New to the property investment game? Thinking it’s about time you got some real estate to your name, but unsure if your current financial position or the wider economic climate will prevent you from taking that first step toward financial security and the portfolio of your dreams? Let Horizon Buyers Agency guide you with this helpful article that unpacks the top 5 property investment strategies recommended for beginners.
Inside we explain what each approach entails, how they work, the pros and cons, who it is best suited to and when to consider using it.
So first up, what is a property investment strategy?
A property investment strategy is a specific approach to investing in real estate to achieve specific financial goals such as income generation, capital appreciation, or diversification of your investments. Depending on your income needs, risk tolerance, tax considerations, and how long you plan to hold your investment (aka the time horizon you’re willing to commit to), property may or may not be the wisest investment for you. So below we discuss some of the popular investment strategies that beginners tend to opt for.
Investment strategies for beginners
1. Reno Flip investment strategies
Thanks to popular shows like The Block and Fixer Upper, many beginner property investors have big dreams of finding that perfect run-down or distressed property that’s in need of a little TLC. The aim? Renovate them to increase their value and sell them for a whopping profit.
So how realistic is it to achieve short-term capital gains by renovating and selling property that has been held for less than a year?
Unfortunately, it may not be as easy as it seems. And even for the tradies who may be a few steps ahead in the handyman field, there are certainly a few things to consider
Reasons we love this strategy (the pros):
- Allows you to enter the market at a price more affordable to you
- An enjoyable experience for those who love getting creative and who have the skill to pull it off
- Can instantly add value to a property and allow you to sell sooner than an established property that takes years to appreciate.
Things to consider (the cons):
- It requires you as the buyer to be handy and knowledgeable in the area of renovations
- Depending on the economic environment, the cost of supplies can fluctuate which again can impact ‘how worth it’ the renovations will be in such a short amount of time.
A tip from us:
If you’re keen on flipping a house, you have the skill (or connections) to complete a renovation that will be worth it in the long run, consider a slightly adapted version of this investment strategy: renovating and holding. If there is a way you can rent out the property once flipped or even make it your own home, holding the property for a little longer may help alleviate some of the potential risks that a fixer-upper with a blown-out budget may hold.
2. Rentvesting
Now this one is a little personal, rentvesting is something that we do ourselves and swear by!
For those who have never heard of the term, rentvesting is a real estate investment strategy that involves renting a home in the location you want to live (think about how handy this is for proximity to family and friends, jobs or being within zones for certain schools and educations), and then purchasing a property in a more affordable or high growth area.
For some, this is the answer to getting the best of both worlds – living the lifestyle you’re dreaming about, while also getting your foot in the door when it comes to owning property and being in the market.
Reasons we love this strategy (the pros):
- Allows you to start building a portfolio and still live where you want to, it provides a way to enter the property market for those who cannot afford to buy in their preferred living area
- Investing in higher growth, higher rent-yielding areas without restricting yourself to areas you want to live can mean you can get higher returns on your investment
- Investment properties can offer tax deductions on expenses such as mortgage interest, property management fees, and maintenance costs.
- There are no significant entry and exit costs if your lifestyle or life circumstances change as a renter
*A special note for home owners:
You want to take into account the entry and exit costs associated with buying and selling, for example:
- You were 25 when you bought a 1 bedroom apartment on the outskirts of Sydney as it was all that you could afford or needed at the time
- At 26, you met a strapping young gentleman and had your first child at 28
- Being forward-thinking parents you realise you need to upgrade to a 2-bedroom apartment to accommodate the new bub
- You are required to pay exit costs for the sale of your 1-bed home which includes agent commissions, marketing and advertising, and conveyancing and now, you are also required to pay entry costs such as a deposit and stamp duty as well as conveyancing, building and pest, insurances, and relocation costs on the more expensive 2-bedroom home in the same building
- When we are talking about going from a $1mill to 2mill home ($40000-$100000 in stamp duty), from a $2mill to 3mill home ($95,000 to $150,000 in stamp duty), or a $3 mill to $4 mill home ($210,000) you can see the entry and exit costs can become quite prohibitive as your needs or lifestyle changes.
Things to consider (the cons):
- Managing both rental payments and investment property expenses can be financially, emotionally and physically challenging. Read our blog on Why your Property Manager might be the most important person on your team.
- Investment properties can require you to pay a capital gains tax upon sale, unlike a property that is your primary place of residence. Nonetheless, there are exemptions after holding the investment property for more than 12 months, and if your investment property was your PPOR for 12 months… all things we can explain when you choose to partner with us.
- You will need to think about property maintenance for your tenants, if hiring a property manager is on the cards, this is an extra expense to consider.
- Being a renter yourself means that nothing is set in stone, your landlords could change your terms or require you to move out sooner than originally expected, they may even increase rent unexpectedly, and often with only 60 days’ notice required. Although there are rental tenancy laws in place to protect tenants from these kinds of things, it can still catch you off guard.
A tip from us:
Rentvesting is a super do-able property investment strategy for beginners. Nonetheless, depending on your current situation, the time you want to invest in managing your properties and how involved you want to be in it all, it can be extremely helpful to speak to a seasoned buyers agent who is well-versed in this type of thing. That’s where we can help you! Get in touch today.
3. The buy-and-hold property investment strategy AKA buying rental properties
Reasons we love this strategy (the pros):
- The property you choose to invest in can be based on high-demand locations that can yield higher rents that cover the costs to hold your investment or even provide you with passive income
- You don’t need to worry about whether you personally want to live in that location
- Depending on what your budget is you can scale with commercial property options too, investing in office spaces, retail shops and industrial buildings that are rentable to businesses
- Annual rent reviews are in line with current market rents which can further boost investor cash flows and passive income.
