Are you still holding on to your 1st property as an investor? It’s a fact that if you want to build an excellent property investment portfolio, it doesn’t have to take many years of planning, waiting, preparation, and saving. Of course, a primary attribute would have to be the passion for property investing. What it also requires from you is your dedication to learning, as well as a personalised strategy to be able to achieve your financial goals successfully in a shorter time.
Fortunately, the very 1st property is usually the toughest. Once you’ve hurdled that, you can go to several ways to be able to achieve your financial goals successfully.
It is no doubt that many Australian property investors employ several strategies daily. We are listing here some of the key investment property strategies that have worked well so far. If you want to maximise your results, we recommend that you check each one and use which best suits you, or perhaps, combine a few that will work out even better in achieving your goal.
Buying your Home Investment Strategy
When you purchase your own home, where you can primarily reside is one of Australia’s recognized investment strategies. It is how Australians usually get their first step in the property market or industry.
You do not generate revenue immediately from residing in the house you’ve purchased but here are the topmost benefits you can derive from this strategy:
- If you hold on to the property longer and/or you renovate it, your baseline cost is most likely to accelerate in value;
- If you decide later on to put the property up for sale, the benefit is you do not have to pay tax on capital gains.
Buy and Hold Property Investment Strategy
Do you know what buying and holding the property investment strategy means? It refers to a property bought, then aiming to hold on to it until such time you can make capital growth.
It is an easy and uncomplicated property investment strategy since the only expectation from the investor is purchasing the property and waiting until it appreciates.
The only problem in this approach is it is highly probable that it can go anywhere from an estimated 7 to 10 years for your property to realise capital growth.
The best thing with this strategy however is while waiting to have capital growth on your property, you can generate rental income from it. The rental income can cover your mortgage payments and other expenses related to holding the property which can be claimed as tax deductions.
For property tax deductions, you may claim for the following:
- tax depreciation;
- rental expenses like insurance, utilities, and advertising costs;
- interest on the loan used for the purchase of the property
Negative and Positive Gearing Strategies in Property Investment
What is gearing in a nutshell? It simply involves borrowing money to invest. There are 2 types: negative gearing and positive gearing.
There are times when you take out a loan for property investment but the rental income you gain from it turns out lower than your expenses. Simply put, you are not profitable. This is what negative gearing is all about.
It is certainly not a perfect condition, but based on Australian tax policies, running at a loss is not negative.
It is the ATO or Australian Tax Office that lets property investors subtract some losses made from their property’s taxable income.
Usually, investors who push for the properties’ capital growth on a long-term basis have no expectations of earning income from the rent.
As a consequence, what they utilise is a combination of both the negative gearing and ‘buy and hold’ property investment strategies.
The rent forms part of the expenses while the investor waits for the cash out in their property’s long-term capital growth.
In 2017, Mia bought a property for investment for $350,000.
Mia covered most of the property’s cost but also loaned out $300,000 for the deficit. After computation, the loan’s annual interest payable is $22,500.
Mia decided to use a ‘buy and hold’ property investment strategy then leases the house in the meantime. The tenant’s rental rate is $375.00 weekly.
- $375/weekly multiplied by 52 weeks = $19,500 annual rental income;
- Annual rental income of $19,500 minus $22,500 annual interest payable = – $3,000.
This is an example of a property that’s ‘negatively geared’ as Mia is losing $3,000 yearly.
*The advantage in this situation is that Mia’s taxable income is lessened by $3,000, meaning she’ll have a reduced tax payment.
On the other side is positive gearing — it is when you earn income is higher than your expenses.
This implies that you are consistently profitable, and you could use the excess income to gradually pay off the amount of your loan, for instance.
Consequently, this does mean that you will be subjected to a higher marginal income tax rate.
Subdivision Strategy in Property Investment
This strategy is all about buying a piece of land then dividing it legally to have two individual portions of the land.
What are the options available for you when doing this strategy?
- You can keep a piece of the land then sell the other;
- You can sell both the divided portions of the land; or
- You can keep both- use one portion as your primary residence, while the other for generating income.
- You have two-fold benefits here: varied choices on how you want the lots to be utilized, plus the land’s value will also typically increase once the property has been divided.
- Subdivision typically is longer to complete versus the other property strategies. So, anticipate that things can happen in the market that can pose a challenge to selling either or both portions of the land.
- There is potential to maximize your investment result with this strategy, but it is important that you are aware of the potential risks as well.
Renovate and Hold Investment Property Strategy
For renovate and hold investment property strategy, the goal is to maximise your property’s earning potentials.
Kevin made a property purchase in 2018, located in a premier spot in Sydney. This area is remarkable – showing off the spectacular Sydney Harbour sights from many portions of the house – family room, dining room, and kitchen.
The property’s price was pegged at $950,000. He then paid for $120,000 on renovation, tearing down the walls dividing the family room, dining room, and kitchen. The idea was to bring more natural light to the property and to have wider and more open living spaces.
- The property’s value rose to $1,200,00 after the renovation was completed.
- $990 was the weekly rental rate before the renovation and $1300 per week after the renovation.
The increase was able to cover the loan’s interest utilized for the completion of the renovation and still left him with excess income.
The potential risk with this strategy, however, is that there’s no assurance that your situation will be almost like that of Kevin’s ‘renovate and hold’ strategy. Even if you propose to mitigate the risks, there’s still a chance that your newly-renovated property will not earn income more than what you have spent for it.
Just like the subdivision investment strategy, you can maximize your results with a ‘renovate and hold’ property investment strategy, however, you just need to be aware of the potential risks.
Flipping Property Investment Strategy
Most people who are into property investing are not patient to wait for a few years to be able to see profit from the investment they have. So, some look for old, dilapidated, or rundown properties and renovate them to increase their sales value. Such a process is termed as ‘flipping.’
Flipping as a property investment strategy normally fits well to someone who’s experienced and wants to expand his investment portfolio immediately.
One advantage of this property strategy is that you realise a profit quickly as most investors succeed in completing the whole process in a year. Yet, it may be the property strategy that requires the most skill as it requires a lot of planning and experience if you want to achieve maximum returns.
When it comes to renovating, you really must make sure to plan, execute and strictly monitor and control your expenses as there is always a big risk of spending more vs. your budget especially when you get carried away with the project and end up doing more than what you have initially planned for.
Our Key Takeaways
There is no universal strategy that can apply to all investment properties.
The key to maximizing your investment results is making sure that your investment property, current financial situation, and investment strategy all aligns with your investment goals.
A combination of strategies can help you maximize your return on your investment property.
Take a bold step towards a great future in property investing. With all the strategies we’ve presented to you, we know that you can do it and it will not be much of a challenge. Learn, grow and enjoy the journey!