10 Apr Australian Property Investors – Tips and Strategies
While real estate is arguably the best investment (they aren’t making more land, and population is growing worldwide), it’s not always easy to make money and all too easy to lose big.
Understanding different investment strategies, knowing your market, and working with reputable professionals help to ensure that you make money today and tomorrow. Property investment in Sydney is a competitive market, and you can either make it big as an investor, or fail big. Melbourne property investors face the same challenges.
If you’re like many first-time Australian property investors, you are probably feeling overwhelmed. Developers, financial planners, customers and architects can all give you lots of great – and conflicting – advice. Should you build from ground-up? Should you renovate older properties? Should you manage your rentals or hire a management company? Should you go for long-term gains, or fast cash? Or all of the above?
There is not one simple or clear way to increase wealth through property investment. However, there are three potential ways Australian property investors can use to achieve financial freedom, and they each involve a different approach:
● Capital growth
Seeking out diamonds in the rough – properties that you can improve without destroying your budget – is a great way to benefit from established neighbourhoods that often have a lot more personality than sterile suburbs. However, renovation is not for the timid!
● You are forcing growth in the market, which can mean quick added value even in a flat market.
● If your timing is good, you purchase the right property and do the right renovation, you could make a big profit whether you sell or rent.
● Sometimes, a renovation opens up a messy can of worms of unexpected expenses, and you get much more than you (or your budget) can handle.
● There is no guarantee that your newly renovated property will be valued as you had hoped.
Renovations are best for experienced investors looking for a quick boost in property value, for investors looking to expand a portfolio quickly, and for people who love hands-on projects and who can adapt to potentially many unexpected surprises and setbacks.
Capital growth means buying properties with the expectation that they will increase in value over time. This strategy means minimal effort after you purchase a property (no expensive renovations), but there is a lot of up-front research needed to find the markets that are ready for growth. You also need to focus on whether you want to hold on to the property short-term or long-term, as this will affect what you are willing to invest.
● If you buy in up-and-coming areas that are expected to grow long-term, expect to pay more than the rental income you may receive; you may experience a cash shortfall for several years.
● It’s a passive investment that requires minimal effort outside of regular maintenance costs. After doing the research and finding the right property, you simply sit back and wait for the property to grow in value.
● You need to have enough cash on hand to cover all property-related costs such as mortgage payments and maintenance issues that are not covered by your rental income.
● You need a keen eye to spot market trends… before they are trends, so that you buy low and sell high. This isn’t always easy, and many investors mis-time their purchases.
● You will be hindered by a lower borrowing capacity. You’ll be supporting a negative cash flow, which means until your investment turns positive, you won’t be able to borrow much for additional investments.
The capital growth strategy is best for investors who enjoy a high income and are looking for tax breaks, investors with plenty of time (around 8 years on average) to realise a return,
● If you have high income and looking for ways to maximise your tax benefits and you can support your investment if rental income is insufficient.
● If you have plenty of time to ride out at least one investment cycle (around 8 years).
With this strategy, your intent is to generate immediate cash flow. Typically, this means owning an investment property where the rental income is more than the property holding costs. This is the strategy most favored by beginning investors, especially those with only a small amount of money to invest.
● You will enjoy extra cash flow, to use for personal expenses, property holding expenses, further property investments, or to offset any shortfalls due to unexpected situations or economic downturns.
● You will have a higher borrowing capacity since your rental income will cover most of your holding cost and leaves you with greater disposable income that enables you to borrow more to invest.
● You will be more secure in the case of an economic downturn – the extra income will help, and you won’t have to sell at a loss should you lose your job.
● Building equity takes time since your capital growth is slower. Most high-yield cash-flow properties are situated in lower socio-economic areas or areas with a strong rental but poor buyer’s market.
● You will receive little or no tax benefits. If your property generates income equal to or more than your expenses, your tax deduction will be lower and you may have to pay tax on your rental income.
The cash-flow strategy is ideal for a beginning investor who is finding it difficult to get a loan due to low income or poor cash flow. While growth is slow, if you’re careful and save your excess income, you can move on to more lucrative types of property investing.
The Bottom Line
Weighing the pros and cons, and going through the process of investing in property, potentially remodeling it and renting it, can be time-consuming, complicated and it’s always a process fraught with uncertainty, especially for the inexperienced investor.
However, you don’t have to make your decisions alone, and you do not have to go through the process without guidance or support – particularly if you choose renovations as your primary strategy. At White Gorilla Development we leverage our expertise to make every step as easy as possible, while keeping in mind maximum ROI for you. Please give us a ring and schedule a complimentary consultation with Neal Ashworth today!