Which Property Investment Strategy Is Right For You?
With so many ways to create wealth from real estate, it’s hard to know which one is best for you.
And unfortunately, I don’t have the answer.
This isn’t because I’m not up to date on all the options.
Quite the opposite.
It’s because different strategies work better for different people.
And what might be ideal for you, might not work well for other people.
Instead, let’s go through the most common strategies so you can get a feel for what works best for you.
Buy-And-Hold
The most popular strategy of all is to buy-and-hold.
This is a simple strategy where you purchase a property, rent it to tenants, and hold it for the long term.
Then, as it grows in value, you use the equity you have gained as a deposit for your next investment.
The biggest benefit of buy-and-hold is how simple it can be.
If you’re like most people and you’re short of time, it’s a relatively straight-forward process which requires little time, either initially or ongoing.
And you can work with a buyer’s agent to source a quality property as well.
Other, more complex strategies may sound more appealing, but if you can’t get started then you miss out by being stuck on the side-lines.
You can either buy an existing property, or you can buying ‘off the plan’.
Buying off the plan is a strategy where you invest in a property which either hasn’t been completed, or maybe hasn’t even commenced.
There are a few benefits to buy-and-hold.
- It’s straightforward and easy to do
- You can take advantage of significant tax deductions which you can claim to reduce your tax bill. Typically, the newer the property the more tax deductions there are
- If you buy in the right location, you can enjoy significant growth
- Rental incomes typically continue to rise, and your property can add to your income
- If you purchase off the plan, you don’t pay for the whole package until it’s complete. And your property can appreciate in value before construction is complete, meaning you build equity into the deal
- This is a low risk strategy, as long as your house is what tenants want in an area which is growing in value
Of course, there are some drawbacks to this strategy as well.
- It is a slower wealth strategy than other, more complicated strategies
- Less opportunities to add value over time such as renovating
Rentvesting
Rentvesting is a strategy which has grown more popular in recent years.
It’s a solution to the dilemma of wanting to own a house, but not wanting to sacrifice your lifestyle.
Let me explain:
The problem many people, particularly young people have is wanting to live in the inner suburbs, close to pubs, restaurants and the nightlife.
However, they can’t afford to buy in these popular areas when they’re starting out.
And the areas they can afford to buy in don’t offer the kind of lifestyle they crave.
The solution?
Rentvesting.
What rentvesters do is purchase a property solely for the purpose of investing.
This means in an area with high capital growth potential and good rental returns.
It doesn’t even need to be somewhere they’d want to live in. It could even be in a different state.
And then they rent a property in a popular, lifestyle location to live in.
This way, they’re getting the benefits of owning real estate.
And enjoying a great lifestyle at the same time.
These are some of the benefits of rentvesting.
- Enjoying a capital gain and rental income from owning an investment property
- Living the kind of lifestyle they desire
- Depending on the investment they buy and the property they rent, the investment can potentially cover their rental expenses
There are, however some drawbacks to this strategy.
- Renting in a popular suburb is often expensive, and depending on their finances this strategy might not work
- By paying rent, their budget for an investment property may be limited
- Banks will not take all the investment property rental income into account when assessing their borrowing capacity, potentially reducing their investing budget
- You cannot add value to your investment property in the same way as you could if you lived in it
Flipping
Flipping houses is a strategy where you buy a house, renovate it and sell it again.
This can be a lucrative strategy if you’re an experienced renovator.
By carefully managing your renovation, you can add significantly more value than what it costs to do the work.
You could, for example, spend $100,000 renovating a house which ends up being worth $250,000 more at the end of the project.
However, if you’re not experienced at doing this, there are plenty of risks.
The benefits of flipping are:
- The potential for significant profit in a relatively short period of time
- The harder you’re prepared to work, the more houses you can flip and the more you could save by not paying tradespeople
- When you sell each property, the money is paid to you, not locked away in a house in the form of equity. This makes it an income-producing strategy instead of a compound growth strategy
There are, of course some drawbacks to flipping:
- It’s very easy to lose money by flipping houses.
- An inexperienced flipper can easily over-capitalise by spending more money than they intended, and by not adding as much value as they planned.
- This could result in making less than expected, or potentially losing money
- Flipping is very time consuming. You will need to be on-site several times a week, and you may choose to do some tasks such as painting yourself.
Not only is this time consuming, it can be very physically draining and stressful
You will be taxed on your profits when you sell. All investments are taxable when sold, but when you buy-and-hold a property, your capital gains are not taxed while you still own it
Things can go wrong when you flip a house. Your budget might be wrong, unexpected costs can arise, there can be delays, and your expected profits can quickly evaporate.
Entry and exit fees are high. Every time you flip a house, there are purchasing fees such as stamp duties, council rates, conveyance costs and other levies to pay.
Then when you sell, there are more fees to pay such as agent fees and more conveyancing costs.
These are sunken costs, and can eat into your profits significantly.
Commercial Instead Of Residential
Investing in commercial property is where you invest in a property which is rented to a business, not for a person to live in.
Factories, warehouses and shops are common commercial investments.
Investing in commercial property is a popular alternative to investing in a residential property, yet both strategies can be very different.
There are some benefits to investing in commercial real estate.
- Commercial property typically earn a higher rental yield than residential property, although this is not always the case.
- Commercial property leases are often longer and more stable than residential leases, due to businesses wanting to stay in the same location
- Finance for a commercial property is usually based on the strength of the deal, rather than the finances of the purchaser
- The tenant pays all the expenses (also known as outgoings) including council rates and building insurance
There are, of course some drawbacks to investing in commercial real estate.
- The risks can be higher because commercial properties typically take longer to rent.
- When they go vacant, they really go vacant.
- If a tenant goes bankrupt you could lose your rental income for a longer time between tenants, as well as potentially having to deal the cost of cleaning up an abandoned property
- The value of a commercial property is closely linked to rents, so if rental income stagnates (and leases are typically 3 – 5 years) so will the value of your property
- Longer leases (with options in favour of your tenant) mean you can’t take possession of the property easily to renovate or redevelop. And properties with a lease in place must be bought and sold with that lease remaining in place
- High quality commercial property can be expensive, often $1 million and up.
- You need a higher deposit to purchase a commercial property, typically around 30%
Is There A Right Answer?
As you can see, there’s no one-size-fits-all approach to investing in real estate.
All these options work well for different investors.
Some work well for first-time investors.
Others work well for more mature investors with greater financial backing.
Others still, particularly flipping can be great options for people with the time to put into them.
The answer for you is to think about the pros and cons of each, and decide what works best for you.
Start Your Property Investment Journey with AllianceCorp Property Experts Now
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