Essential investment strategies and tips
1. Buy and hold
Goal: Build long-term wealth through capital growth.
What it is: This is the classic property investment strategy where you buy a well-located property, rent it out, and hold on to it for the long haul. Over time, the property (ideally) increases in value while your rental income covers all expenses.
Investor tips:
1. Location is everything. Focus on areas with strong growth potential such as infrastructure projects, schools, transport, or employment hubs.
2. Get your finances in order early. Also ensure you have an emergency fund in place to cover unexpected costs that may arise during your investment journey.
3. Review your loan structure regularly. Ensure you’re using interest-only loans if appropriate for cash flow, or switch to principal and interest if you want to build equity faster.
2. Negative gearing
Goal: Offset property losses against other income to reduce tax.
What it is: Your property is negatively geared when your rental income is less than your expenses (like interest, maintenance, and management costs). While that sounds like a loss, the key benefit is tax related. You deduct the shortfall from other income (like your salary), potentially reducing your tax bill.
Investor tips:
1. Negative gearing only works if the property grows in value over time, ensuring that the long-term benefits outweigh the initial losses.
2. Make sure you can comfortably cover the cash shortfall each month – this strategy is ideally suited for investors who have excess cash flow.
3. Speak to your accountant to understand the specific tax implications and benefits for your particular situation, and how they align with your overall financial strategy.
3. Positive cash flow
Goal: Generate ongoing income from the property.
What it is: A positively geared property has the potential to bring you rental income that exceeds all expenses associated with the property. This means, you end up with a surplus each month. This is a popular strategy with investors looking to boost their cash flow.
Investor tips:
1. Investing in regional or high-yield suburbs can potentially offer better returns, but there’s a higher risk of vacancy rates or value volatility in these areas.
2. Watch for reduced tax deductions. When you have positive cash flow, your taxable income could increase – so it’s crucial to plan for a higher tax bill.
3. Consider directing your positive cash flow into an offset account, bolstering your emergency fund, or saving for the next property deposit.
4. Renovate and sell (flipping)
Goal: Turn a profit in the short term through value adding renovations.
What it is: You buy a property that’s a bit run down, renovate and sell it at a higher price. It’s a hands-on, fast paced investment strategy used by many investors.
Investor tips:
1. Know your numbers. Budget for all renovation costs, holding costs, agent fees, and stamp duty before you start. Keep a 10-15% buffer for surprises.
2. If you need to fund renovations quickly, short-term finance might be beneficial – but make sure to carefully assess the higher costs involved.
3. Avoid the risk of overcapitalising. Renovate to suit the area’s price ceiling and market demand, not your personal taste and preferences.
5. Subdivision or dual occupancy
Goal: Increase the property’s value and rental yield through additional dwellings.
What it is: You subdivide a block of land into two or more lots or build a secondary dwelling (like a duplex) on the same land. This may unlock hidden value and give you more options. For instance, you may sell one part, rent both or a mix of these options.
Investor tips:
1. Not all properties are suitable for investment. Always check for zoning regulations, minimum lot sizes, and specific access requirements.
2. Obtain a loan pre-approval that covers the entire scope of your project. Ensure that your lender is prepared to fund each stage of the project.
3. Subdivision can take time – especially with council approvals. Budget accordingly for ongoing interest payments, council rates, and potential land taxes.
6. Rentvesting
Goal: Get into the property market while maintaining your lifestyle and location.
What it is: As a rentvestor you continue renting where you want to live (often in a convenient, lifestyle-driven suburb) while owning and renting out an investment property in a more affordable or high-growth area. This helps you build equity for future property purchases, without sacrificing your current lifestyle.
Investor tips:
1. Choose your investment location strategically based on data – look for strong rental demand and future growth prospects.
2. Use a separate offset account linked to your investment loan. Keep your finances separate from personal spending for tax efficiency.
3. Be clear about your long-term goals: rentvesting works for some, but others may eventually want to own where they live.
Choosing the right strategy for you
No matter what path you choose, the best strategy is one that matches your financial goals, risk tolerance and investment timeline. Some investors will choose one strategy, others may combine a few. It’s also worth keeping in mind that if you choose to sell your investment property, you’ll need to factor in potential capital gains tax (CGT) liabilities. What matters most is doing your homework, seeking professional advice, and approaching each strategy with a clear plan.
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