No one goes into a business that has an assurance that he will gain from that business. Every business is a big risk; it is either you will win, or you will lose, but there are many things that you can do to make sure that you’ll get the latter result.
In real estate, one of these ‘winning’ things is having the best property investment techniques and strategies. These strategies helped most of the successful real investors in the past and today.
Property investors in the past did their research and found these strategies. Some of these strategies may work well to others regardless of the country where you from while not to others, but still, you can combine the first one with the second one, or you can make your combination of strategies and see if it will work for your investment.
Remember, there are several methods one can make money through property investment. However, the primary objective here is to comprehend the various investment strategies before diving into it.
Selecting the correct property strategy will be a wise decision, particularly in case you are only starting out and at early stages speaking to different professionals.
In this article, you will learn some of the most common best real estate investment strategies used by most of the property investors, reasons why did they choose to use these strategies and how they succeed in real estate investment using these strategies.
To make things easier to elaborate, we have classified the property investment strategies to: Buy and Hold Strategy and Other strategies.
Buy and Hold is a long-term strategy, while Other strategies are short-term ones. Here, long-term means 10 years or more. Short-term can be a few months to a few years.
Buy and Hold Investment Strategies
Buy and Hold strategy is the most common strategy for real estate investors to build their wealth through investment. Buy and hold strategy is a process of acquiring property and aiming to generate long term growth in its capital.
Most often, investors who use this strategy buy a property from a fund borrowed from lending companies (e.g. bank). This property will eventually appreciate the value as time passes by. Investors look for tenants who will pay their monthly dues, and that will be a help in paying investor’s loan.
There are lots of strategies that are under this buy and hold strategy. Let us discuss them one by one.
Buy a Brand-new Property and Hold for Long Term |Negative Gearing Tax Benefits
Let us look at the first “Buy Brand-new and Hold Investment Strategy”, which is very popular in Australia, as it is a negative gearing tax benefits strategy.
What is negative geared property?
In a given financial year, when you subtract the rental income from the property from the all the expenses, if the answer is negative (that is you made a loss), that property is considered a negatively geared property.
Investors who are using this strategy are buying a brand-new property, and they are holding it long term so that they can gain profit in the long run. What is best about this strategy is that it can be combined with other strategies.
Negative gearing tax benefits commonly refer to an investment strategy wherein the annual expenses are much bigger than the income generated from the rents of the tenants.
Why you need negative geared properties?
Maybe you are now asking why investors need to this strategy? The answer is simple yet, a very intelligent strategy. Investors are using this strategy to prove that they will have loses. Australia’s investors with a loss can claim a deduction of tax in their taxable income. This is because of Australia’s current Tax Law.
Because of this, as for studies, specifically in the Australian capital cities, prices of properties are growing much more than enough that would offset the losses that have happened because of the negative gearing period. As you hold the property, the rental income will build up and eventually may cover the losses you acquired during the first 10 years.
Buy a Cash Flow Positive Property and Hold for Long Term | Positive Gearing Tax Benefits
Of course, if there is a negative gearing strategy, there is also a positive gearing strategy. This is where the investor’s goal is to generate higher income as the rental income so that even depreciation takes place, the capital will not be affected much. And of course, there will be a net profit in the month-to-month balance sheet.
The good news is in this case, the positive geared additional income can help the investor to borrow more to buy more properties.
What is a positively geared property?
In a given financial year, when you subtract the rental income from the property from the all the expenses, if the answer is positive (that is you made a profit), that property is considered a positively geared property.
What is positive geared real estate?
Acquiring a property that is positively geared is not that easy. You need to do extensive research to find a good positive geared property.
The flip side is that positive geared real estate property usually does not grow much than the other types of properties.
An example of this is acquiring a property in rural areas such as a small town, or in a low social-economical highly populated area. There would be a tendency that you can be getting high rentals in the short-term since there is only a small population with a ‘booming’ economy.
