There is an abundance of property types and property investment strategies that residential property investors may consider before jumping into an investment.
To get clear on what property type and strategy is right for you, start by asking yourself the following questions:
What would suit your needs?
What is aligned with your goals?
Does this property type or strategy fit within your budget?
Here are a few different property investment strategies that investors may choose to adopt.
1. Owning Your Place Of Residence.
This is without a doubt, the strategy most Australians use. Holding their place of residence for decades and feeling emotionally satisfied and comfortable.
A handsome return should be expected if the property was held for a long time, and having most, if not all, of the mortgage, paid down when it comes to the sale of it. On top of this upon the sale, there would be no capital gains tax required to be paid.
2. Purchasing A Residential Investment Property.
Purchasing a residential investment property where it's held for at least 7-10 years and rented to tenants, is a popular investment strategy suggested by most financial advisors as a method to grow wealth and minimise taxes. This can be achieved through negative gearing or in some cases positive gearing.
Negatively geared is when annual expenses exceed the income generated by the property. Under current tax laws (May 2020), the deduction can be claimed against the investors' income on the new property.
If positively geared, the property generates an income that exceeds its expenses before depreciation is included in the calculation. These types of properties are usually found in mining or rural towns, student accommodation, or holiday rentals and are very rarely worthy of capital growth.
I firmly believe in the phrase:
“If one invests for yield one rarely, if ever, finds adequate growth, but if one invests for growth, the yield will ultimately take care of itself”.
With careful selection, purchasing a residential investment property is a highly effective strategy that has little or no impact on investors lifestyle or serviceability. Today there are many investors taking up this strategy, as they struggle to get into the property market, particularly in Sydney and Melbourne.
3. Flipping A Property.
The "flipping" strategy is where an investor renovates their selected property with the goal to sell it immediately after the renovation.
This strategy is far trickier than it sounds and unfortunately the vast majority of people who attempt it fail!
Most people who attempt to "flip" a property will over or under capitalise.
There are many reality TV shows on this strategy, think 'House Rules' and 'The Block', however, they are all a far cry from the reality of the costs, the time it takes, the demographic of the potential purchaser for that suburb, the market it will arrive in and of course the labour involved.
Also, remembering that no rental income is received whilst the renovations are being completed. Some choose to hold the renovated property which provides more time to recoup the costs, get higher rent and, increase the value of the property.
4. Developing Yourself Or With A Consortium.
A strategy where one investor or a group of investors purchase the land to develop by themselves, using architects and builders.
Alternatively, another branch of this strategy is to invest with a developer as a passive investor, where you are simply supplying the funds as a development loan.
It's important to note that these strategies can certainly be very profitable, however without extensive knowledge in all facets of this process and a lot of luck, this is a very risky and costly proposition.
5. Land Banking For Subdivision.
Land banking for subdivision in a suburb waiting for restrictions to change is yet another strategy that can also show healthy returns but again terribly tricky to master.
Subdividing a block of land can be a profitable investment, however, investors may wait years or decades for those changes to eventuate, if they change at all, with zero income of rent whilst having to pay the land taxes each year.
6. Investing In A Property Fund.
Investing in a property fund can also be a strategy that doesn't require large amounts of capital or equity for the initial purchase of the property. This allows the investor to invest in a diversified portfolio of properties which are mainly used in commercial properties.
7. Purchasing In A SMSF Or Family Trust.
Purchasing in a SMSF or family trust has become an immensely popular strategy today. Many investors have been disappointed with the performance and volatility of the stock market and find comfort and better performances from bricks and mortar, such as residential property.
Albeit the lending criteria for funds are much more difficult and more costly, the percentages of investors using their super or family trust funds to invest in property have increased significantly.
Once again it needs to be a well-selected property for this strategy to work.
As you can see, there are many ways to invest in residential property and many different types of property types that can be invested in.
The trick to getting any of them right is to find the strategy that works for you with suitable advice from your accountant and/or financial planner.
Once you have a clear direction, it's imperative to be working with people who are experts at what they do.
The more educated you can become in what to invest in for the outcome you want to achieve, the better chance you will have of success.
Getting it right from the get-go will make a significant difference to the life you will get to lead down the track.
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Warren Jacobs - Senior Property Investment Consultant at Meridian Australia
P: (02) 9939 3249
Disclaimer: When considering purchasing a property, it's always prudent to seek the advice of an appropriately qualified professional to determine which strategy is most appropriate for your individual circumstance.