Have you ever wondered why property investment strategy is such a hot topic amongst business professionals and ordinary Australian residents? If so, you’ve come to the right place.
Have you ever wondered why property portfolio strategy isn’t the same for every Australian region or person? Because there are different methods that work but only a few that are a long term plan for success. It doesn’t matter whether you’re a successful business owner or simply a motivated individual looking for a new revenue stream to secure yours and your family’s financial future. If so you’ve come to the right place.
With so many risky investment options on the market, many people turn to property investment for lower maintenance, reduced risks, and long-term rewards.
Easy and effective investments may sound too good to be true—and sometimes they are. The best property investment strategies require ample research, knowledge, and planning that take more effort than purchasing stocks.
Many people falsely assume that buying and renting out a house has zero risks and 100% rewards, but even the most experienced investors often fail. So how can you build an adequate property investment plan that won’t lead you into debt?
Read on to learn about all of the risks and best options to understand what may go wrong and how to avoid it.
Spending your time learning about investment properties can yield incredible financial freedom results that can support you for an entire lifetime!
If you’re interested in building your property investment strategy, our team at Positive Real Estate is a top property investment company in Australia that will cover everything you need to know below.
What Is an Investment Property?
First, let’s start with the basics. An investment property is any real estate that you purchase with the intent to profit in some way or another. When you buy real estate, you are investing in the property’s short and long-term value.
An experienced investor may own dozens of investments, while others can flourish with one or two properties. Funding property investments is a great way to put huge chunks of your savings to good use so that it doesn’t just sit in the bank.
Property investors purposefully purchase a particular property that meets their portfolio building goals with the intent to renovate and sell, rent and hold long-term. A standard homeowner usually invests in a house to have somewhere to live, which means that the eventual selling profit is just a bonus.
Either way, owning property makes you an investor, so it’s critical to learn how to use your money the right way so that you can achieve financial freedom.
Why Is Real Estate Such a Popular Investment Strategy?
Property investment strategies stand out amongst other investments for a few reasons. The Australian property market continuously increases, which means that this investment should be fairly low-risk, assuming you’ve done your research and purchased in a growing area.
In comparison, investing in the stock market is a much higher risk, though sometimes, it creates a higher pay-off. Many people find that learning the ins and outs of buying and selling shares is far more complex than the housing market, because it requires on-going management of constantly moving parts.
You could also opt for investment bank accounts for a much lower risk, though these provide minimal short-term payouts and lower long-term results.
Investment properties make a perfect cross between the other options, with a low-to-medium amount of risk and a decent reward, depending on how much you invest.
Property values increase and decrease based on home improvements, population growth, and location in fairly predictable ways, so strategising is less complex than picking a stock.
You can use investment properties for short-term funds or develop a more long-term strategy for continuous cash flow throughout your life. We will cover each of these options more below.
Current Residential Property Market Trends
Since the property market is fairly predictable, investors can foresee what trends will arrive shortly based on past patterns. You can use these predictions to your advantage when generating your strategy.
- Continual surge in home buyer demands: Australian house values will continue to rise, creating panic-purchasing behaviours that only elevate the demand.
- Property investors’ demands may trump those of home buyers: Real estate investors and homebuyers often battle over houses, with one side typically reigning supreme.
- A steady increase in property prices: Australian house prices will increase due to improved buyer confidence post-pandemic, reduced interest rates, high demand, and continued economic growth.
- Buyers might pay above market value for location: Location is everything when investing in a house, whether you wish to sell it or make it your home. Paying above the market value for a home in a highly desirable location is nothing new, and this won’t end anytime soon.
- The suburbs may see lower capital growth: In the past, all Australian estate investments gained value at somewhat equivocal rates, but recently, this growth split in two. You can expect to see a larger value increase in capital cities and inner-city suburbs than in outer-suburban divisions. Purchasing from a gentrifying area can offer much larger profits, though you will have to fork out more money up front.
What Different Types of Investment Properties Should You Consider?
An investment property does not need to be a residential house. You can invest in many different types of properties depending on how much you want to pay up front, when you want to earn money, how much you desire to own, and how much work you’re willing to give.
An investment property is not always a residential house. There are many different property investment options that may be suitable for you depending on how much capital you’re willing to invest.
