Property Investment Strategies in Australia
If you are a first time property investor, or even if you have some experience in the market, deciding on the right to suit your resources, lifestyle and financial goals is not always easy. There are any number of approaches that can be taken when it comes to buying an investment property, and no shortage of property investment advice available. While it is good to be as informed as possible, sometimes it feels as though there are too many options to choose from.
At High Income Property, our aim is to show you how to create wealth with property, and to that end we aren’t blinkered or limited in our approach. Instead, our property consultants help you choose the based on your specific circumstances and what you want to achieve.
To do this, we will take you through a range of property investment strategies using real world examples and property data, enabling you to see both the short and long term benefits and drawbacks of each approach, making it easier to choose the right way to build your property portfolio.
Generally speaking, we divide real estate investing strategies into three broad categories:
- High cash flow
- High growth
- Portfolio builder
High Cash Flow
When doing your research, you might see high cash flow properties referred to as , positive income or positively geared investment properties. These interchangeable terms all mean broadly the same thing, namely that any rental income you derive from your investment property is greater than the associated costs of owning it (e.g., mortgage and insurance payments, rates, maintenance, cost of finding tenants, etc), meaning that you make a cash profit each month from the property.
Advantages of a positive cash flow investment properties
In short, a gives you an immediate return in the form of passive income each month. This amount will likely not be huge, but it is nevertheless one of the most effective ways of building prosperity through property. For many, it’s the most straightforward approach to investing for the first time, as it is relatively low risk, and can also generate cash that enables you to pay off the mortgage more quickly, or get additional funding to purchase another investment property.
A simple example might be as follows: the total holding costs associated with your investment property are $30,000 per annum, while the income derived from the rent is $32,000. This would mean that your positive cash flow per year is $2,000, or just under $40 per week.
These sorts of immediate returns can be appealing because it means you don’t have to wait until you sell your property to see a profit on your investment.
Drawbacks to owning a high cash flow investment property
At the same time, there are some drawbacks to buying a positively geared investment property that mean it’s not necessarily an approach that will suit all investors. You will need to factor in, for instance, the fact that any income derived from the property (after expenses) will be subject to tax. This means that, depending on your circumstances, it’s unlikely in the short term to be the way to prosperity through property.
Furthermore, it is not always possible accurately to predict all of the holding costs associated with owning the property. In addition, it also tends to be the case that a high cash flow property will, over the long term, produce slower capital growth than some other approaches to investing in property, which could ultimately impact on your net worth and potential access to funds in retirement.
Finding the best suburb to invest in
Finding areas where it is possible to invest in positive cash flow properties requires extensive research and a thorough understanding of the market for property investment in Australia. At High Income Property, we utilise a range of industry data that enables us to formulate property investment strategies based on the most up-to-date information.
For instance, we examine an area’s potential for economic growth, the stock of housing supply available, the surrounding suburbs and their current status, the historic and current vacancy rates, the rental yields generally available, as well as the current and planned infrastructure in the district.
Advantages of a high growth investment strategyAn investment property purchased as part of a high growth strategy will generally bring in less rent than is required to meet the monthly holding costs (e.g., mortgage, insurance, rates, maintenance, etc.), meaning that it costs you money each month to own (although in the longer term, it is nevertheless expected that this type of property will eventually become cash positive). However, there are distinct advantages to this, one of which is that your property is negatively geared. This means that the net rental loss after holding costs and deprecation have been accounted for can be claimed as a tax deduction when set against your other income. As a simple example, if the income you derive over a year from your investment property is $5,000 less than the overall holding costs, then your taxable income for the year will be reduced by this amount. Losses can also be carried forward to the next financial year. Another important reason why a long term growth strategy can be an effective way of investing in property in Australia is that any initial losses you accrue in the early stages of owning the property are offset by significant appreciation in its value over the period which you hold it (one of the keys to successful investing is generally considered to be the length of time you own a property). In addition, purchasing an investment property as part of a high growth strategy may mean that it generates significant long term returns over time so that you do not need to build up as large a property portfolio in order to make a sufficient profit on your investments.
Drawbacks to high growth investment propertiesFor some investors, the most significant drawback to pursuing long term, high growth property investment strategies is that there are fewer immediate benefits with regard to income and returns. There is also likely to be greater risk, in that you are dependent on the value appreciating sufficiently to cover any initial losses, and therefore a significant fall in value could cost you dearly. It might also be the case that opting for a high growth strategy that does not generate any income in the short term inhibits your ability to grow your property portfolio, as you do not have sufficient income to secure further financing.
As we have seen, property investing can be done in quite different ways, and can achieve quite different outcomes. There is much debate as to which approach is the best, and one or the other may suit you more as an individual investor; however, there is also much to be said for a portfolio builder, or balanced property investment strategy.
This involves a combination of the two approaches outlined above — both positive cash flow and high growth — and will usually be designed to incorporate a mix of property types, which may be spread across different areas of NSW and throughout Australian capital cities.
In this way, you gain some good benefits in the form of rental returns on your investment, combined with properties which help you to fulfil the long term goal of appreciation and growth in value. Having different property types in your portfolio also enables you to pursue different investment goals at different times.
However, a diverse property portfolio does not simply mean buying more and more property. Rather it is about enabling you to take advantage of different market cycles, for instance, and becoming more resistant to rapid changes in market conditions in one particular location. Quality and value are in the long run much more important than quantity.
At High Income Property, we work with you to devise a personalised approach to building a diverse property portfolio. This will take into account, amongst other factors, your goals, the equity you have in existing properties, and how you can use cash flow to finance further investments.
Talk to High Income Property to find out more about how to invest in property
Talk to High Income Property to find out more about how to invest in property
If you already have an idea about what property investment strategies might work for you, or you need assistance to run through all of the options available to you, our expert property advisers are here to help.