Which investment strategy is best for you? Top 7 explained
There are many strategies used to buy property. One isn't necessarily better than another. You have to weigh up the risk factors with your investment goals to work out which will best deliver your desired outcome.
Property investment can be approached from many angles.
But before you dive in with thousands of dollars, it’s important to understand which investment strategy will work for you.
It’s not about finding which is best. One isn’t necessarily better than another. You must weigh up the risk factors with your property investment goals to work out which plan of attack will deliver your desired outcome.
If your investment strategy is right from the start, you’ll be on track for sustainable gains. Yet it’s a daunting task to choose when ‘perfect’ strategies can still go wrong.
There are many strategies used to buy property. Here are the top seven to help determine which suits you.
1. Buy and hold
This is a long-term strategy that involves holding onto the property and drawing on its equity over the years.
Buy and hold is a popular strategy used by the majority of Australian property owners because of its history of success. Typically, it’s ideal for first-time investors. Properties under this strategy are generally bought for rental income or capital growth.
Compared to other strategies, buy and hold is simple – purchase, hold and keep for rental income.
- Easy to implement
- Passive income
- Tax advantages – write off expenses such as loan fees, depreciation, mortgage interest and maintenance/renovations
- Leverage - borrow money against the property to finance more real estate
- Long-term appreciation
The buy and hold strategy has the lowest risk. However, potential risks to consider are:
- Choosing the wrong house and location can plunge a good buy and hold strategy into debt
- Investor panic – if you change your mind after a loss and decide to sell
2. Renovate for profit
Renovating for profit has been made popular thanks to reality TV shows like The Block.
Unfortunately, there’s more to this strategy than kerb appeal and a fresh coat of paint. To gain returns it’s about strategically adding real value through renovation.
You buy a property and renovate it over a 3-9 month period to sell for profit. The key is picking the biggest eyesore in a good location, with the least cost to fix up. Experienced investors or homeowners looking to expand their portfolio quickly can benefit from this strategy.
- Potential to make a quick profit
- Reduces holding costs the sooner you renovate and sell
- Boost property value even if a stagnant market if the renovation adds value
- Can be easy to overspend on issues that haven’t been factored in – tightly control costs and avoid budget blowouts to minimise this risk
- No guarantees you’ll make the money you spend
- Structural renovations are riskier, opt for cosmetic and budget 10% of the property’s value which will transform inside and out instead
- Insurance risks – planning DIY? You may need to consider extra cover
Subdividing allows two or more dwellings to be built on one block to maximise profits.
This strategy includes strata titles, blocks, granny flats or splitting the block. ‘Splitter’ blocks retain the existing property and build additional on the back.
- Can increase value
- Extra titles boost capital value
- Tenant appeal for new, modern dwellings
- Restrictions and permits – for example, in some locations granny flats can’t be rented out to non-family members
- Expensive process with council/developer fees, excavation and other costs
Property development is a full-scale strategy which can be riskier but is generally highly profitable.
Turn an empty block into multiple dwellings to build strata townhouses or units..
Logically this strategy makes sense. But it’s not for the faint-hearted. Larger scale developments, in particular, are more common for experienced investors.
- Easier finance and better leverage upon project completion
- Strategy flexibility - hold or sell all, hold/rent some and sell a few
- Investment security
- Market can slow down or go backward by the time building has finished
- Construction costs including material and labour can blow out
- Permits, approvals, environmental issues may hold up the process
5. Boarding house conversion
Boarding houses offer managed accommodation to many occupants needing low to moderate cost space.
It’s a highly advanced strategy that allows you to rent room (small apartment) by room. The property is converted into multiple houses to rent to residents. Boarders can be students, backpackers or long-term residents, depending on your investment goals.
If well-established, boarding house conversion strategies can offer a solid capital growth.
- Can be a better investment than an apartment or single house if strategised right
- Solid capital growth for well-established strategies
- Can charge a premium if you get the design right
- High insurance costs
- Can be harder to finance – some lenders may limit to 80% of the purchase price
- Expensive when furnishing, property management and other costs are factored in
- Planning approval can be a challenge
6. Positive cashflow
If you want to enjoy immediate returns on your investment, consider positive cashflow.
In an effective cashflow strategy, the investment property earns more rental income than the costs you’re pouring into it. Newer investors use this strategy to achieve financial freedom. It’s also ideal for homeowners nearing retirement.
- Generate a passive income
- Rental income covers most holding costs including mortgage, property management, rates and maintenance
- Extra cashflow to offset shortfalls if you’re holding other negatively geared property
- If it’s not rented, there’s no positive cashflow
- High or unexpected maintenance costs can make you negatively geared
- Tenant problems like not paying rent
- May be difficult to sell
7. Negative gearing
Properties you gain growth from, but don’t generate enough income to offset annual expenses are negatively geared.
It’s a capital growth strategy that relies on property values appreciating. Normally, prices grow enough to offset losses during negative gearing. You’ll want to invest in a low-risk area offering a high chance of capital growth over 12+ months. This strategy is better for investors with top wage brackets to gain higher tax reductions and cover potential cost blowouts.
- Combine with other strategies (buy and hold)
- Claim losses as a deduction against your taxable income
- Shortfall expenses must be met until you sell or it becomes positively geared
- Avoid purchasing purely for tax benefits as tax policies can change and you could be left with an under-performing investment.