Property investment is a game that can be approached from many angles.
Many property investment advisors push one strategy over the others (usually the very same strategy they happen to promote). But the truth is, there are a multiple ways to succeed as a property investor.
Here are the top 7 broad property investment strategies used in Australia today. Some of the strategies may overlap, depending on how you apply them.
Strategy 1: Buy and Hold
This is perhaps the most popular investment strategy among industry advisers and professionals.
Buy and hold refers to acquiring property with the goal of generating long term capital growth. Usually you buy a property (using borrowed funds) that appreciates in value over time, with live-in tenants to help you pay off the mortgage.
As property values go up and rents increase, Buy and Hold investors often parlay their equity into purchasing the next property in their portfolio. Then in future, they may sell some of their stock to reduce debt and emerge with income generating assets.
With good asset selection and the benefit of time, Buy and Hold can be a very effective and low-hassle strategy.
Strategy 2: Negative Gearing
Negative gearing can be combined with other strategies (e.g. Buy and Hold), but the term refers to a property investment where the annual expenses exceed the rental income.
This leaves the investor with a loss, which under Australia’s current (and hopefully future) tax laws, can be claimed as a deduction.
Historically, particularly in capital cities, property prices have grown more than enough to offset the small loss incurred by a period of negative gearing.
Strategy 3: Positive Gearing
The flip side of the coin is Positive Gearing – where the property generates a higher income than expenses, before tax is taken into account.
Positively geared properties are usually hard to find (and if a newly purchased property is genuinely positively geared, there will usually be a downside, such as poor capital growth prospects).
However, properties may become positively geared over time, as increases in rental income outstrip expenses.
Strategy 4: Positive Cash Flow
A close cousin of Positive Gearing is Positive Cash Flow.
Positive Cash Flow properties are properties that put cash in the investors’s pocket after depreciation and tax deductions are taken into account.
New properties or newly renovated properties have the greatest potential to deliver positive cash flow because they offer the largest depreciation benefits.
Strategy 5: Renovation or Flipping
Renovating a property is a way of manufacture equity, allowing you to fetch a higher rent, or sell the property in a process known as “flipping”.
Renovation sounds simple, but by the time you factor in your hard costs, plus the cost of any time and labour, it’s relatively challenging to make money over and above what you could make via other investment strategies.
Nevertheless, some investors are very skilled at renovation and are able to make it into a lucrative investment model.
Strategy 6: Passive Property Development
Passive property development is where you supply money to a property developer, who then develops a property project, thus manufacturing equity.
Passive property developers provide the funds but not the expertise or elbow grease. This strategy can be considerably faster and more lucrative than more conventional strategies such as Buy and Hold – but it also entails more risk, such as the risk of the development not going to plan
Strategy 7: Active Property Development
Active property development is where you go out yourself and manufacture equity by adding value to land and buildings. You can either sell off the properties you build and/or hold on to stock, which you’ve now acquired on a “wholesale” basis.
Property developers can do very well… but many also go to the wall in spectacular fashion. And property development is a highly skilled profession with a substantial learning curve.
And that’s a wrap
Which strategy is the best? It depends. Each strategy has its place, depending on your current situation and goals. Contact us to formulate a property investment strategy that is right for you.