Or, property prices are low due to the ‘quality’ of the area with a normal rental demand.
Another example of these properties is short-term holiday vacation houses or student accommodation.
Negative gearing to Positive gearing
Nevertheless, you do not have to worry. A property that you like may not be positively geared property at the moment, but if you buy it, it can turn into one through the time, efforts and hard works. Its rental price may eventually increase and offset maintenance expenses. (as noted under above ‘negative gearing’)
Positive and negative gearing
In other words, a positive gearing strategy is similar to a positive cash flow strategy. Properties in positive cash flow also are bought and rented to be ready for the depreciation period. What does it mean? Well, in some instances, even depreciation is taken into account with a positive geared new property purchase, so the property is already qualified for a substantial tax deduction.
Here, the positive means the strategy gives you a ‘profit’, and negative because it still allows you to claim property depreciation-related negative tax claims as a new/renovated property.
To use this strategy with added negative gearing benefits, the best properties that you should purchase are the new properties or even the newly renovated ones because these properties offer the largest depreciation benefits.
Buy, Add Value (e.g. Renovate) and Hold
When you have a keen-eye as a real estate investor, you see every creative thing to do even in a most disgusting property. This is where renovation takes place.
Most of the best properties that can be located, regardless of its location, are damaged nor abandoned. Sometimes, there are beautiful spots in the area, which can attract tourists for vacation or tourists looking for a property to be their vacation house.
If you selected the location right, ‘buy, add value and hold’ is one of the best long-term strategies to use. These properties often have a lower value at the time you purchase it because of the things needed for its repair. What you need here is to maximize the potential of the place. You just need to make sure that the property still has a strong foundation (e.g. land value) and the rest of the details lay on your creative hands and imaginative mind.
Once renovated, the property can have a chance to generate a higher rental income, and the value goes higher and higher as time goes by. The place can also have a higher market value once renovated. The higher the rental income, the faster you can pay off the expenses you had for the renovation.
Another great thing about this renovation strategy is that you have all the time to get the renovation done. You can start and continue the renovation once you have the time, money and energy to renovate the property. Renovation can even take place in stages. Of course, faster you get the renovation is done, higher the gain will be.
Capital Growth Strategy
The capital growth strategy mainly concerns about doing minimal work to the property after buying it, as explained by Jeremy Sheppard (owner of DSRdata.com.au). The time taking part is mostly linked to the searching required. You need to find those markets with capital gain potential, which are ready to have a high rate of increase in value in the current state and in the future as well.
The time frame for keeping (or holding) any particular property may also affect on what you intend to purchase; therefore, it is vital to be clear about the strategy first before searching for a deal to purchase.
What are the benefits of a high capital growth strategy?
The short to medium period, for instance, is one where your property gets an increase in value within the first ten years after which, you would need to sell it or trade it back to the market to realize some cash profit.
For the capital growth strategy to work, one needs to concentrate on a specific ‘high-growth’ area where you would see a short-term major value increase or purchase in a location which is expected to be on the upturn verge to ride the impending growth.
While in the long term the buy and hold strategy means you are going to buy into a location where you can see the continuous desirability, where there will be an ongoing demand and several reasons why the market has the potential to continue improving.
The capital growth strategy is a passive investment. It means that you only need to spend some effort in finding the right property to buy in the correct suburb, then you will just wait for the property to get an increase in value, after which you can take a wise action of selling or trading it.
What are the challenges with the capital growth strategy?
This strategy has a significant benefit over long-term growth. The capital growth strategy involves purchasing in desirable locations with long-term growth prospect. Therefore, the property prices continue to increase in value at a higher rate; however, when compared to the rental yield profit it derives, that makes a cash flow shortfall (negative), which one would then claim against their other sources of income. There can be a negative gearing tax benefit, though.