Some common investment property options include:
- Standalone houses: Residential standalone houses attract high demand and can yield strong returns.
- Apartments and condos: Purchasing an apartment can allow you to target renters, offering long-term cash flow.
- Townhouses: Townhouses offer more indoor/outdoor space than apartments, making them a popular option amongst renters.
- Villas: Villas are larger estates in rural areas with high-purchase prices and potentially large payouts if you can find the right location.
- Entire apartment buildings: Apartment complexes are difficult to come by since full companies join the bidding war, though these complexes can be a great investment option if you’re willing to front the higher price tag.
- Student housing apartment buildings: Many recommend against this option since the profit margin is substantially lower.
- Industrial or commercial real estate: Commercial property investments can be an excellent strategy, though not a great starting place for new investors since it requires ample market experience.
Aside from selecting which type of property you wish to invest in, you will also need to consider if you want something brand new or a second hand investment property and how much you want to spend.
Next, we will discuss the pros and cons of apartments and houses, new and old properties, and low versus high prices to help you determine the right property for your personal objectives.
Apartments vs. Houses
Investing in an apartment offers lower purchase prices with potential for high returns as renters usually pay higher rent for the location and amenities. Fully developed apartment complexes typically enjoy steady value growth, though you may struggle to find prospective tenants in less-developed areas. When buying older units, it’s important to note that renovating the unit to improve value can create challenges since the building owners and Body Corporates may restrict certain changes.
Property, more so houses with large land sizes, have consistently reported steady price appreciation and in turn are deemed a solid long term investment. Whilst it can be more expensive to purchase a standalone house than an apartment, houses are more inclined to appreciate consistently over the property investment period as they are highly sought after for families and particularly, renters with children and pets.
New vs. Old
Purchasing a new property allows you to sell or rent with minimal time-consuming renovations. Many buyers and renters prefer new builds, so finding someone interested shouldn’t be hard. The biggest issue with modern properties is how high the initial purchase price can be. In saying that, there are several tax benefits offered to new property buyers that second hand investment properties may not receive.
Opting for older real estate investments over new properties allows you to purchase at a much lower price and renovate to make instant positive cash flow. The established property strategy requires a lot of manual time and effort, so you must factor in maintenance costs and estimated time for the property development process.
Low vs. High Price
High-priced properties require a much larger deposit sum and loan uptake, however investing in higher price brackets can generate great rewards. Whilst during an economic downturn these property types can be harder to sell or rent as people are afraid of over-spending, they can also create the greatest capital growth % in times of an upmarket swing.
Cheaper properties will always stay in demand, even when the economy is bad, since people will want the lower price options. Depending on your financial situation, the down payment and mortgage repayments may be far more accessible. With lower land tax costs and reduced risks, lower priced properties are highly competitive and harder to come by.
Which Property Investment Strategies Will Make You Money?
Building your property investment portfolio involves more than just picking the property type, price, and age. You must also determine how you plan to make money off of that property. Many sound property investment strategies exist that offer different ways to earn profits.
The capital growth strategy involves investing in property with a larger capital growth history, meaning about a 7% to 12% price increase and a lower rental income potential at around 3%. Essentially, when opting for the capital growth strategy, you plan to primarily make money from the property’s natural value increase rather than the potential rental income.
To successfully make a decent income using the capital growth strategy, you must pick high-demand properties that offer above-average price appreciation. Typically, the best way to pull off the capital growth strategy is to purchase houses in a hot location that will continue to become more popular over time.
For example, inner-city properties offer far better results for capital growth than outer-suburban areas without city lifestyle advantages.
Capital growth properties offer more consistent, long-term profits, though paying your mortgage in the short term may provide additional challenges. Without constant cash flow, you need to ensure that you have the funds for monthly payments.
When attempting to rent a capital growth property, many investors struggle and experience negative gearing. Negative gearing means that your mortgage costs exceed the rental income you make each month, though you can deduct this loss from your taxable income. Some investors purposefully include negative gearing in their strategy, though most would not recommend this tactic.
Cash Flow Rental Income
Another popular property investment strategy involves investing in cash flow properties. Cash flow properties typically offer lower capital growth of around 4% to 6% but higher rental potentials of up to 10%.
Investing in strong cash flow properties allows you to make enough money from the start to cover your mortgage payments before eventually profiting.
