First-time investor starting out? Bit of an old hand in the DIY property investment game? Somewhere in between? Wherever you are in your property investment journey, a strategy that works for you is the key to reaching your investor dreams. So we spoke to property investment strategist Jay Anderson to demystify some of the most common property investment strategies. He takes us through their ins and outs and shares his tips for deciding on one that’s right for you.
Hi, Jay. Let’s start at the beginning. What’s the first step for someone interested in investing in property?
First up, it’s important to know the relationship between goals and strategy. I like to think of it like this: a goal is something that an investor wants to achieve or thinks that they want to achieve, and a strategy is the blueprint for how they’ll achieve it.
The next thing to know is why you’re investing and what you want to achieve. These define your goals. Ask yourself: What’s the primary reason I want to invest in property right now? What about in five years’ time? And in 20 years’ time? This is important because you might have a different answer for each moment in time. Your answers could be anything from increasing net worth to building an asset base, from generating a passive income to improving (or achieving) your retirement. And it can often be a mix. But every property needs to have its own rhyme or reason to be invested in. From there, how you make it all happen is your strategy.
Tell us, broadly, about the different types of property investment strategies.
The most common strategy in Australia is ‘buy and hold’ (also known as long-term capital growth) – that’s buying a property and holding onto it for at least 10 to 15 years. Then there’s negatively geared, neutrally geared and positively geared. There are value-add strategies too, so buying a property and doing something to add value to it, like renovating, before selling it (or ‘flipping’ it) in the short-term. And then you’ve got development strategies, which can be anything from subdividing a block to building townhouses and units.
Let’s get into the details. Can you break down these common strategies for us?
Buy and hold (or long-term capital growth)
This is typically considered a low-risk strategy. It’s where you have a goal of generating capital growth or wealth over a longer period of time. With this strategy, it’s extremely important to be buying the right property in the right suburb – one that’s going to deliver that long-term capital growth. And when we say ‘long-term’, we’re talking about holding onto the property for 10 to 15 years, as a minimum.
This strategy is where your net rental income (the rent you receive minus expenses like interest repayments, repairs and maintenance) of the property is negative. So, basically, you have made a loss. This loss may be offset against your other assessable income and in turn could reduce your tax liability – which essentially means you claim the loss for the year at tax time.
A lot of investors make a mistake with this strategy by saying, “I need to buy a property that’s negatively geared so I can save on tax.” But tax savings is only a secondary benefit. It’s like going out and buying a business that’s running a loss each year just so you can claim the loss on tax: it doesn’t make sense. You want to make sure that the business is still a good business and has longevity. The primary purpose of a negatively geared strategy should always be investment performance, capital growth and the long-term return.
This is the polar opposite of a negatively geared strategy. It’s where, after you’ve collected the rent and paid all expenses, you have made a profit and have surplus funds that can go into your bank account or can be invested elsewhere.
This passive and positive cash flow is good for young families, first-time investors and single investors, because it can boost household income. It can help you pay down debt, too. And it can boost your loan serviceability and borrowing capacity for additional properties (say, if you have a plan to invest in more properties in the next five to ten years).
A neutrally geared strategy essentially means that the property looks after itself. It’s not really costing you anything, and it’s not putting a positive cash flow in your pocket. This strategy typically draws young families or lower- to middle-income earners who don’t want property costs and management to affect their day-to-day lifestyle yet are interested in a property that’s earmarked for strong capital growth over time.
Flipping (or short-term buying and selling)
Flipping is a renovation-for-profit strategy – it’s about making the most of a disparity in the values of unrenovated and renovated properties. For example, if unrenovated properties are selling at $600K and similar renovated properties are selling at $900K, there could be an opportunity to make a margin. It can fit into a development strategy, too, by buying a property and value adding. For instance, you might buy a three-bedroom home with a floor plan that allows it to be converted easily into a four-bedroom. An additional bedroom could add substantial value.
A risk with flipping is buying in the wrong market or location – somewhere that won’t offer the margin you’re looking for. You could also spend too much on the property, and your renovation costs could blow out.
One simple, straightforward development strategy is subdivision, where you buy a property on a large block of land and cut up that big block to end up with two (or more) blocks. This opens up multiple strategy opportunities. If you bought in an area earmarked for strong capital growth, you could do a hybrid strategy where you renovate the existing property and then do a development strategy on the vacant block. You could build a house on the vacant block and sell the house, or you could keep it long-term, or sell both. As you can see, different circumstances give you different potential strategies.
Jay’s top tips for choosing your property investment strategy
- Make a plan that maps out what you want to achieve now and in the future.
- Consider the pros and cons of each strategy and work out which ones align with your circumstances and which are most likely to help you achieve your financial goals.
- If you’re trying to build a property portfolio that provides a passive income, look for positively geared properties.
- If you’re busy with work and family and don’t have time to be actively working on your properties, look at long-term strategies like buy and hold or neutrally geared. A development strategy isn’t for you.
- If your goal is increasing your net worth or building an asset base, look at a mixture of strategies that work together. In particular, look beyond only positively geared investments.
Disclaimer: This article shouldn’t be viewed as financial or tax advice. Please seek independent professional advice to take into account your personal circumstances.
ING is not affiliated with the individuals and organisations mentioned above and does not endorse their product or service, nor accept any liability in relation to the statements made by them in this article.
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