Creating Your Own Property Investment Strategy
Investing in property has long been a popular way for Australians to build wealth. Yet far too many people purchase an investment property without really knowing what they hope to achieve.
Many understand they need to invest for their future. Some even recognise that property investment might offer various other incentives and benefits aside from wealth creation. There are also those who buy a rental property because everyone they know says it’s the right thing to do.
But how many actually create a customised property investment strategy that works for their unique financial situation?
Why do you need a property investment strategy?
Let’s face it: your financial situation and goals aren’t the same as anyone else’s. Your income and expenses are unique to you. Your family needs, your lifestyle choices and plans for your future are also individual to you.
When you get right down to it, you also have different dreams and goals and a different appetite for risk to anyone else. Even the type of property you choose to add to your portfolio and the location you prefer might be completely different to another investor’s choices.
So why would you consider using a property investment strategy that works for someone else’s financial situation?
Taking the time to create your own customised property investment strategy allows you to focus on what works for your unique situation. You can choose how much you want to spend, how you want to structure your investments, decide how and when you want to sell or whether you want to pay down your mortgage and generate rental income for cash flow.
Rather than simply trying to follow what works for someone else, consider how you can tailor their strategy to suit your personal needs instead.
What should go into your strategy?
In order to create a solid strategy that works for you, it’s important to begin at the end. Determine what goals you hope to achieve by investing in property first. When you have a clear destination in mind, it becomes easier to form a plan to help you get there.
As with any type of investment, there are inherent risks to take into account. The objective behind creating a strategy for your property investment portfolio is to minimise any inherent risks wherever possible.
Your strategy should also account for the finance structures and ownership options that work for your needs. It’s also important to check how owning an investment property could impact your tax situation.
At the same time your investment strategy should also incorporate ways to optimise your cash flow, maintain your portfolio, and develop long-term capital growth.
Here are some of the more common strategies used by property investors.
Buy and Hold existing property
The ‘Buy and Hold’ strategy is perhaps the most common strategy among Australian investors. You buy an existing property and you’re able to rent it out to tenants to generate rental income right from settlement day.
The Buy and Hold strategy also incorporates the goal of generating capital growth over a period of time. The rental income you receive helps you cover the costs associated with owning the property until you’re ready to sell.
Build and Hold newly-constructed property
Some investors prefer the option of buying vacant land and building a new home on it. This strategy needs to take into account the interest costs that need to be paid during the construction period when there is no rental income yet.
A newly built property may offer different tax benefits to buying an established property, which could form a part of your overall investment strategy. Some tenants may also be willing to pay a premium to live in a new home that offers better energy efficiency and more modern designs than an older home.
Negative gearing simply means the rental income you generate from your investment property is not enough to cover all the costs associated with owning the asset. Many Australian investors love negative gearing, as it can provide a range of tax benefits.
The rental income you receive still helps towards covering some of those costs. However, negative gearing also allows you to secure an asset in a prime location in the hopes of generating good capital growth over a period of time.
Positive gearing simply means the rental income you receive covers all your costs, including your interest payments, council rates, insurances and management fees. Investors focused on generating cash flow tend to aim at creating positively geared investments.
However, many newer investors may find it challenging to find positively geared properties that are ready to go. In most cases, positively geared properties tend to be located in outer suburbs or regional centres that often have lower demand and fewer resources than metropolitan areas.
In fact, many investors begin with negatively geared properties that become positive over a period of time. As the rental income increases each year, you increase the capacity to cover the ownership costs, until eventually the property becomes positively geared.
Units, apartments, townhouses, or houses
There are property investors around who have a strong preference for one specific type of property to add to their portfolio. Others are happy to use a combination of property types to help spread their risk and appeal to different sections of the rental market at the same time.
Units and apartments can sometimes provide investors with a lower cost option for getting into the market. Townhouses are often built alongside other homes of the same type and appeal to investors who want a low maintenance home. Freestanding homes often have yards and gardens that need to be maintained, but may appeal to tenants with families.
Renovate and flip
Not all investors want to hang onto a property forever. Some are happy to buy only with the intention of selling quickly to reap the profits. This is commonly known as ‘flipping’.
Some investors love the idea of buying a ‘bargain’ property in the hopes of renovating it and selling it off at a profit. The throng of renovation TV shows has increased the popularity of this strategy enormously in the past decade or so.
The objective is to find a home with sound structure that needs a little TLC and buy it at a lower price than other homes in the surrounding area. You spend a little more money completing your renovations and giving the place a makeover, before putting it back on the market at a higher price.
While this strategy seems relatively easy on the surface, there are a number of things to factor into your plans. When you take into account the purchase costs, such as stamp duty, and then add the cost of the renovations, the amount you pay to acquire the property could end up higher than you expected.
You also need to take into account the real estate agent’s selling fees, plus any capital gains tax you need to pay after the sale. The potential profit you stand to make from your hard work could be eaten away by fees if you’re not careful about your project budget.
Some property investors love the idea of developing an existing property into two or more properties. The idea behind property development is to purchase land or an older property on a great block in a highly sought-after location and subdivide it to create something different.
You might choose to divide the original block in half to create two or more separate titles over smaller blocks of land and sell them for other people to build on. Alternatively, you might decide to develop the newly created blocks and build two smaller homes on them.
A property investment strategy after the development is complete could include selling both homes, selling only one property and renting the other, or renting both properties and holding them for the long term.
Property development has the potential to generate great profits and can be intensely rewarding, but it’s certainly not a strategy for a beginner. If the project isn’t managed properly, there is a risk of losing money, especially if budgets blow out, timelines are extended and the property market doesn’t reflect the sale prices you hoped to achieve.
Mix and match
The beauty of creating your own customised property investment strategy is that you’re free to mix and match various options to suit your needs. You might choose to build one property and buy another.
You could decide to purchase a brand new, off-the-plan apartment in a CBD or central location and a modern townhouse in a beach location to appeal to completely different prospective tenants. You might also decide to try your hand at renovating an older property to increase its value and manufacture your own equity.
No matter what you decide, your investment strategy should be suited to your unique dreams and goals.
Take the time to make an appointment with an Assured consultant and ask how we can help you create your own personalised investment strategy today.
This article provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied upon as such as it does not take into account your personal circumstances or needs. Professional advice should be sought prior to any action being taken in reliance on any of the information.