Things to consider (the cons):
- Upkeep the property can be an ongoing expense and can depend on the type of tenants you get in and how they maintain the property
- Filling the property and ensuring it doesn’t stay vacant for too long can be stressful, especially with commercial property.
- Tenants can be unreliable or lose their jobs, so securing ongoing rent can be a risk if you don’t hire a professional to vet potential tenants.
Now when it comes to the buy-and-hold investment strategy, there are actually two ways you can do this, by either positively or negatively gearing your property.
1. Positive gearing investment strategy
Positive gearing is all about property investments that generate enough short-term income to make a profit. This is great for new investors as the additional income can allow you to pay off your mortgage quickly.
Reasons we love a positive gearing strategy (the pros):
- Lower risk upfront
- The surplus income can help cover other expenses or be reinvested, reducing financial pressure on the investor
- Surplus income can be reinvested in other assets or properties, potentially accelerating wealth accumulation
- Although the income is taxable, some expenses can still be deducted, potentially lowering taxable income.
Things to consider with a positive gearing strategy (the cons):
- These properties usually have lower capital growth
- Extra money coming in will mean you will be paying more tax as you go
- You need to make sure the rent you are charging will cover all of your expenses to hold the property.
2. Negative gearing investment strategy
To negatively gear a property is to buy a property where the short-term costs are more than the rental income it will yield. This means month to month you will need to cover the losses with an alternative revenue stream. So why would this kind of investment be worth it?
Reasons we love a negative gearing strategy (the pros):
- It is said in some situations that the negative gearing losses that you make as a tax deduction can end up offsetting your total tax liability, meaning that you will save in taxes overall
- As the property’s value will likely appreciate over time, there should be significant capital gains when the property is sold.
Things to consider with a negative gearing strategy (the cons):
- Making sure you have an additional income stream that can cover the short-term costs is vital
- The strategy relies on property values appreciating, which is not guaranteed and subject to market fluctuations
- Rising interest rates can increase borrowing costs and negative gearing losses
- It can put a strain on your cashflow.
A tip from us with negative gearing:
This can be a higher-risk choice if you don’t know what you’re doing. Ensuring you have support is key! Again, this is where engaging a property buyers agent like us who can help you through the process will help mitigate the risk.
Overall, when it comes to strategies for investing in real estate, positively gearing yourself is a great way to avoid overextending yourself. For beginners, this is a great place to start!
If investing in a property that will be primarily used for rental purposes, having a professional buyer’s agent like ourselves helping you to identify the property types and locations that are most in demand can help ensure you don’t end up in a sticky situation.
At Horizon Buyers Agency, we not only look into the expected: economic cycles and market trends, but we also do due diligence to connect you with the right team who can help you legally protect your investment with the correct lease terms and a rental property manager that will check tenant creditworthiness and help with leasing out the property as soon as possible. Our unique connections are certainly an advantage that arms you with all the support you need. Find out more about our property investment services here.
4. Subdividing your land
Subdividing property is also another well-known property investment strategy that involves buying a large property and splitting it with separate titles to create multiple properties.
And although the idea of multiplying the properties you’re holding by only buying one may sound remunerative, there are definitely a few things you need to consider.
Reasons we love this strategy (the pros):
- The profit potential of this kind of investment is larger than a single property investment
- In this day and age, whether it be affordability or just the change in lifestyle, many are open to buying townhouses and apartments, especially for their first home. The marketability of easier-to-maintain properties has certainly increased over the years
- You can go as far into the development process as you’re comfortable with. For example, you can simply split the land into smaller allotments according to local regulations and approvals, or you can go further into the development process, gaining plans and permits for new builds, or even complete the new build process yourself.
Things to consider (the cons):
- It’s not as easy as it sounds. Subdividing can actually have significant upfront costs including surveyor fees, legal fees, and costs for obtaining permits or building in the necessary infrastructure to make it compliant with local regulations
- Rezoning and adhering to environmental impact overlays can also be a costly and time-consuming process with unforeseen costs. This means that you may not be able to see a return on investment as quickly as you’d hoped and is therefore not suitable for all kinds of buyers
- Changes in the market can also significantly impact this investment strategy type. Should the value of the property go down in that specific area, it may not be worth the additional investment you have needed to put into subdividing the property.
A tip from us:
This may be one of those strategies best executed by a more seasoned investor rather than a beginner investor who wants to do it on their own. Alternatively, engaging a property buyers agent that can help you through the process will help mitigate the risk.
5. Land banking
Landbanking is the last kind of property investment strategy that we’ll discuss in this article. This is where new property investors may choose to invest in a lot that is undeveloped with the intention of holding it as it increases in value. From there, the land can be sold as is, or developed on and sold from there.
Reasons we love this strategy (the pros):
- It’s pretty low risk. You can purchase land at a price within your budget
- As you won’t necessarily be looking for personal lifestyle reasons, you can purchase in an area that is high growth
- As you won’t be renting it out, costs of maintenance will be low
- Depending on the size and location of your property, it can be highly desirable to developers.
Things to consider (the cons):
- You may need to hold the property for years before it is worth selling. This is definitely not a short-term gains kind of investment
- It also doesn’t have rental income potential, so it won’t be a helpful investment to those who need cash flow to help positively gear themselves
- Changes in the market and zoning laws could potentially affect the value of the land.
So there you have it
Some of the most popular property investment strategies Australians and beginner investors should start thinking about today. Ready to get your foot in the market? Want to make sure it’s something you can afford, and set yourself up for success?