However, the expected cash flow constraints are difficult aspects to be dealt with and due to its higher price tag (purchase price); you are also likely to have to cover property-linked fees like maintenance issues and mortgage repayments out of your pocket. It is also difficult to time the market. Since you intend to increase your property’s capital growth within the least possible time, you need to purchase at the bottom price and sell at the top price of the market.
Who should use the capital growth strategy?
This strategy suits people who have high income from a career or business, and looking for methods to increase their tax benefits, in addition to those who have much time to ride out at least one investment period and people who have the possibility to support their investment out-of-pocket in case it is not making enough rent to cover the holding costs.
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Cash Flow Strategy
In this strategy, the priority is the cash flow, which means that there is less focus on capital growth or the other strategies like as property development or renovation, although they are also sometimes considered.
The cash flow strategy may assist those looking for supplementing their income (increase the monthly cash flow).
Indeed, the cash flow strategy is where the property makes more income through renting than the Total Costs of Property Management, mortgage, rates, associated maintenance fees and any other expenses.
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What are the benefits of a cash flow strategy?
The high borrowing capacity is advantageous in this strategy because the rental income compensates most of the holding cost, which means that as the owner, you will have a greater disposable income that allows you to borrow more money to invest in other properties.
In addition, the extra cash flow would assist you to offset any shortfall you have in case you are holding a negatively geared property.
Furthermore, in case you quit your job, the cash flow positive properties (let’s say if you have a few of them) will support you during the economic downturn.
The flip side with cash flow positive strategy
However, the cash flow strategy is slow in the process of building equity, which will affect your financial status negatively by limiting your investments. This is due to slow capital gain.
In addition, there is no to low tax benefit out there. Therefore, since your investment property is making almost equal to more income compared to your expenses, your tax deduction will be low.
In case your property generates more income than it cost you to keep it (in terms of tax), then the owner may even need to pay from their pocket to cover its taxes.
Other Real Estate Investment Strategies
Now, let us talk about some other strategies other than the buy and hold long-term strategies. The below short-term strategies may include buy and sell strategy such as buy, add value and sell strategy, ideal for an investor interested in passive property developments or active property developments.
Buy, Add Value (Renovate) and Flip
The first one in the lines, is the buy, add value and flip strategy. As I have said, adding value to a property by renovation is a very good strategy.
However, you need to buy the property at a lower price-point, renovate it (with a budget), so that the property may have an added value and you can sell it soon after at the completion of the renovation, which is the process commonly known as ‘flipping’.
Some investors think that this strategy is an easy one but thinking about the expenses of renovating together with the time and effort, you will just realize that it is not as easy as what you are thinking, but some really good investors make out the best with the use of this investment technique.
The key to a successful buy-renovate and flip
To be successful in investing in using this strategy, an investor needs to foresee if the renovation process will give a better potential to the property. Another thing to consider is that you need to budget your money and calculate the renovation cost well, even before purchasing the property.
You must do the renovations that will add value to the property. You have to make a good decision here. You also have to be careful in managing your time. You have to remember that time is gold. Every minute that goes is also a penny that goes.
For example, renovating the kitchen may add value to the property while replacing an internal plumbing line would not.
This strategy is buying a property, fixing it up through renovating and then selling it to generate a profit. This is not an easy task. You need to be a very skillful, and ideally hands-on person to be a successful investor using this strategy.
What are those critical skills required to be successful in buy-renovate and flip strategy?
Here is the list.
- First, you need to be very observant and organized. You need to check the structure of the property and make sure that all the foundations are strong and no structural issues. You can also assure by asking the (current) tenants that the overall condition of the property is a good one.
- Second, you need to have a great estimation skill. You need to estimate the total cost of renovation so that you can have a future look if you can get a good profit with this property or not.
- Third, you need to make sure that after renovating the property, it will attract the buyers. That is your main goal anyway; you renovated the property need to look glamorous because you want to sell it at a good price and gain a profit from it.
