3 Property Investment Strategies for Beginners
Making money on an investment property rarely happens by chance, so it’s important to have a clear strategy to maximise your chances of success.
There is no blanket strategy to become a successful property investor, and there are just as many ways to lose your money as there are to make your first million. However, having a defined investment strategy to help guide your decisions can help get you on the path towards financial freedom.
Capital Growth Strategy
In it’s simplest form, a capital growth strategy involves buying a property with the expectation that it will increase in value over a period of time. This strategy suits the beginner investor as it requires very little effort or input after purchase, however identifying the right property is crucial to success.
The timeframe you set for this investment strategy can also impact on both the type of property you buy and the expected return on your investment, so having a clear idea about the strategy and its’ intricacies is extremely important before you go ahead and put in an offer.
A long term buy and hold strategy usually will mean that the property is in an area where there is long term desirability, and hence continued demand within the market. Conversely, a shorter timeframe of 1-5 years for example requires more of a focus on identifying regions which are on the verge of an upturn in growth.
Capital Growth Positives
Negative Gearing works for you: The strategy generally means buying in areas which are more desireable and have longer term growth prospects. As a result, prices can be higher compared to the rental income which you are able to derive. This can produce a cash flow shortfall that can be claimed against any income, and improve your tax position.
Play the Long Game: Long term growth can help you move towards financial freedom and ride the bumps in the market.
It’s a Passive Investment: Once you have identified a property which meets the strategic needs, the hard work is done. Simply wait for property value to increase to the threshold you’ve set during the initial research stage.
Capital Growth Negatives
Timing is everything: Maximising capital growth of the property in the shortest possible time requires a perfectly executed buying strategy. You want to buy at the bottom of the market, and sell when it’s hot. This isn’t always easy or achievable, and any mis-timing could result in negative financial outcomes.
Your borrowing capacity is reduced: When you negatively gear a property, you are in effect spending more money than you are receiving each week. This will affect your borrowing capacity which can stop you from borrowing further funds down the track.
Cash flow gets tight: Higher prices, mean you are likely to have to cover additional property related costs, such as repayments and maintenance issues out of your own pocket, which restricts your cash flow.
Cash Flow Strategy
The cash flow strategy puts the focus and priority on a attaining a positive cash flow for your investment. There is less attention paid to potential capital growth, either through long term strategies or short term value adding.
This strategy is a favourite of new and beginner investors, as the simplicity of identifying a property which earns more rental income than the cost of servicing the debt and property expenses combined, allows those on lower incomes to enter the investment market.
As the investment property will most likely be rented out to ensure the positive cash flow is achieved, the property’s rental yield is important to identify. In the example below, the 10 year rental yield for units in Milton is displayed. This strong long term positive growth of rental yields is a sign that the cash flow strategy could be successful in this suburb.
Cash Flow Positives
Extra Cash: The investment is positively geared, meaning more cash in your pocket.
Increased borrowing capacity: Because the rental income covers most of your holding cost, you have greater disposable income that enables you to borrow more to invest.
Less exposure to the market: By investing in a property which is positively geared, there is less pressure to sell during a downturn in the market or if your personal financial circumstances change.
Cash Flow Negatives
Fewer tax benefits
As your property is generating income, you tax deductions will be lower. If your property is positively geared to the point where you are making more than the cost of upkeep and servicing your debt – you may even pay tax on the income.
Building equity is slowed
Most positively geared properties have a lower capital growth rate, and hence are slower to build equity. This can affect your borrowing capacity for future investments.
Renovation / Value-Add Strategy
This strategy involves identifying properties which you can improve to boost value for both resale and renting. The key to this strategy is selecting a property which has the right balance between amount of work required (in both hours and dollars) and the current state of the house. Remember, the more you spend, the more likely you will be to ‘over-capitalise’.
Selecting an investment property with price growth potential, together with adding value to the property is integral to this process. Not only should the property be in a suburb with historical price growth, but the demand to buy must also be traditionally high. In the below example, we see the long term median price growth in Highgate Hill. When coupled with the sustained high demand, this suburb is a prime candidate for a value adding investment strategy.
If the timing is right, you could potentially make quick and big profits on your investment. Home buyers will also look at the standard of renovation too, so take into account your limitations when thinking about what to spruce up and what to leave alone.
You don’t rely on the market
By adding value through improving the property, you are not relying on the market to grow for your investment to be positive. Organic growth can take time, but renovations are immediate and can ‘force’ price growth for your property.
There are no guarantees
While a lot of planning and buying well could help you mitigate this risk, the reality is that there’s no guarantee that your newly renovated home would be valued as you expected or want.
Spending can spiral
Overspending on your renovation is very common especially if there are unforeseen issues that you haven’t factored in.
Remember the most important part of any strategy is to do your research. If you know what you’re looking for, and most importantly when to say no, your chances of successfully implementing your investment strategy will improve.
Disclaimer: The information in this article is of a general nature only and should not be relied upon as financial advice. You should seek professional advice for your particular circumstances before entering into any transaction.