Property Investment Strategy Australia
13 Effective Property Investment Strategies for Australia
Whether you own your own home, or you are trying to get in on the market,
it is wise to understand that there are opportunities to create wealth using property. If you position yourself with a strategy that works for you and your lifestyle, you may find the Australian Dream come alive for you.
Property investment strategies are growing in popularity in Australia. Here is a short list of some of the most effective for right now.
1. Owner Occupier – with some tweaking to maximise your capital growth.
2. Buy and Hold – including positive and negative gearing.
3. Renovate to Sell – adding value to an existing property, then selling it.
4. Flipping – selling a house with a new and improved marketing strategy.
5. Distressed Sale – buying cheap/quick sale properties and selling at the market price.
6. Subdivision – split a single block of land and on-sell as two (or more) blocks.
7. Dual Occupancy – create two dwellings in one house.
8. Duplex / Second Dwelling – building an additional granny flat or backyard dwelling, eg. converted shed or garage.
9. Partnership – combine funds and resources with a partner to accelerate your goals.
10. Property Funds – investing in shares tied to real estate.
11. Development – building townhouses or flats on large or multiple blocks.
12. Rezoning – repurpose a property into a new zoning category to make a profit. For example, turn a residential property into a commercial property according to zoning.
13. Owner Finance – buy a house for someone else and create passive income along the way.
To maximise the benefits of your first home, you should be considering how to buy your second house, and your third. To do this, you will require a strategy. There are many to choose from and they all hold different requirements and risk. Choosing the right one for you will take some figuring out, and as I discovered, the strategy changed along the way for me. Just by knowing the flexibility of the things that you can do with real estate, can give you more freedom to make choices that are right for you.
1. Owner Occupier
At first glance, it is not really a strategy, but you can turn it into one if you apply some thought into what your future goals are.
If you buy your dream home today and max out your lending capacity, you could hinder future investment opportunities. There are other things you could consider. Look at buying to renovate or making additions to a property to increase its value. Sometimes the little things can make a big difference in value – new paint, new bathroom, or an updated kitchen or flooring. This can be an ongoing project while you live in the property, thus creating more equity. Once you have additional equity, you can access this to buy your next investment property.
Work Smarter- have a plan
Another option (this is a favourite of mine), is dual occupancy.
I have implemented this myself, and I have seen great benefits in the long run. My wife and I were looking at houses in our price range, however we found that there wasn’t too much to choose from. So we decided to go up into the next price bracket, with the condition that we could find a property with dual living. We found a fabulous 3 bedroom house that we loved and it had a newly built granny flat. This was a win for us. Yes, we spent a little more money on buying our house, but it also had potential to create a weekly income for us. As the granny flat was ready to go, our new tenants moved in the same week that we moved in upstairs.
At the end of the day, it is costing us less to hold the property than what it did when we owned/occupied our 2 bedroom unit. Also, although we declare the rental income at the end of the year, we currently do not pay any additional tax, as our tax is offset by our other investments.
My advice for you today if you are just starting out, do not simply be an owner/occupier – not just yet. It is cheaper to rent than to be an owner/occupier. I would recommend buying a house as an investment first. There is much more to gain if you get your strategy right and use an investment portfolio to do all the work for you.
2.Buy and Hold
This is split up into a number of categories and your strategy may even implement a combination of them. Here are some of the popular options that are being used on investment properties.
Positive cash flow
Essentially this means that your incomings from the property are greater than your outgoings.
Money in hand today, usually low/no capital growth
Long term plan, multiple properties
Hard to find- getting the numbers right can be difficult
Small returns unless you hold many properties
Increases lending capacity
You can use this strategy to implement other strategies, such as:
Renovation to increase rent
Buy a property that is a distressed sale
Find a dual living property
Buy a property that has a second dwelling
There are many benefits to this strategy if done well. There has been a lot of bad publicity and talk about negative gearing and what it is doing to house prices. I follow a strategy that uses negative gearing to build new houses. This is part of the solution – I am creating more housing that is available to the renting market. In other words, creating more supply for the demand.
New properties / house and land packages
When you buy and build a new house, you will get access to all sorts of tax benefits, including depreciation. You will get the most benefit from this if you hold the property for a reasonable length of time. We also recommend to avoid buying units or townhouses, so as to avoid paying Body Corp fees.
It is a good idea to minimise as many fees as possible, so you can get the most out of your investment.
When this strategy is done well, you can benefit greatly by financial gain. It won’t happen overnight, but if you have a plan and stick to it, you can set yourself up to be much better off financially in the next 10 years.
