Buying a property is not an investment strategy.
Building a property investment portfolio involves much more than picking the property type and your price bracket.
You need a goal in mind and a plan for achieving it.
Note: Investing in property with the right property investment strategy can be both lucrative and rewarding.
And not only that… it’s essential!
After all, planning is bringing your future into the present so that you can do something about it now.
That means that creating a property investment strategy needs to be the first essential step when you set out on your property investment journey.
Tips: You need to document a proven property investment strategy that aligns with your risk profile, your goals, and your time frame.
However, choosing exactly what strategy works for you can be a daunting task.
In my experience, winning strategies lend themselves more to the tortoise pace of slow and steady.
To help, I’ll share my list of the 8 most popular property investment strategies in Australia and how they work.
But first, there’s an important point I’d like to make…
Are you aware that you can profit from real estate in one of five ways?
And if you get the combination right you’ll make money from bricks and mortar.
They are:
- Capital growth - To build yourself a sound asset base, your properties will need to appreciate in value at wealth-building rates.
- Cash flow - In other words, your rent.
- Tax benefits - While you should never invest solely for this reason; a good tax strategy can help you manage your cash flow, decrease your tax obligations and increase your bottom line.
- Accelerated growth - Getting your hands a little dirty (metaphorically speaking) by purchasing a property that needs a bit of cosmetic TLC through renovations or a major facelift through property development is a great way to manufacture capital growth.
- Inflation - Property investors have learned it's too hard to make money using your own money. Instead, they have learned to use other people's money to leverage and gear.
1. Positive Gearing Property Investment Strategy
Positive gearing is a type of gearing-related strategy. This is when the income from a rental property covers the expenses incurred in holding the property and delivers some extra cash flow.
In other words, you are making a profit from your investment property, and you have the added benefit of the option of using some surplus income to reduce the size of your loan or maybe for your living expenses.
Note: The problem is…those investors looking for cash flow are thinking about the here and now, rather than the long-term, and while buying cash flow-positive properties may solve a short-term problem, in general, it won’t give them the long-term results they hope for, because in general, this type of property does not deliver strong capital growth.
Of course, I can understand why many beginning investors look for cash flow-positive property deals.
They’re looking for cash flow to give them choices, but they need to build an asset base first before they can move to positive gearing or positive cash flow investments.Down the track, they may achieve this by lowering their loan-to-value ratios, through commercial properties, or perhaps by buying shares.
At Metropole, we help our clients develop substantial retirement income, in other words, cash flow from their investments but these stages must occur in the right order.
The three stages of building wealth through property are:
- Accumulation phase: This is the stage where you build a portfolio of high-growth “investment grade” properties, usually over a 10 – 15 year period.
- Consolidation phase: The consolidation phase involves slowly reducing the debt on your properties, which conversely increases their cash flow when you need it the most.
- Lifestyle phase: This phase is all about enjoying your life and living off the cash machine you have produced in the first 3 phases.
That’s why at Metropole we take a long-term view of property investment.
Our plan is not to beat the short-term averages, but to build a substantial asset base in the long term, which means we steer clear of “get-rich-quick schemes”.
Note: Remember that, in simple terms, a positive cash flow property is one that generates a return that is higher than the property costs to own.
Here is an example of a $200,000 regional apartment, which generates a 6% gross rental yield of $12,000 per year:
- The purchaser used a 25% deposit or $50,000 to purchase the property.
- They apply for an interest-only mortgage on the remaining $150,000, fixed at a rate of 4%.
- Rental income – 6% yield $12,000
- Mortgage – interest only 4% = $6,000
- Repairs, management, strata fees, council rates = $3,500
- Total Income ($12,000) – Total Costs ($8,000)
- Net cash flow per annum before tax of $2,500.
The potential downside to the approach of investing in a property for positive cashflow is the fact that as a landlord, you may be required to extend your property search to regional locations outside of the major capital cities.
This is because capital city properties generally return a lower yield.
Case study by Metropole Property Strategists
In today’s higher interest-rate environment, it would be very difficult to get any positive cash flow from properties unless you have a very low loan to value ratio.
The other big problem with many cash flow positive properties is that, in general, cash flow-positive properties are in cheaper areas, lower socio-economic areas, or regional locations.
Not only do these locations offer lower capital growth, but they also offer the prospect of lower rental growth.
Note: While in the early years, the investment yield (the rental return as a percentage of the value of your property) may be high, it will be hard to increase the rent in the location where many of these properties are located.
