The journey to smart property investment is a personal one, and the reality is that there’s no one-size-fits-all formula for growing a property portfolio. To achieve success, it’s important to identify and work towards goals that align with your specific circumstances.
With that said, there’s no shortage of property investment tips out there, and it can be difficult to cut through the noise to find advice that works for you – especially if you’re just getting started.
Here, we walk you through some of the key strategies and approaches to property investment, so you can make informed decisions about your long-term financial freedom.
Property investment advice: Where to start
Before you enter the property market – whether it be as an investor or an owner-occupier – it’s critical to have a plan of action in place to minimise risk and seize opportunities. With that in mind, you should do the following:
1. Assess your financial situation & develop a plan
Consider your financial circumstances and how much you can feasibly afford to invest in property for the time-being. Avoid get-rich-quick schemes and don’t assume that you’ll be more financially secure in future. Speak to an accountant, financial planner, or mortgage broker to help you develop a plan that works for your situation.
2. Weigh up the risks
Although property investment can be less risky than some other investment approaches (such as high-volatility shares), it’s nonetheless a big investment and comes with a certain level of risk. Factors such as where you invest, what type of property you invest in, the structure of the property itself, and the state of the real estate market can impact the degree of risk you’re exposed to when investing. Talk to an accountant or financial planner about the specific risks you should be aware of, and what you can do to minimise potential negative impacts on your cash flow.
3. Get to know the market
At its core, property investment is a business proposition, so it’s important to identify a target market and understand the types of features that market is looking for in a property. For example, buying a studio apartment could make sense if it’s in a central area with a high density of single young professionals, but wouldn’t be a good idea if it’s in an area with a lot of families.
Keep in mind that even if a suburb or region has seen recent growth, it’s still crucial to understand what the typical owner-occupier is looking for in that area to increase your chances of a healthy return on investment.
4. Understand the tax implications of investing
Whether you’re investing in property to rent or sell, there are a number of tax implications to be aware of, such as:
Capital gains tax – A tax on the profit made when you sell a property. GST – If you’ve developed a property and it’s considered to be a ‘new residential premise’ then you may be entitled to claim GST credits for purchases you make that go towards the sale of the property. Negative gearing and positive gearing - if the interest on your mortgage outweighs the income you get from rent, you can claim negative gearing deductions from your assessable income. If you make a profit from rent, you’ll have to pay tax on that income.
It’s a good idea to ask your accountant about how these tax liabilities could impact you before you invest.
Property investment strategies compared
Once you’ve done a good amount of research into the property investment market and sought advice from professionals about your particular situation, it’s time to decide on a strategy for property investment. There are three main approaches to choose from:
1. Capital growth strategy
A capital growth strategy refers to buying a property with the expectation that it will increase in value over a period of time without any additional effort on your part. This strategy tends to involve buying a property with a higher price tag in a desirable area, and waiting for growth to continue over a relatively long-term period.
- Focused on long-term capital growth
- Passive investment i.e. little-to-no additional effort after purchasing
- You can reap the benefits of negative gearing if rental yields are lower than your mortgage interest
- Because of the higher price tag, you may have to cover a percentage of mortgage -repayments out-of-pocket
- Capital growth is based on speculation, so it can be higher risk
2. Cash flow strategy
A cash flow property investment strategy is one where your focus is on making a profit from your property as soon as possible to keep a positive cash flow. Typically, investment properties bought for cash flow earn more rental income than the cost of the mortgage and other expenses such as maintenance.
- Extra cash flow can be used for other expenses or to offset the shortfall of a negatively geared property (as above)
- Income earned from the property gives you more borrowing power
- Less direct financial risk
- Capital growth tends to be lower over the long term
- Slower to build equity
- Fewer tax benefits
3. Renovation strategy
With a renovation strategy, you actively seek out a property to renovate and boost its value when renting or selling (think fixer-upper).
- Potential to add value relatively quickly, even if the market is stagnant
- Potential to sell and make a profit, which can be used in invest in a more long-term capital growth property
- Renovation requires an initial bulk investment, and it’s easy to go over budget
- There’s no guarantee that the sale price of the property will exceed the renovation costs and make a profit
Good luck getting on the property investment map, and don’t forget to check out our guide to the best types of investment properties for more info.