Although I am not yet an expert in this area, part of my strategy is to engage people that are. These experts use their time to keep up to date with current laws and other information around property investment. Use their expertise, as it will help you achieve more and avoid a lot of pitfalls in the long run.
Existing house or unit
This is what a lot of people are doing, and a lot of them are making it work. However this strategy is often a part of the problem in Australia when it comes to housing affordability. In and of itself, it is not the root cause or driving factor for rent increases. However, when someone buys a second hand property and renovates it to make it more appealing, they tend to put the rent up to get a return on their investment.
At the moment, this is a really popular approach, so it drives up the rent on all newly maximised/renovated properties. This can create an affordability issue in some areas.
This strategy does have other pitfalls if it is not done well. It is usually not as simple as it sounds. You will need to do your homework, otherwise you could be facing a lot of bills with no income. You could also be facing long delays if unexpected issues arise. This kind of strategy will likely take up a lot of your time. I am not a carpenter or tradie, so if you are like me, this would require vast amounts of time and $$$ hiring the right people to get the job done right.
3.Renovate to Sell
This is very popular at the moment all over the country.
The principle is very basic, and is very
doable if you have the time and skill. There is potentially a lot of money to be made in this strategy. Basically, you find a property that is run down, out dated and needs some work. Sometimes a property may need just a touch up – or it could require a full comprehensive renovation. The type of property you choose is up to you and your budget.
Once again, doing your research and crunching the numbers is key here. You have to consider all of your buy-in costs and the time it takes to renovate (holding a property/loan with no additional income). If you allow 2 months to do a renovation, and then the job takes 3 months, you are now forking out additional money on the loan.
Then there is the cost of renovation work, and hiring tradies to complete the job. You also need to calculate the exiting costs involved when you sell the property.
This is a very attractive strategy, given that it is not too complex and you have hardware stores like Bunnings with everything you could possibly need to do the job. However, this could take up considerable time if you are doing the work yourself, or take up valuable money if you are paying tradies.
Very similar to renovate to sell, however the idea is to acquire properties that may not be marketed to their full potential, or possibly a property that has been on the market for too long. As an example, it is possible to find a property that is being sold as a single block, but it has the potential to be split and make a profit. You do not have to split the block yourself, just market the property as a splitter. Basically, you are looking for opportunities to buy cheap, repackage the deal with better marketing, then sell. However, you will need to watch out for all the fees that can eat into your profits on this one.
This is similar to the flipping strategy, but you will be looking for cheap
properties that need to sell quickly. For example, this could be a house that has had a foreclosure on it, which the banks will auction off cheap or just try to off-load quickly.
Other examples are, deceased estate; or a divorced couple, who will put the house up for a quick sale, so they can move on with their lives.
You will find that there is a whole movement of people using this strategy. Also, a number of companies have set up businesses around this model. They actively go out looking for these properties, and try to snap them up before they hit the open market.
In our current housing market, we are seeing the average block size for houses shrinking. Now we see
entire houses taking up almost the entire footprint of the land it is on.
In the past, block sizes were much larger. This presents opportunities to buy a larger block and split it so that the one piece of land can be sold off as two (or more depending on the size and structure of the block).
The land could be vacant or have a house on it, but splitting the property would have to make sense. Will two houses work with the new configuration?
If a new house was going to be built behind the current property, is there driveway access? This could present significant problems that require solutions.
Another aspect is that the local council would need to approve the split of the property. There are many other questions to consider – definitely another strategy to ask for expert help.
This is a highly profitable strategy – it is just a matter of finding the right property, getting approval for the split, and negotiating a great price before somebody else snaps it up.
People are actively working this strategy, and are doing it well. Depending on your location or target area, you may also find this option an extremely competitive market.
The key here is finding the right property, and also working out how to effectively divide a house into two. To create dual occupancy, a house needs to be split up with dividing walls, and have appropriate facilities in both sections, eg. bathroom, kitchen, bedroom/living areas.
I have seen this done effectively with two story houses. I have also seen a double lock up garage turned into a separate dwelling, then a carport built in front of the house.
Now the place can be rented out as separate dwellings – or you could live in one half/section and rent the other. It is unlikely that you would be able to sell one half and keep the other in this situation. If you rent out both halves, you may find that the return on your investment would cause the property to be positively geared.
8.Duplex / Second Dwelling
This strategy is almost the same as dual occupancy – however the difference is that it is usually a separate granny flat or separate house built on the same piece of land.
