then you’re in a stronger position to make your decision based on how each one fits within your overall strategy.
Here are our top 10 property investment strategies:
It seems almost too simplistic, but buying and owning your own family home is the most basic form of property investment there is. In fact, the majority of property owners buy a family home and then spend all their time and effort paying down the mortgage.
Many people don’t consider their family home as a property investment, but the reality is that you’re still buying an asset that has the potential to increase in value over time.
Buy and hold
Perhaps the most familiar type of property investment most people associate with is the ‘buy-and-hold’ strategy. You simply buy a rental property, lease it out to tenants, and collect rent over the long term with no intention to sell in the near future.
The objective of the buy-and-hold strategy is to benefit from the rent received during your ownership of the property, plus the prospective capital growth the property could achieve over time.
There are two primary options used with the buy-and-hold investment strategy. These are:
Negative gearing: Negative gearing means that the rental income received doesn’t cover all the costs associated with owning the property. However, the primary objective is to hold the property until such time as the market value increases and the investor can realise a capital gain or release equity to purchase more properties. The landlord is expected to cover the shortfall of funds required to cover expenses from salary, but there are some tax benefits to take advantage of that could potentially reduce a tax liability and improve cash flow overall.
Positive gearing: Positive gearing means that the rental income received is larger than all the costs associated with owning the property, even after depreciation is taken into account. Many landlords aim for positively geared property to generate cash flow from the rental income received.
Most people delay getting into property investing until after they’ve bought their family home and paid down the mortgage. However, there are plenty of Australians who are choosing to get into ‘rentvesting’.
Rentvesting simply means you remain living at home with your parents or renting from a landlord, but you buy a rental property and charge your tenants rent. For some people, the opportunity to enter the property market and have some of the costs of ownership offset by rental income can be an appealing way to start building wealth.
Buy, renovate and flip
Not every landlord wants to hang onto a property for years or even decades to take advantage of profits. Many property investors search for homes in need of renovation and purchase them with the sole intention of upgrading, repairing, or otherwise renovating them in an effort to increase the resale value.
The objective is to buy the property at a bargain price, spend some funds completing renovation works and then re-sell the property at a profit. On the surface, it sounds like a relatively simple way to generate profits. However, it’s also possible to spend more money completing the renovations than originally expected and completely blow the budget. There’s also the risk that the property price may not increase as far as expected, which reduces the potential profit.
Buy, renovate and hold
The idea of buying a home, renovating it and holding it in your investment portfolio for a period of time is a direct combination of two strategies. The objective is to purchase a home at a relative bargain, spend money upgrading or otherwise renovating it to improve its market value, and then renting it to tenants to generate cash flow.
Property development offers investors the potential to turn one property into two or more properties. The objective is to source a property in a great location where the potential exists to transform the original home or land into something completely different.
For example, you might demolish an old home and develop it into a courtyard of four or five townhouse homes. Alternatively, you might choose to simply sub-divide a large block of land into two or three new titles to take advantage of the demand for low maintenance housing in inner city suburban areas.
While the opportunity exists to generate lucrative profits when property developments are done correctly, there is also a significant risk of losing money if you’re not careful about planning and managing absolutely every step of your strategy in detail.
Indirect property investment
Not everyone has the risk tolerance to buy a rental property and deal with being a landlord. Likewise, not every investor has the energy or enthusiasm to renovate or develop.
Fortunately, there are more passive forms of investing available that allow you to invest in property with minimal risk and minimal work. Some investors prefer to put their money into managed funds or real estate investment trusts (REITs). The advantage of investing in property through a managed fund or other type of property investment fund is that you can get started with a relatively small investment and it’s not necessary to borrow money to enter the market.
Many funds offer moderate returns on the money invested that may not seem exciting, but considering there is substantially less risk and less time spent, it’s still a strategy that works for some people.
When most people think about property investment, they automatically picture residential rental homes. However, some investors do very well investing in commercial property.
With a commercial property, your tenants are business owners who rent the premises in order to operate their businesses. Commercial properties might include offices, warehouses, showrooms, shopping malls, industrial buildings, medical clinics or consulting suites, hotels, or even commercial farms.
In many cases, the rental returns can be higher for commercial properties than for residential rental homes. However, the risks can also be potentially much higher, so it pays to do your due diligence before deciding on a commercial property to your investment strategy.
Buying property in super
In some very strict circumstances the government may allow you to purchase an investment property inside a superannuation environment. They may also further allow you to borrow money to increase your purchasing power.
Choosing to buy an investment property gives you the opportunity to take control over how your retirement funds are invested. However, the process is complex and requires the involvement of many experts, so it’s crucial that you seek professional advice before deciding if this path is feasible and or suitable.
Mix and match
Savvy property investors understand that the real estate market goes through certain stages. There are points in the market when it might make sense to build a new home as opposed to purchasing an established property. You might realise that it sometimes makes sense to negatively gear one property for various tax benefits or potential capital gains benefits, while it might also make sense to keep a positively geared property in your portfolio while it’s generating cash flow. There are times when sub-dividing and developing a property may be more lucrative, and other times when renovating or flipping a property will be better suited to your overall investment strategy.
There is no right or wrong strategy when it comes to property investing, especially when you might have the opportunity to mix and match a variety of tactics to suit your preferences based on each individual opportunity. However, the real key to building wealth through property investment is to choose the right combination of strategies to suit your personal goals and your financial needs, so make sure you talk to the experts at Assured before you get started.
The information in this article is of a general nature only and does not consider your personal objectives, financial situation or particular needs.