2. Negative Gearing Property Investment Strategy
This is the second type of gearing-related property investment strategy.This is where, unlike positive gearing, the rental income doesn’t cover outgoings and expenses, including your mortgage meaning there is a cash flow loss.
Put simply, gearing means that you have borrowed money to buy your investment property.
A property investment strategy using negative gearing usually involves buying a property in a high capital growth suburb, but where the net rental return is lower than the cost of holding the property.
Note: Yes…you make a cash flow loss.
Running at a loss is not ideal, but in terms of Australian tax law, it’s not actually all that bad.
That’s because the Australian Tax Office (ATO) allows property investors to deduct any losses they make on their investment property from their ordinary taxable income.
Investors who purchase properties for long-term capital growth don’t usually expect to make their money on the rent.
They recognise that residential real estate is a high-growth, relatively low-yield investment, so they will generally use the negative gearing strategy in conjunction with the 'buy and hold' property investment strategy.
They understand that while rental income will keep them in the game, it's really capital growth that will get them out of the rat race.
The pros of using this type of property investment strategy are that if you know what you’re doing, you can legitimately claim a tax deduction and use your tax to help cover the expenses of holding the property investment.
But the downside is that the investor has to cover the shortfall to keep holding the property.
That’s why this strategy tends to work best for higher-income earners in the top tax brackets.
But many ordinary mum and dad investors buy negatively geared properties using the strategy of having a financial buffer in place to buy them a couple of years of time using their cash flow buffers.
In other words, they do not borrow up to their full financial capacity to purchase their property and leave funds in a financial buffer, such as in your offset account, to buy themselves a couple of years' negative cash flow.
In other words, these smart investors are not only buying themselves property, but buying themselves time.
If you are on a low income, the tax effectiveness is significantly reduced, as you would be on the lower end of the tax brackets.
Note: Just to make things clear… a property is neither a positive cash flow nor negative cash flow property – it all has to do with how much finance you take on to purchase the property.
In simple terms, negative gearing takes place when you own an asset, in this case, property, that costs you more than you are earning from it.
For example, the interest you are paying on your mortgage and all other associated costs with the property, equal more than the income or rent you earn from that property.
As a result, you are making a financial loss.
In this example, a higher rate taxpayer has bought a $750,000, two-bedroom capital city unit, which generates a 3.5% yield.
- Rental income – 3.5% yield $26,250
- Mortgage – interest only @ 4% = $24,000
- Repairs, management, strata fees, council rates, etc. – $8,000
- Net cash flow per annum is a loss of $5,750
The bonus is that this financial loss of $5,750 can be claimed against their income tax, meaning they’ll receive a percentage of that loss back at tax time.
Which means that as a higher tax-paying investor, you could receive up to 45% of this loss back.
Case study by Metropole Property Strategists
Confused about how this benefits you?
Here’s a very simplistic example:
You own an investment property and every year you’re left $10,000 out of pocket after all expenses and rental income is accounted for, then you can claim that $10,000 against your income tax.
If you pay tax at the higher end of the scale, of around 45 cents in the dollar, then you stand to get $4,500 back at tax time.
Meanwhile, if the investment property goes up in value (but you don’t sell it), no capital gains tax (CGT) will be payable.
In the example above, if the $750,000 investment property increases in value by 7% a year increases in value by $52,500, considerably making up for the $5,750 cash flow loss.
Case study by Metropole Property Strategists
3. Using Equity to Buy an Investment Property
This property investment strategy involves using the equity from your home (or other investment properties) to help buy your next investment property.
Note: Put simply, equity in a property is the difference between the current market value of your property and how much you owe on it.
Here’s an example:
If your home is worth $800,000 and the current debt on her home loan is $500,000, then you have $300,000 worth of equity in your house.
So while you may have thought of your home as a never-ending series of monthly loan repayments, with every payment you make you are building up your equity and over the last couple of years, with the market pushing property values, your home equity is likely to have grown considerably.
There is a difference between the equity in your home and your usable or borrowable equity though, which means the first step when using this property investment strategy is to calculate your usable equity and then work out how much you can borrow with that equity.
By using the equity in your existing property to purchase a new investment property, you can avoid the deposit-saving process (and even avoid selling your home).
I’ve heard some refer to this as “leapfrogging.”
Essentially, you’re using your equity as a deposit.