With lower initial prices and reduced risks, the positive cash flow strategy is great for beginner investors, though managing the rental process involves more hands-on work and time.
You should keep in mind that this extra cash flow will often require you to pay tax bills more frequently. If you wish to avoid negative gearing, you must ensure that the rent you charge will cover all of your required payments.
Sometimes, you can achieve both cash flow income and capital growth by investing in a lower capital growth property upfront that you suspect will gain demand in the long term. Property investors would consider this strategy to be top-tier, making these properties rare and highly competitive. If you can find such real estate, you can enjoy both rental cash flow to pay off your mortgage and long-term capital gains.
Renovations and Developments
Another excellent investment property strategy is to purchase properties that require cosmetic enhancements, major renovations, or even entire builds. You can enjoy a low purchase price and instant high returns with the right property.
While renovation investment strategies may seem like an instant win, they also offer many challenges. Renovations require expensive and lengthy property development work. As a property investor, you must budget for expenses like manual labour, material, permits, inspection troubles, and more.
Property development takes more of your personal time as well since you must oversee all changes. Other investment strategies require manual effort, though renovations and complete builds typically involve the most work.
Property development strategies offer higher risks as well. Not only do you need to purchase the property, but you must also pay for all of the changes. If the house doesn’t sell as anticipated, this can result in you losing money on your investment
Out of all investment strategies, relying on tax benefits as your sole income is a poor choice. Instead, use this factor to your advantage in combination with one of our previous strategies for excellent results.
You should always follow tax advice to achieve maximum tax deduction benefits to save more money. Mortgage interest deduction strategies allow you to deduct interest payments up to certain restrictions so that you can save money and potentially purchase more properties.
Dealing With Rental Property Management
If you decide to go with the cash flow rental strategy, you must consider how you will deal with the property management. Even with 12-month-lease tenants, you must cover the application and screening process, property maintenance and repairs and sometimes, cleaning or maintenance between residents.
Each time one of your renters complains about a broken AC, leaky faucet, or burned-out light bulb, you must resolve the problem quickly. When owning multiple properties, managing each can become very time consuming to do independently.
Typically, an established investor will hire one or more Property Managers to oversee all leasing information and maintenance duties. A Property Manager can help you collect rent, manage tenants and tradespeople when maintenance is required.
The extra work involved with the rental investment property tactic requires that you budget accordingly. You will need to pay any Property Managers, professional cleaners, maintenance teams, property insurance, increased utility bills, land taxes, and all maintenance costs, including expensive appliance replacements.
Property Investment Pros and Cons
Now, since you understand all of the different ways that you can generate your property investment strategy, let’s discuss the general pros and cons.
All property investment strategies offer different benefits and risks and you should always consider the following:
Real Estate Investment Pros
Investment property benefits include the following:
- Positive property market history: Australia’s investment properties feature a track record of consistent and profitable results. Over the last few decades, you can see a strong upturn in the property market.
- Decent outcome control: Rather than placing your bets on another corporation’s decisions, you can take total control of your investment. You cannot prevent a company from failing, but you can avoid making your own poor decisions.
- Convenient lending: Banks or private lenders feel more inclined to offer you a loan on an investment property rather than market shares. Lenders understand that you can always sell the property to pay off a loan, but you’re out of luck if your stock fails.
- Tax protection: In some instances, you can take advantage of different tax offers and programs like negative gearing.
- Secure appreciation: Properties do not randomly fail like businesses do, which means you can depend on consistent value appreciation.
- Insurance: When it comes to the risks involved with renters, renovations, or property development, you can easily purchase insurance packages to protect your investment.
- Short and long-term income: Depending on the strategy for your investment property, you can enjoy both short-term profits from renters and long-term wealth when you sell the property.
Real Estate Investment Cons
Whilst real estate is a relatively low-risk investment, it still includes some disadvantages, including:
- Huge upfront investment: While you can pick your budget, investing in property generally requires a much higher upfront investment than typical stock shares do. Many buyers spend a minimum of $10,000 just on the deposit. As competition increases, so does the need for a large savings account or loan.
- Higher risks with fewer properties: Typically, beginner investors will start with just one property rather than buying multiple upfront. Placing all of your bets on one investment can be risky if you fail. While the property market is fairly low-risk, certain types of properties fluctuate in value more often than others.