This would not require you to split the land. I have seen backyard sheds converted into granny flats, and also purpose built granny flats installed in a backyard.
There are also opportunities to build under existing houses that have suitable space under them. The house could be on a sloping block that leaves a lot of space underneath. Old style houses on stilts often have suitable space underneath to build another dwelling. Council approval is required for this kind of work.
This is an interesting one as it has a lot of variables, but has the potential to make a lot of money quickly. It is a good starting point if you do not have enough money yourself. The trick is finding the perfect partnership. Sometimes friends and family can be a good choice. Since a lot of money and responsibility is on the line, you really need to trust the people you are partnering with.
One aspect to consider is:- How is the partnership going to work? If the other partner is fronting all the money, what are you bringing to the partnership? Are you going to do all of the work? In which case, how are the profits going to be split?
Also, in a worst-case scenario, how are the losses going to be taken care of?
There are many successful partnerships out there. Just recently a friend of mine went into partnership with a new developer. He gave his investment house to the developer, then the developer did all the work splitting the land, demolishing the current house, and building a set of townhouses on the land.
This was a very lucrative move for everyone involved and is a good example of what can happen when a partnership works out.
This strategy can get you started in the market, or possibly give you an added push in a new direction with a property you currently hold.
You will have to make sure all legal paperwork and contracts are done. This can be time consuming, and the banks will want clarity with your partnership.
This strategy is basically a shares market that uses real estate and property as their equity. It is a relatively safe and secure option. You will find funds that operate globally and locally. The downside to this is you are looking at small returns. Most of us are looking for larger returns when it comes to investment strategies. Like all returns on investments, the higher the risk, the higher the return.
I have a ten year plan and goal. I view this option as far too safe, with little return to achieve my goal. However, if you have excess funds in your Self Managed Superannuation Fund (SMSF), this may be a better option for your money, rather than just sitting in the bank.
Now you’re playing with the big boys.
Big risk, big money, lots of work and legalities. This would possibly require you to enter into a partnership, but I have met people who have started off doing renovation jobs, and then eventually found opportunities to develop.
An opportunity may be as simple as finding an old house on a big block, or finding two lots side by side for sale. You could then clear the block to build a set of flats or townhouses. Of course, that is if the zoning rules allow this type of development.
Lots of homework and due diligence will be needed for this option. But it is definitely a great next step when you get involved in the property market.
This is a tricky one, and requires some homework. You will need to know zoning regulations for the target area you are looking to buy in. You will need to find a property that is in an area that is rezoned for a different purpose.For example, an older house or block of land that used to be residential, may now fall into an industrial zone.
So you could buy this property, and resell with the new industrial purpose on the property. You could also develop a set of warehouses or sheds to rent out individually. There are many options to make this one work and you could see a tidy profit at the end of the day.
Another example is finding a rural property that is rezoned for residential. Buying a large rural block, and then splitting it up to sell individually could see you a nice profit if done well.
This is a long-term strategy that could tie up your finances. Basically you act as a bank for someone else.
You will enter into an agreement with someone looking for a house, and you will purchase the property for them.
They will then move into the house and pay you “rent”, plus interest plus all additional costs of holding the property – eg. water and council rates. Thus the weekly cost for them is higher than just renting, but they are working towards buying the property outright.
The rent you receive will go towards servicing the loan, and the interest is your positive cash flow. But this is where it can get tricky – the weekly bills the client has to pay, has to be affordable for them.
The end goal for them is to access the equity after a couple of years, and to buy you out.
This is a win for everybody. You get to make some passive income on top of the outgoing bills, and your client gets to get ”in” on the housing market.
There will be a lot of homework required, and legal paperwork to be done.
The upside for this is positive cash flow. The downside is, there is no access to capital growth while the client is living there. There is a medium risk – if the client does a runner, you gain access to the property, keep all the money, and put the property back onto the market.
The list goes on…
We will not mention all the possible scenarios for investing strategies in this article, as some of them are quite complex. Also some are not really worth mentioning. As you can see with this current list, it is possible to combine strategies for a maximised effect. Combining strategies can get the best result for you and your skill level and also time that you have available to put into a project.
As for my wife and I, we have engaged professional help to buy and hold properties. We use a team of professionals to implement a well thought out and highly leveraged strategy. It is a comprehensive and technical strategy that works for us. It is not labour intensive and does not require too much of our time. The best part is that the property does most of the work. Find out more HERE.