- Fourth and the last one, you need to have great marketing skills. Renovating it without a vision to sell it at a higher price would be useless. You need to have at least come up with a good market price for the property. You have to consider all the factors that need to consider, such as the median property price at the location, the expenses related to the renovation costs and your capital investment in buying the property.
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You also need to consider the prices of the comparable properties in the market because you might not be able to sell it if you have a much higher anticipated price than the other properties in the market of the same style/condition.
Yet there are many things to consider in this strategy, and it is still one of the best strategies for some of the hands-on property investors.
Buy, Add Value (Get authority approval to divide/split the land) and Sell (without splitting)
Another great strategy that is very popular in Australia is buying a property with a larger land, and adding value to it by getting authority approval to divide the land. Once you receive the authority approval, then you can sell the property to a real estate developer without dividing. This means that you will still sell the property as a whole, but it is already divided into smaller lots where the developer can complete all the groundwork (including the physical division).
To be successful in the strategy, you need to make sure you are confident that the property/land fulfill authority requirements for land division. You need to be familiar with authority guidelines for the land division for the particular locality and then should seek approval to divide the property.
As the flip slide, you need to remember if the authority rejects your plan for land division or if you miscalculated the property’s land division potential, your project falls apart resulting in a loss. Therefore, it is imperative that you approach the authority (e.g. local Council or Municipality) to get preliminary approval for land division even before purchasing the property. This is done so that all other ‘in-detail’ matters for development can be considered in the process of planning.
Buy, Add Value (Get authority approval to divide/split the land and split) and Split, and then Hold Some or Sell The Rest
Take a step beyond the above strategy, this strategy allows the investor to split the land, which he bought, and he has to decide whether he held it long term or he would sell it. In this case, the investor works as both a Property Investor and a Developer.
As same as the other way of getting approval from the authority, it is still recommended getting the support (pre-approval) for the development first before the purchase unless you are confident that you can get approval based on your experience working with that particular authority (or the locality).
Invest in Passive Property Developments
Investing in passive property developments is one of the real estate investment strategies that is far from the buy and holds strategy. In this strategy, you don’t need to buy a property. It is also more like what we call as Wait-and-Earn Scheme.
An investor invests his money in property development company and waits when the property earns a profit. It is much easier than any other strategy, yet you will not gain expertise from here, as others will be investing and developing using your ‘investment’.
For new investors, it might sound pleasing but take note of the Risks that property Investment May Bring. Yes, you only need to supply your money and let the property developer don his work, but they may not tell if all the things plan will go as the way it is planned. If things don’t go well, you may not be guaranteed if you can still get even the capital of the money that you invested.
Become a Developer (Active Property Development)
Becoming a developer or in other words, this is an active property development strategy, which is also far from the ‘buy and hold’ strategies discussed above.
With this one, you are the one who will build the properties in the blocks of land parcels you created. It is up to you if you are going to sell the properties that you have constructed or you will hold a few to the long term as rental properties.
Being an active developer requires you to be a professional and skillful one. You need to be very knowledgeable on this real estate field.
Conclusion: Which is the Best Real Investment Strategy?
Buy and Hold Strategy is the most popular strategy among successful passive real estate investors. This strategy is proven effective as buying a property and holding it for the long term may cover up all the capital and may give you a good monthly profit in decades to come.
While in Australia in particular, adding value to the property before flipping them to earn a profit is one popular strategy used by real estate investors. Another strategy in Australia that is a favorite by many investors, is renovating the property and getting approval from authorities for construction or subdivision (land division).
No one of the stated strategies is best for one or worst for others. There is no other way to find out, which is the best one for you, but to try one after another. These are just a guide, and you are not obliged to follow any of the following, but doing any of these may be a great help in growing your investment.
In our opinion, any successful property portfolio is a combination of a few strategies but should not be a just a single strategy.
For different real estate investors, there are also different best strategies that work for each of them. It may take great skills to succeed using these strategies because the knowledge of these strategies alone without the skills on how to do it would be a useless way to generate any profit from investments.