The first step for buying a property with equity, or even building on your property investment portfolio, is to approach your mortgage broker or lender to request a valuation to assess your property’s fair and current market value.
If you’ve lived in your home for a while you probably have considerable equity in it.
- Also read:Perth housing market update | December 2024
- Also read:Sydney housing market update | December 2024
- Also read:Latest property price forecasts for 2025 revealed. What’s ahead in our housing markets in the next year or two?
- Also read:Melbourne housing market update | December 2024
- Also read:Australian housing market update [CoreLogic’s video] | December 2024
This will then help you determine your usable equity as we discussed above.
The loan product you choose and the amount of equity you are looking to access may result in various fees and costs, such as Lenders' Mortgage Insurance or if you decide to switch to another lender, there may be costs such as fees associated with breaking from a fixed rate product, a new loan application fee or government fees.
4. Buy and Hold Property Investment Strategy
The buy-and-hold property investment strategy is the easiest and lowest-risk form of real estate investment and history shows it’s a great strategy.
Buy the asset, never sell it, and draw on the equity it creates over the years to buy another property.
The idea is simple because you’re basically just holding onto your property and relying on compound growth to do the work for you.
The key trick is to select what we call an ‘investment grade’ property in a good suburb primed for capital growth and hold onto it for long enough.
Tips: You need to do your research to identify the key drivers of growth in a local market in suburbs that will benefit from infrastructure development, great transport links, shops, schools, and other lifestyle suburb traits that make the area grow in popularity.
The area and property type should also be in strong demand and where development is restricted.
Finding the right investment strategy is harder than it sounds, but at Metropole, we have a wealth of experience behind us to help you make the best investment decisions.
Now just to make things clear…
Note: When mentioning buy and hold, I don't mean set and forget - you should treat your property investments like a business and review their performance at least on an annual basis.
5. Renovate and Hold Property Investment Strategy
While renovations can be an effective way to boost equity and add value to your property by “manufacturing” capital growth, it's not the right property investment strategy for everyone.
That’s because it’s very easy to overrun your budget - after all, every renovation project is liable to encounter some sort of additional, unexpected cost at some point.
Then there are the surprise costs - once you begin renovating, you may unearth “hidden” work that requires an investment, but that doesn’t add any value.
It’s also difficult to get an accurate estimate of the work’s cost, particularly because costs fluctuate depending on the area, materials, tradespeople used, and the age of the property.
And the rising costs of materials and construction in the current market mean that resources are both scarce… and expensive.
It’s not all bad news though.
The benefit of renovating and holding an investment property is that you can increase the rental income and the value of the property at the same time.
It can also increase tax depreciation allowances.
Not that long ago we received a brief from a client in Brisbane who wanted help finding a “renovators delight” in a high-demand, investment-grade suburb.
As you can see, we certainly did that!
Because this was not to buy and sell but to hold and focus on longer-term wealth, they were able to renovate accordingly.
They could renovate and spend a little more to upgrade it to an “owner-occupier” standard, they didn’t have to scrimp and save and cut corners to make a profit.
The property has now become a set-and-forget inside their portfolio for the next 20+ years to create a higher level of wealth for them.
Case study by Metropole Property Renovation
6. House Flipping Property Investment Strategy
The other renovation alternative that some speculators use is to house flip.
This is buying a property, renovating it, and then selling it for profit within a short timeframe.
Proponents of this strategy, and those who sell courses teaching how to do this, will tell you that the key to flipping houses successfully is knowing the types of improvement you should make to the property to maximise your bottom line.
They suggest that you should at least double your renovation outlay, aiming for about $2 for every $1 spent on cosmetic improvements.
In order to achieve such lofty profits, you are usually taught to undertake a heap of due diligence by researching:
- Local property values and the growth history of the actual building are to be improved.
- Ceiling prices – what is the highest property price achieved in the area?
- Costs and potential profit margins – is there any profit left in it after all expenses? This is the (sometimes literally) million-dollar question.
- The market itself – you need to become a local real estate expert understanding your target market, who is your potential buyer, what they expect, and what they’re prepared to pay.
- The target property – “house flippers” tend to go for properties being sold by highly motivated vendors. The theory is to buy at the lowest possible price – clearly something very difficult to do in today’s seller's market.
While this strategy might make a few experienced property investors money, in my opinion, it’s the wrong strategy to adopt for two reasons:
- To improve a property's value by $2 for every $1 you spend on it you need to do much more than the simple cosmetic renovations – the type which is in the scope of most D.I.Y’ers. It generally involves structural renovations that cost significantly more, take more time, require permits and involve a different level of expertise.
