Property investment is a game that can be approached from many angles.
Many property investment advisors push one strategy over the others
(usually the very same strategy they happen to promote). But the truth
is, there are a multiple ways to succeed as a property investor.
Here are the top 7 broad property investment strategies used in
Australia today. Some of the strategies may overlap, depending on how
you apply them.
Strategy 1: Buy and Hold
This is perhaps the most popular investment strategy among industry advisers and professionals.
Buy and hold refers to acquiring property with the goal of
generating long term capital growth. Usually you buy a property (using
borrowed funds) that appreciates in value over time, with live-in
tenants to help you pay off the mortgage.
As property values go up and rents increase, Buy and Hold investors
often parlay their equity into purchasing the next property in their
portfolio. Then in future, they may sell some of their stock to
reduce debt and emerge with income generating assets.
With good asset selection and the benefit of time, Buy and Hold can be a very effective and low-hassle strategy.
Strategy 2: Negative Gearing
Negative gearing can be combined with other strategies (e.g. Buy and
Hold), but the term refers to a property investment where the annual
expenses exceed the rental income.
This leaves the investor with a loss, which under Australia’s current
(and hopefully future) tax laws, can be claimed as a deduction.
Historically, particularly in capital cities, property prices have
grown more than enough to offset the small loss incurred by a period of
negative gearing.
Strategy 3: Positive Gearing
The flip side of the coin is Positive Gearing – where the property generates a higher income than expenses,
before tax is taken into account.
Positively geared properties are usually hard to find (and if a newly
purchased property is genuinely positively geared, there will usually
be a downside, such as poor capital growth prospects).
However, properties may
become positively geared over time, as increases in rental income outstrip expenses.
Strategy 4: Positive Cash Flow
A close cousin of Positive Gearing is Positive Cash Flow.
Positive Cash Flow properties are properties that put cash in the investors’s pocket
after depreciation and tax deductions are taken into account.
New properties or newly renovated properties have the greatest
potential to deliver positive cash flow because they offer the largest
depreciation benefits.
Strategy 5: Renovation or Flipping
Renovating a property is a way of manufacture equity, allowing you to
fetch a higher rent, or sell the property in a process known as
“flipping”.
Renovation sounds simple, but by the time you factor in your hard
costs, plus the cost of any time and labour, it’s relatively challenging
to make money over and above what you could make via other investment
strategies.
Nevertheless, some investors are very skilled at renovation and are able to make it into a lucrative investment model.
Strategy 6: Passive Property Development
Passive property development is where you supply money to a property
developer, who then develops a property project, thus manufacturing
equity.
Passive property developers provide the funds but not the expertise
or elbow grease. This strategy can be considerably faster and more
lucrative than more conventional strategies such as Buy and Hold – but
it also entails more risk, such as the risk of the development not going
to plan
Strategy 7: Active Property Development
Active property development is where you go out yourself and
manufacture equity by adding value to land and buildings. You can
either sell off the properties you build and/or hold on to stock, which
you’ve now acquired on a “wholesale” basis.
Property developers can do very well… but many also go to the wall in
spectacular fashion. And property development is a highly skilled
profession with a substantial learning curve.
And that’s a wrap
Which strategy is the best? It depends. Each strategy has its place, depending on your current situation and goals.
Contact us to formulate a property investment strategy that is right for you.
