Real estate investing is a long-term game, and it can be a very profitable one. But building an investment portfolio can also be risky, as there are many factors that can affect your ability to gain a good return on investment, such as property market conditions, investment location, property type and investment timing.
Whether you want to achieve financial freedom or set your children up for the future, having a solid property investment strategy in place is the key to reaching your investment goals. In this guide to property investment strategies, we're going to show you some of the biggest factors every property investor should consider before creating their own property portfolio strategy.
What is a property investment strategy?
Your investment strategy is your long-term roadmap to achieving what you want out of property investment. Ideally, you should be thinking about this before you purchase properties, however your strategy can be adjusted as you progress through your investment journey. It also helps to follow market trends to help you stay informed.
There are several components that make up a property investment strategy. On a basic level, these may include:
Your current financial situation
- What type of assets, if any, do you own now? (ie. cash, shares, properties)
- How much of that can you readily access to buy an investment property?
- What specifically would you like to achieve out of property investment?
- In what timeframe are you aiming to achieve this?
The resources you need to achieve your goals
- How much do you plan to pay for the property/ies?
- How will you finance your purchase(s)? (ie. using an investment loan)
- What is your borrowing capacity and how could it change along your investment journey?
- What will your estimated annual rental yields be and how do you plan to leverage this?
What actions you'll take to reach your goal
- What type of property/ies do you plan to buy?
- In which locations do you plan to buy?
- How much time and effort do you want to put into managing the rental property?
As with so many things in life, what works for another property investor may not work for you. This is why it’s important to review your own situation when planning your property portfolio strategy.
What are the main types of property investment strategies?
There's more than one way to make a profit from property investment. Here are 4 of the most commonly used investment property strategies.
Strategy 1: Buy and hold
Buying and holding involves purchasing a property, preferably under market value, and renting it out long-term to service the mortgage and other holding costs. At the same time, the property investor will build equity over the years. Potentially, when the property has increased in value, the investor might sell the property for a profit.
The expected capital growth is partly why some investors are comfortable making a loss in the short term. This strategy involves using negative gearing and taking advantage of tax savings, through investment property tax deductions. Alternatively, the investor might stick with a cash flow strategy and live off any surplus rental income, by targeting positive cash flow properties from the start.
An investor who is buying and holding generally won’t sell their properties very quickly because they're either waiting for capital growth or relying on the cash flow for day-to-day expenses. This strategy is relatively low risk, especially when positively geared, compared to house flipping or subdividing.
Strategy 2: Buy, renovate and hold
A property investor who is holding may also complete renovations to increase its rental and/or market value. This is a popular investment strategy for investors who want to boost the returns from their property without having to wait for market growth. An investor will purchase a property, renovate it at some point, and rent it out at market rates.
Alternatively, they might build a granny flat on the same land lot to create another income stream. In both cases the investor would use the rental income to cover their mortgage repayments and other expenses.
This property investment strategy is ideal for investors who want to actively generate or increase rental yields from their portfolio. Depending on the type and scale of the renovations, there may be tax benefits in some cases, including property depreciation. However, investors will need to factor in renovation costs and any potential lost rental income during the renovation period.
Strategy 3: Buy, flip and sell
This is another popular property portfolio strategy for investors who want to make money from their properties without having to wait for capital growth. Buying and flipping typically involves substantial renovation work to manufacture equity. This strategy involves a property investor purchasing an undervalued but well-located property in need of renovation work and then selling it for a profit.
They invest in a renovation on the assumption that the improvements will appeal to future buyers and help push up the property’s overall value. Aside from renovation costs and stamp duty, investors who are considering house flipping should also account for sales agent fees, which will likely cut into their final profits. Capital gains tax is another consideration, especially if the property is resold within 12 months of purchasing.
Strategy 4: Buy, subdivide and sell
For investors who do not want to rely on values to increase, they may choose to do a subdivision. The investor would buy a large block of land and then subdivide it into two or more properties with separate titles.
This is seen as a more advanced investment property strategy due to the different laws and industry expertise involved. On top of that, zoning restrictions and planning regulations vary across councils, states and territories. This is why it is crucial for investors who are subdividing to understand the local laws and restrictions before they purchase the property. But if done right, this strategy can be very lucrative.
The idea is that the larger block of land has been undervalued because it has been treated as one property rather than two or more. This can be due to zoning restrictions or poor positioning. When you subdivide the block into smaller lots and sell them separately, you create more value for yourself and increase your chances of selling each lot quickly and at a premium price.
For investors who want to take this strategy further, they may even choose to become property developers and build on the subdivided land. However, construction costs will increase the outlay substantially.
Which type of real estate investment strategy is best?
No investment property strategy is inherently better than another. The best strategy for you will be the one most aligned with your goals, financial situation and personal circumstances, as well as the level of risk you're willing to take.
For example, if you want something that's close to a set-and-forget strategy, then you may want to buy and hold. One of the downsides of this strategy is that success is highly dependent on the market where your property is and the quality of your tenants. This means that if rents go down in your area, then so too will your returns, which are largely outside of your control.
If you want to make profits faster, don’t mind getting more involved and can accept more risk, then house flipping could be for you. However, with this strategy, there's a chance that you could overspend on renovations, lowering the amount you end up pocketing. Another risk is that your resale price could be the same as or lower than your initial investment, which could wipe out your profits. Additionally, the success of house flipping is highly dependent on whether you are able to secure a lower priced property to maximise profits.
Whether you’re a beginner or experienced investor, knowing your preferences and situation before choosing an investment strategy can help you make educated investment decisions.
What are the different types of real estate?
There are three main types of real estate (or asset classes): residential, commercial and vacant land.
Housing is the most common type of real estate and the one most people are familiar with. It includes freestanding houses and units, as well as semi-detached dwellings such as duplexes, townhouses, terraces, villas and semis. Most investors start with residential property investment as it is simpler and relatively low risk.
This generally refers to any property used to conduct business. It can encompass office spaces, retail shops and industrial units. These can come in a larger scale, in the form of office buildings, shopping centres and warehouses.
This is property that doesn't have any buildings on it but could potentially be used for residential or commercial purposes in the future. The land purpose would depend on a mix of factors including the zoning, town planning and development approvals, if any. These are also factors which could determine the potential value of the land.
What type of property is most profitable?
There is no simple answer to this question as it will depend on your own circumstances and the market at the time of purchasing. To find the most profitable type of investment property for you, you’ll need to weigh up the pros and cons of each property type according to your situation.
In residential property, units generally have lower capital growth prospects than houses. Investing in attached dwellings often means you’ll have the added cost of strata or body corporate fees. However, investing in houses also has their downsides, including higher entry costs, lower yields and higher maintenance costs.
You'll also need to understand the market factors relating to each property type and this will differ across markets. In some cases, location is arguably a more important consideration than property type.
For example, if you buy an apartment in an area with an oversupply of high-rise apartments, you may face tougher competition when renting out or selling your property. Considering another scenario, if you buy a house in an area with few amenities and business activity, your property may have limited rental demand.
Is it a good time to invest in real estate?
Given that property values generally trend upwards over the long term, some say that the best time to own a piece of the housing market was yesterday.
So, rather than thinking about whether it's a good time to invest in property, it makes more sense to ask yourself whether it's a good time for you to buy a property. A big part of being ready involves being able to afford your new investment in the long run and having enough money left over for all of your other expenses.
The best time to buy a property is when you have your ducks lined up in a row, and when you’re ready to commit financially and personally.
As they say, it's about time in the market, not timing the market.