- Unexpected expenses: When you own property, you must accept that surprise expenses will pop up at some point. You may need to pay for repairs, new interest rates, renovations, storm damage, and more. A simple hail storm may cost you thousands of dollars in roof repairs.
- Ongoing costs: Purchasing property is not a one-and-done deal. After the initial acquisition, you must continue paying for insurance, taxes, mortgage, renovations, property staff, utilities and more.
- Renter issues: When renting property, you must often deal with vacancies, missed payments, or other scenarios that prevent you from making the money you expected.
- Market and interest fluctuations: As supply and demand shift, the property market will also fluctuate. While house values generally increase, you may see dips in specific areas. Sticking to investment-grade properties can ensure that you don’t risk purchasing a depreciating asset.
- Unsuccessful properties: Non-investment-grade properties in a less-than-ideal location may create more expenses and problems than profits.
- Inaccessible funds: You cannot instantly sell your property for quick cash if life hits you with a curveball. Selling a house takes much more time and effort than selling stock shares.
- Potential government actions: While government laws are not a huge risk, you should keep in mind that certain rules, like negative gearing, might change in the future, so you should not base your strategy around such programs.
How Can You Reduce Property Investment Risks?
Investing in property includes some negative risks, though you can avoid many of these with adequate planning, knowledge and research. Here are some tactics to reduce your investment risks:
- Don’t spend everything—keep enough funds in your savings account for a rainy day.
- Find a relevant credit provider for your needs.
- Hire a mortgage broker to find the best loan rates.
- Opt to purchase your property in money-making, investment-grade locations.
- Consider new properties rather than renovations for fewer complications.
- Invest in income protection and property insurance.
- Purchase multiple properties in case one fails to provide a steady income.
- Hire a professional Property Manager to oversee rentals and a contractor for renovations.
- Plan any future investments within your budget.
- Speak with a tax professional before making any purchases.
- Plan and track your tax deductions ahead of time.
- Track your investment performance and re-assess based on success.
- Do not feel afraid to sell if the investment falls short of expectations.
- Do not quit your main job until you save up enough money from purchasing properties.
How to Create Your Property Portfolio Strategy
Now that you know the different property types, tactics, benefits and risks, it’s time to begin your investment journey. The first step is to plan out your strategy.
Investment strategies require thorough research and details, but you can ensure that you cover all bases by following the steps below.
- Create your business profile: Investing is a business, and you should treat it that way. Set up an additional bank account and a correct email address.
- Decide on property type: Decide which property you want to purchase first. Consider residential houses, apartments, condos, commercial properties, new builds, renovation projects, or entire apartment complexes.
- Build your investment strategy: Depending on your property type, you can decide whether you will choose a cash-flow renter income or a capital growth strategy.
- Target a location: Selecting an optimal location is very important, so you should conduct ample market research before deciding. Consider which areas can expect the largest price increases in the near future.
- Consider tax benefits: Before making any purchases, plan your tax strategy and allocate a certain amount of your budget toward these payments.
- Create a budget: Now, consider your funds, property type, location, and expected taxes to generate a realistic and safe budget that leaves room for surprises. Be sure to also think about your down payment.
- Find loans or finance options: If you cannot fund the project yourself, present your budget and investment plan to a lender to receive a loan for the property.
- Purchase and renovate: After receiving adequate funds or pre-approval, you can shop around, bid on your favourite property, and purchase. If the house needs renovations, hire a contract team to help you manage the process.
- Rent or sell: Once you’ve finalised any property changes, you can sell or rent it out to tenants.
- Use profits for your next investment: The investment cycle is ongoing. The more properties you purchase, the more funds you can make for future investments.
Real estate is an investment gold mine. Property consistently appreciates as demand increases, allowing you to invest your money in a safe and low-risk way.
Entering the property investment game can be challenging, especially when established investors often dominate the market. Luckily, you can start small with a single purchase and work your way up from there.
Successfully pulling off this investment requires ample research, a solid strategy and a detailed plan. Learning how to build the ultimate property portfolio strategy will ensure that you make no mistakes while taking advantage of all profit opportunities.
At Positive Real Estate, we want to help you achieve financial freedom by learning how to invest in the Australian property market successfully. Call us today on 1300 365 886 or register online for our educational events!