For centuries the rich and powerful have had one major advantage over the poor working-class….the ownership of property.
By leveraging rent-producing real estate, they were able to stop trading their time for money – and focus on working smarter and not harder, developing their financial capacity and enjoying greater personal freedom.
Fortunately today, property ownership is no longer reserved for the elite. Every Australian has the right to own property, and Australians are eager to take advantage of this potential.
However not all property investment tactics are created equal, so here are some things you need to think about along with a quick guide to some common approaches.
Choosing Your Angle of Approach
When it comes to investing in property, there is a lot of groundwork you need to do before you can decide on the best approach.
You need to understand what your buying power is. Your buying power is decided by a combination of you’re your financial history, outstanding loans, household income, savings and assets which could be used as security.
If you are young, you may not have much wealth behind you and your buying power is likely to be smaller. This will likely limit your buying options, at least at first until you build up some equity in your investment portfolio.
If you are in your late 30’s or early 40’s then your savings, income, and assets will probably give you greater buying power. However, it is important to ask yourself whether you want to max out your financial capacity. This would often mean using all of your savings, offering your family home as security and most likely sacrificing a sizeable chunk of your weekly income.
It’s important to balance the risk. Is this something you are willing to do temporarily to develop and sell a property? Are you comfortable shouldering this risk for the longterm as you buy and hold property? Or would you prefer to avoid it altogether and stick to something less expensive?
But let’s not forget about the other side of the equation, the reward! If you are targeting aggressive wealth creation and are looking to create a short cut to retirement, then it’s necessary to sacrifice some comfort now in return for future gratification.
It’s important to understand that there is no right or wrong answer to these questions. It’s something you need to explore and decide on yourself before you explore which of the investment tactics below suits you best.
The Most Popular Investment Tactics that Work Today
1. Buy and Hold
Investors who choose a buy and hold strategy usually aim to purchase several investment properties to generate passive income.
The buy and hold strategy is favored as a passive strategy and works best with properties which have a neutral to positive cash flow – allowing investors to leverage their rental income and equity to fund additional property purchases.
The buy and hold strategy is generally a long term strategy that requires one to two property growth cycles for properties to double in value and open up the possibility to negate debt through selective selling to pay down portfolio debt to $0 – leaving unencumbered cash flow.
Flipping property is the polar opposite of the buy and hold strategy. Investors who choose to Flip property expend a lot of effort and expense in a relatively short period, intending to make a net gain.
Generally, properties that are purchased with the intention of flipping require significant renovations, upgrades or sub-divisions to make the transaction profitable.
Flipping also requires a certain degree of skill, expertise, and calculated risk. A downside of flipping is that at the end of the process, a large percentage of the profit needs to be paid as capital gains tax.
Some investors are professional flippers and make this their full-time job.
3. Sub-divide / Develop
A subdivision or development is a tactic that can be used by both flippers and buy and hold investors. Subdivisions require council planning approval and sizable expense, however, it comes with the potential to magnify the return on investment significantly.
For example, by subdividing land, you can create two properties where there was one – potentially manufacturing $100,000’s in the process of one or two short years.
Or by developing an additional dwelling such as a granny flat on an existing property, you can increase the rental return by hundreds of dollars each week.
Renovations can be minor cosmetic changes requiring just a few thousand dollars, or massive structural upheavals which could cost $10,000’s or more.
Generally buy and hold investors won’t be forking out the big bucks, and will stick to small strategic cosmetic renovations to bump up the valuation of their property and increase appeal for tenants.
Investors looking to flip a property generally undertake more serious renovations intending to create a new lease on life for an old, outdated property and add a big boost to the final valuation in time for sale.
5. Boarding House
In areas where property values are high, and rental returns are generally negative then boarding houses offer an excellent opportunity to create better rental returns.
In metropolitan areas of Sydney, single rooms in a three-bedroom boarding house can rent out for $350 a week or even more if well furnished.
The same house may only be able to receive $700 a week in rent – meaning that converting it to a boarding house would bring in an extra 50% rental return.
The downsides of boarding houses are more wear and tear, regular vacancies and boarder turn-over and you will likely need to manage tenant selection, rent collection and maintenance yourself as very few leasing agents will manage boarding houses.
6. Commercial / Venue Purchase
Commercial real estate has the potential to offer very lucrative rental returns, above those available in the residential market.
The downside is that commercial properties are often reliant on a specific kind of tenant and may experience extended vacancies lasting months to even years if the right tenant is not available.
Commercial properties are also likely to experience less capital growth than their residential counterparts in the same area.
Similar to boarding in its ability to maximize rental return, Airbnb is becoming more popular as a well-managed property in a sought after location can generate much more than it would on the regular rental market.
This arrangement also offers the owners the ability to block out certain dates for themselves if they need to occupy the premises, making it a very flexible arrangement.
The downsides to AirBnB is getting adequate insurance as many policies do not cover it.
It is also a very active strategy requiring you to be able to advertise your property, manage a booking calendar, deal with guest relations issues and make sure the property is cleaned between each stay.
Apart from flipping, AirBnB is the most hands-on property investment tactic. The good news is there are more and more Airbnb management companies willing to do all the hard work for you – in exchange for a fee of course.
Rent-vesting is the term used to describe investors who choose to invest in a property, while also renting their place of residence.
Rent-vestors can use any of the tactics above, generally, favour the buy and hold approach due to its relative ease of entry and ongoing holding costs and effort.
The benefit of renting, instead of homeownership is that the weekly cost of living is reduced – allowing more to be spent on an investment property.
So there you go, there are the most common successful property tactics all summed up. This is by no means an exhaustive list! But it’s a pretty comprehensive list of the approaches most likely to get success. Think about what might suit your situation and comfort level best.