- And even if you can undertake this type of work… Most of your profits will be eaten up in costs.
You can read more about the costs of house flipping and whether flipping houses is still profitable in Australia here.
For the occasional flipper that makes a profit, it’s likely that they have fortuitously caught the right stage of the property cycle and values have moved in their favour.
In other words, they got a “free kick.”
The problem is that most experts, let alone beginning property investors, have real trouble pinpointing where we are in the cycle until it’s already moved on to the next phase.
Tips: You must also be cautious with asset selection; one false move could trip up your flip.
That’s because budgets and time frames are at serious risk of a blowout should you purchase a property that, at first glance, looks like it’s in need of a few cosmetic enhancements, but actually turns out to be a structural money pit.
7. Subdivision Property Investment Strategy
This strategy involves buying one piece of land and splitting it to create two individual parcels of land on separate titles.
You can then do one of the following:
- Sell off each subdivided part of the land
- Keep one piece of the land and sell the other
- Keep both and use one plot to generate income and the other as your primary residence.
Not only will you have various options when it comes to deciding how to use the plots, but the value of the land will also generally increase once it has been subdivided.
The downside is that subdivision is a longer-term strategy because of the amount of time needed to complete.
And the risk is that in the meantime, a change in the market may mean it is difficult to sell one, or both, pieces of land.
Similar to property renovation investment strategies, there is potential to maximise the return on your investment, but there are also quite a few risks.
A few years ago we secured a development site for one of our clients.
It was in an A-Grade suburb of Brisbane and more importantly within one of the most prestigious, in-demand streets – and it drew a large crowd at auction.
We certainly weren’t attracted to the property itself, it was pretty much uninhabitable, but we were won over by the fact that the property sat on an 810 sqm block that could be subdivided into two smaller blocks of 405 sqm.
In fact, the benefit here was that it was already on two lots and therefore a much simpler process.
Fast forward 12 months and our client had the finished product - two modern, stylish, contemporary, brand new homes with high owner-occupier appeal.
This client effectively used the subdivision property investment strategy to fast-track their wealth creation.
Case study by Metropole Property Development
This is a significantly lower-risk strategy and it is not solely about chasing profits or income.
It is more about building longer-term wealth.
As I said above, there are downsides to this investment strategy, but by having a team around you that is known, proven, and trusted, you can lower the risks substantially, while maximising your return.
It becomes less about maximising profits and more about finding the right state, suburb, and street for longer-term capital growth.
8. Real Estate Investment Trusts (REITs)
A REIT is an alternative to all the property investment strategies above for investors who want portfolio exposure to real estate without a traditional real estate transaction.
A REIT is created when a corporation (or trust) uses investors’ money to purchase and operate income properties. REITs are bought and sold on major exchanges, like any other stock.
The benefit of investing in a REIT is that it is essentially a dividend-paying stock - that means that a portion of the company's earnings is distributed to investors on a regular basis.
Not only are they cash-producing, but they’re also a long-term investment.
The cons are, you’re not investing in the traditional physical real estate market and the value of your shares in the trust fluctuates in line with the general ups and downs of the property market.
What is the Best Strategy to Choose?
The best property investment strategy depends on your situation, finances, and your goal.
There is a “no one size fits all” strategy when it comes to property investment and what strategies to use.
The key to picking the right property investment strategy for you is making sure it lines up with your current financial needs as well as your future financial goals.
Note: It’s vital then that once you choose your strategy, you only look at investment properties that fit into your long-term strategy rather than getting distracted by the many perceived opportunities in the market.
Having a written Strategic Property Plan means that you won't worry too much about market timing.
When you have a Strategic Property Plan you’re more likely to achieve the financial freedom you desire because it will help you:
- Define your financial goals;
- See whether your goals are realistic, especially for your timeline;
- Measure your progress towards your goals – whether your property portfolio is working for you, or if you’re working for it;
- Find ways to maximise your wealth creation through property;
- Identify risks you hadn’t thought of.
Why not click here now and learn more about how Metropole can build a personalised Strategic Property Plan for you?
And the real benefit is you’ll be able to grow your wealth through your property portfolio faster and more safely than the average investor.
After all, remember… Property investment can be a successful wealth creation tool but it's not as easy as winning a game of Monopoly – that's why it always pays to have professional advisors on your team along the way.
