There’s more than one way to make money from property investment.
Some investors focus on capital growth, others look to yield to boost their cash flow, and yet more like a mix of the two. But how do you know which investment strategies are designed to produce which results, and which ones are the right ones for you? We take a look at the pros and cons of some common property investment tactics.
As with any type of investment, always seek professional advice from a qualified accountant or independent financial adviser before taking the plunge.
1. Negative gearing
If you’ve ever considered investing in property, you will have heard the term ‘negative gearing’. It refers to a property investment where the annual costs exceed the income generated, leaving the investor with a loss. The investor may then be able to claim that loss as a tax deduction. Of course, in order to hold onto the property, they need to be able to cover the losses throughout the year before tax time comes around.
A successful negative gearing strategy relies on the property gaining in value over time. Although historically property prices in Australia’s capital cities have grown more than enough to offset the losses endured during a period of negative gearing, bear in mind that the property market comes with no guarantees about future price rises and when they might occur.
Seek advice from your accountant before embarking on a negative gearing strategy.
2. Positive gearing and positive cashflow
A positively geared property investment is one that generates more in rental returns than it costs to own, thereby putting money in the investor’s pocket. The obvious benefit of this strategy is the additional income, which can be used to offset the costs of owning the property and may add to the investor’s borrowing capacity to help fund future investments. The flip side is that because the investor’s income is greater, they may pay more tax.
It is also sometimes the case that positively geared properties are located in high rent demand areas where capital growth is less, meaning that the value of the property may not grow as much or as quickly as in other areas. Research is the key to finding a property that may offer the best of both.
Consult with an accountant to fully explore the tax implications of a positively geared property before pursuing this strategy.
There are two ways to pursue a ‘hold’ property investment strategy – buy and hold, or renovate and hold.
Buy and hold is a long-term strategy where an investor buys a property in an area likely to experience capital growth over time (think suburbs that are in demand from owner-occupiers with lots of attractive features like good infrastructure, transport, schools and amenities) and holds onto it for a long period before selling at a profit. On the plus side, if you can afford to have your money tied up for a long period, buy and hold is considered a relatively low-risk investment tactic and usually requires little effort from the investor once the purchase has been made. For it to work, it requires the investor to stay committed to the investment for a long period of time for capital growth to fully materialise.
Renovate and hold sees the investor undertake works on a property in order to boost its value and the rental income it commands. While it’s true that you may be able to charge more rent for a recently renovated property, it’s easy to overcapitalise and go over budget with renovations, effectively wiping out any extra rent you may recoup.
When an investor buys a property, renovates it quickly and then sells it, ideally generating a profit, it is known as property flipping. It may be a way to make money from property investment relatively quickly, but it’s not without risk. To successfully flip a property, it needs to be purchased at a competitive price, the renovations need to be kept within a tight budget and timeframe, and it needs to achieve a sale price above and beyond all costs in order for the investor to make a profit. Market conditions can also have a big impact on its success.
Subdivision, also known as block splitting, is when an investor purchases a large block of land and then divides it into two or more blocks, subject to council regulations, zoning and minimum block size requirements. They may then choose to build on one or more of the blocks, sell them as is, or hold on to them in a buy and hold tactic. It can be difficult to find the right block of land to buy and dealing with the council can be time-consuming and complicated, but subdivision may be a way to get more value out of a block of land.
Before pursuing any new investment strategies, always seek professional advice from a qualified accountant or independent financial adviser.
For more information about property investment in Perth, contact our expert team today.