What is a Property Strategy & What's best for you?
There are several paths you can take when it comes to investing in the Australian property market, but it’s not easy knowing which road will work best for you. As you have probably come to understand, there is no one-size fits all approach to building a property portfolio and when choosing the right step, it will often come down to 2 main factors; your financial position and your experience level. Just because you have millions of dollars to invest, doesn’t mean you should jump straight into property development. There are some appropriate stepping stones to follow to comfortably build a wealthy portfolio.
Let’s take a look at the 3 basic pillars to any property strategy:
Capital Growth
The most important and fundamental aspect of any portfolio is to have some strong capital growth. This strategy will see you looking to purchase a property with the intention for it to increase in value over time, thus your property will grow in value as the market grows. A prime example of this is to take a look at the Sydney market over the last 3 years, where an old 3-bedroom house that was worth $550k would now be worth $850k or more. By buying in the right location at the right time, the market is essentially gifting you equity. Like money for nothing!
The capital growth strategy is all about putting the hard work in before you get the property and having little to no effort once purchased. This means your primary focus of this strategy is to do all the research possible to make sure that where you are purchasing is in an area that will increase in value. Once you own the property you won’t need to focus on doing any more work to increase the value. The perfect strategy for newer properties in growing suburbs.
The Property Room Hot Tip: Don’t focus on short-term hotspots. Instead focus your attention on areas with good strong economies that have a proven track record of growing over time. e.g capital cities and major regional areas. These areas have consistent infrastructure pipelines, employment centres, substantial education, health, retail and commercial precincts to keep up with the large and growing population. That will lead to consistent long term property price growth in the medium to long term.
The downside to a Capital Growth strategy is that often properties in strong growth regions have lower yields and therefore often negative cashflow meaning there is a limit to how many any individual can acquire before they run into serviceability issues with lending. A prime example again is the Sydney market, where a $1 million apartment may rent for $680 per week. However, this can also be seen as a major benefit for those who have high incomes as it will be classified as negative gearing and will provide higher tax benefits (again, not applicable to all). The key is to find something at a lower price point in a location that will increase at an accelerated rate, close to the capital cities or major regional areas without having to resort to hotspots or smaller regional areas.
This is not a short-term strategy. Do your research (make sure you read our other articles) and look at the steady rise in average prices of property over the last 30 years. Selling the property within 7 years will be cutting yourself short. We recommend buying and holding.
How does this strategy benefit you? Well besides the obvious that your portfolio value is increasing, when your property value increases so does your equity position and eventually rental return. Increased equity can be used as a deposit on your next investment property. That way it’s not coming out of your own savings.
This strategy suits:
Beginners
Safe & Conservative
Time poor
High income earners
Low on savings or low on current equity
Those less than 60 years old (the younger the better this strategy is)
Positive Cash Flow
Positive cash flow or positive gearing is where the property will actually make more money than it costs after all expenses are accounted for. There are 2 ways to define this;
Positive Pre-Tax – Your rental income will cover every single expense including interest repayments, rates, maintenance, insurance, body corp etc before you receive any tax back from the Government for any accounting loss incurred.
Positive After Tax – Same as above however you need the tax back from the Government, after allowing for an accounting loss, to make the property cashflow positive. You can claim the tax back from the Government by doing an income tax variation with your accountant where you can claim back annually, quarterly or even monthly. To get tax back you actually have to pay tax (your personal income in most cases) to receive the tax back.
The downside to this strategy is that you will find that most properties that are positive cashflow pre-tax have lower capital growth prospects. You may buy a property in a regional town that’s only $280k and renting for $400 per week. Great cash flow although, what you will find it that often those sorts of properties are in areas with stagnant capital growth.
How does this strategy benefit you? As we all know a little extra cash in the bank each week is great but there’s a better reason behind it. This is a strategy that is suited for those who have lower incomes or tighter serviceability. A property that is positively geared, will help increase your serviceability in the eyes of the banks for any lending. This is also more beneficial for those nearing retirement as the capital growth timeframe is shorter and your focus becomes more about replacing your income with property.
The Property Room Hot Tip: Don’t sacrifice capital growth unless you have to. Find a property that is cash flow neutral or slightly positive after-tax to maximise the capital growth prospects. What you need to remember is that when your property values grow so does your rental income. When this happens, your property will become positively geared before you know it.
This strategy suits:
Lower income earners
If you have tight serviceability (the banks aren’t lending you much)
People with a strong equity position
People nearing retirement
If you are looking to create income from your properties now
Manufactured Growth
This is what most people perceive as the “fun strategy”, made more and more popular by television shows like “The Block” and news stories of overnight success. Let us tell you right now, this is the strategy that requires time and work and often, a lot of it. However, in some instances this is the best strategy to get a step-up in the market. Manufactured growth is a strategy whereby you will be looking to take more initiative to increase the value of a property by either, subdividing, renovating or developing. More often known these days as a 'quick flip'.
Flipping a property can be a fast way to manufacture equity. It works especially great in a flat market. Renovation prospects will often look for the worst property in the best street to do a 'reno'. A good renovation will see you spend $60k and add $120k value to the property or more. Subdivisions are also a great way to buy a property, split it into two titles and sell both sides hopefully for a profit. One thing to keep in mind with subdivisions is that it is becoming more and more popular in today's market, so much so that real estate agents are knocking on the doors of home owners whose houses have subdivision potential resulting in higher asking prices. This has caused a big shift in this market over the last few years, making it harder and harder to find a profitable splitter block once you factor in costs, time & taxes.
This is not a strategy recommended for the time-poor or the inexperienced. Most of the time when you see success stories, these people have had a lot of experience, time or assistance from experts. If you are experienced and you know what you are doing, or you have an expert to help, then a quick flip can be a fantastic way to generate some increased equity which can then be used for another investment. But keep in mind, 'quick' doesn’t mean 'easy' or 'guaranteed'.
This strategy suits:
Time rich people who like to be hands on
Experienced Investors
Tradespeople (or close relations to people in the trades industry)
People looking for an fast equity gain
Once you have established what your main strategy goal is, it is then time to look at what type of investment vehicle will get you there. This is precisely how you should look at it – it is an investment vehicle that you will utilise to get you to your goal, not your home. Don’t get emotional.
Although this may seem pretty straight forward, property strategies can get a lot more complex, depending on your financial situation and what your goals are.
It is recommended to speak to an expert if you are having doubts, or if you just need a little more information. Feel free to contact us