Australia has one of the world’s strongest property markets. This has led to real estate being a popular option for anyone looking to invest their money.
As with other types of investing, there are numerous strategies for purchasing properties. The strategy you choose determines your short and long-term goals, the income generated by your investments, as well as how you handle your properties.
Property investment strategies are a big topic to cover. Advice on the matter is usually provided by a property investment company, but it’s a good idea to do some reading on your own. In this article, we’ll look at Australia’s top 5 most popular investment strategies to help get you started!
1. Buy and Hold
Buy and hold is the simplest and most popular property investment strategy in Australia. Under buy and hold, investors purchase a home and hold onto it for the long-term. This allows you to take advantage of capital growth over time.
Given that Australia’s property market has grown at a rate of 6% per year over the last few decades, this is a strong way to turn a profit. While holding onto the property, investors pay their expenses by renting it out. This allows for either a positive or negative gearing strategy, and it means the investor isn’t left out of pocket during their ownership.
Buying and holding an investment property can return tens or hundreds of thousands of dollars in capital growth, along with a steady source of income along the way.
2. Renovate and Hold
Similar to buy and hold, renovate and hold involves purchasing a property that needs work. By renovating the property, you are able to add significant value that will become a direct profit at sale time.
While this strategy is effective, it comes with greater risks than simply purchasing a property to hold. Renovating an entire house can cost hundreds of thousands of dollars. To make money, the improvements you make need to directly correlate to an increase in the final sale price.
Further complicating this strategy is the fact that you may not be able to rent out the house while renovating. If renovations take 12 months or more, this can put a significant dent in your savings. While you will be able to charge more rent once the work is complete, you need to ensure you have enough money to cover the immediate shortfall.
This strategy is best left to experienced investors. It takes practice to spot homes that are priced correctly for the renovate and hold strategy. Done correctly, this is the best way to make money on capital growth. Done poorly, this strategy can be extremely expensive, and it may even result in losses.
3. Positive Gearing
Most investment properties are rented out to tenants. With positive gearing, the rental income your property generates is worth more than the cost of the mortgage, maintenance and other expenses.
This leaves you with positive income from your tenants.
For example, Sally purchases a home worth $500,000. Her weekly mortgage repayments and other expenses come to a total of $600. She charges her tenants $750 per week for the property. This leaves her with a net income of $150 per week, making the property positively geared.
This strategy is simple and effective. The only downside is that your positive income is counted towards the rest of your income, resulting in paying more taxes throughout the year. Some of these tax expenses may be able to be offset with the deductions you’re entitled to as an investor.
4. Negative Gearing
Negative gearing is the opposite of positive gearing. The amount of income you generate from your tenants is less than the ongoing cost of maintaining the property.
If we reuse our example from above, Sally may choose to negatively gear her $500,000 investment property. She charges her tenants $580 per week. This means her investment is costing her $20 per week, making it negatively geared.
This sounds counterintuitive, but Australian investors are entitled to a range of tax deductions that cover the expenses of investment. This includes shortfall due to negative gearing.
Negative gearing is a popular strategy for high income investors. By negatively gearing investments, it’s possible to offset your normal tax obligations and come out on top. That is, it’s possible to use negative gearing tax deductions to earn more than you would if the property were positively geared.
The downside to this strategy is that it’s your responsibility to cover the shortfall. Sally is only paying $20 per week to maintain her investment, but negative gearing could cost you hundreds or thousands each week. You need to make sure you have sufficient income to cover the costs associated with negative gearing.
5. Flipping Properties
Flipping properties is a short-term investment strategy that involves purchasing an investment, improving the property (e.g. through renovation) and then selling it as soon as possible.
This strategy has been popularised by reality TV shows, but it’s one of the most difficult types of investing to do successfully. It’s difficult because investors need to carefully balance the upfront costs of purchasing the home against the renovations that are required. It’s possible to make lots of money in just 3-6 months of work, but it’s also possible to lose hundreds of thousands on the wrong investment.
If you want to flip properties then you will need to become experienced in judging the value of a property before and after renovation. This allows you to make offers that leave room for profit. You will also need to familiarise yourself with the common costs associated with renovations, as well as things that can go wrong along the way.
