You probably know of a few property investment strategies used in Australia…
But do you KNOW THEM ALL?
Well it’s your lucky day today as we’ve put together a complete list.
Some are straight forward.
Some are riskier.
Others are a fusion between different strategies.
But they’re all here.
To make the list even easier to understand, we have categorised each strategy as either short-term (1-2 years), medium-term (2-5 years) or long-term (5+ years).
Short Term Investment Strategies
1. Off the Plan – Deposit Bond: This strategy guarantees the deposit amount against an asset, which would generally be another property or guarantor.
Many beginner investors have deposit short-falls.
In a rising market a deposit bond can enable you to access enough funds to buy the off the plan property you desire.
Provided the market rises and the development allows, you could profit by on-selling the property prior to settlement or hold the property and have equity once settled which would become a medium to long-term strategy.
2. Off The Plan – Bridging Finance/Bank Loan: A strategy enabling you to have enough funds for a deposit, when deposit bonds aren’t possible.
You need to be really sure about the investments returns when using this strategy as interest rates are much higher than normal rates.
3. Crowd Funding: Investing a small amount of cash with a large number of investors.
Typical investments start from $1,000 – $5,000.
The main downside is a lack of leverage and compounding on the small outlay.
To understand more about the concept this video explains in more detail.
4. Sub-letting: Occurs when a tenant of residential, commercial, retail or industrial property sub-lets the premises with written consent from a landlord.
Although not a commonly referred to investment strategy, it can help cash flow.
The original tenant becomes the head-tenant making them have the rights and obligations of a landlord in relation to the sub-let tenant.
5. Property Options: An option is an agreement between the landowner and the optionee / investor who grants the right to purchase their property at an agreed price.
Can cover a period of 12-24 months.
This strategy can enable you to make a strong profit for a ‘small’ option fee.
There are a few ways you can profit through an option agreement:
Risks associated with options are opportunity cost risk, cash flow risk and planning risks.
According to the ATO, “the effect of the exercise of an option depends on whether the option was a call option or a put option.A call option is one that binds the grantor to dispose of an asset. A put option binds the grantor to acquire an asset”.
6. Distressed Sale: A definition states:
“When property, stocks or other assets are sold in an urgent manner, often at a loss as they are needed within a short period of time”.
According to SQM there are over 40 terms often associated with distressed sales which include:
‘Deceased estate’, ‘mortgagee in possession’, ‘divorce’, ‘bank says sell’ and ‘price slashes’, ‘distressed property for sale’, ‘desperate vendor’ and ‘selling below cost/value’.
7. Speculation – Infrastructure & Re-zoning: A speculator bets on the market increasing due to infrastructure changes or re-zoning of key areas within a council.
When timed correctly this strategy can dramatically increase a properties value.
Websites that can dramatically save you time when searching for new and completing projects are: NICS – shows construction timelines and Infrastructure Australia – shows infrastructure projects on a priority list and Infrastructure Investment – shows mapping of infrastructure projects.
8. Renovation To On-sell/Flipping: In this video, Courtney and Dave Wilson from Masters of Flip state:
“We buy houses for cheap, make them gorgeous, then sell them for big profit”.
In other words, you need to buy property at the correct price in order to make this strategy work.
According to Investopedia, other factors to be successful in flipping houses are having enough money, having enough time, having enough skills, having enough knowledge and having enough patience.
9. Knockdown Rebuild: Buying freestanding property with the goal to re-build a more valued modern house in the specific market.
Timeframe typically ranges from 6-18 months to complete a total project.
Can be a great way for a beginner investor to experience small scale development.
10. Dual Occupancy: A common definition used by local councils for dual occupancy housing:
The council states there are two forms of dual occupancies. Attached dual occupancy “means 2 dwellings on one lot of land that are attached to each other”. Detached dual occupancy “means 2 detached dwellings on one lot of land”.
The council also states a “secondary dwelling differs from a dual occupancy in that the total floor area of the secondary dwelling (excluding any area used for parking) must not exceed 60 square metres or 5% of the total floor area of the principal dwelling (whichever is greater)”.
11. Development Financing: Developers sometimes find themselves in a position where they are forced away from traditional funding sources such as major banks and financial institutions.
Secondary finance sources such as private lenders, joint venture partners and high net worth individuals fill the gap in finance.
These secondary sources of finance generally are at higher rates of interest, however can be extremely important in enabling a project to progress.
Investors can make returns from 8-20% depending on the stage and level of risk involved.
Medium Term Investment Strategies
12. Off The Plan – On-sell: Buying a property before construction starts, and selling it before construction finishes.
A projects timeline can vary from 12-36 months.
The construction timeline offers opportunity for an investor to capitalise on a rising property market by on-selling for profit before settlement takes place.
An attractive strategy for a beginner as you only need to put a 10% deposit down to exchange.
This can be a risky strategy if the property hasn’t on-sold by settlement, particularly if finance is not in place.
13. Renovation To Hold: Buying established property with the intention to renovate, add value, then rent out.
This is a combination of two strategies in one.
The prime goal with this strategy is adding value to the property through sweat equity.
Typically investors will re-value the property within a 6-12 month period, enabling access to higher equity levels to borrow against for the next property in the portfolio.
14. House And Land Packages: An off the plan strategy focussed on buying a house before construction.
Packages are typically made up of two contracts or referred to as ‘split contracts’.
The land contract and the house contract.
The process can take anywhere from 6-12 months for the land to register and 6-12 months for the building to be completed.
Usually a 10% deposit is required for the land component and 5-10% deposit for the building component.
This is an attractive strategy for beginner investors because you can experience appreciation in the property by the time the property settles.
You only pay stamp duty on the land component if it is a split contract.
15. Wrap: A wrap is a form of secondary financing for the purchase of real estate.
The seller charges a ‘spread’ on the interest repayments which would be a premium to the purchaser.
The seller also usually charges a premium on the actual sale price.
This is a positive cash flow strategy, however has the downside of locking an investor into a wrap for a period of usually 2-4 years.
Further capital growth increases in the market during this time period would be foregone by the seller.
16. Re-zoning: Changing a permissible use in a local council to become more development friendly.
Many councils around Australia have zoning changes every few years to keep up with changes in the local area.
Often land once used as farmland is gradually turned into growing housing communities.
Land in urban areas can undergo changes from single dwelling to multiple dwelling uses.
This presents many opportunities in these regions.
17. Speculation – International: Speculating on overseas property markets.
Considered an advanced property investment strategy.
Typically not recommended for beginners due to taxes and regulations.
It offers diversification to those hoping to benefit from positive changes in overseas markets.
18. Subdivision: Turning a single lot of land into multiple lots of land.
Land with potential needs sufficient land size to meet local council requirements, referring to total land size, frontage and setbacks.
Land needs to be in the correct zoning.
Subdivision may not be feasible on sloping land with low access and poor amenity connection.
19. Property Development – Armchair: A mixture of crowd funding, development financing and buy and hold.
An armchair development pools investors together to jointly complete a development.
In many cases the project will be low to medium rise with 5 – 20 townhouses or units.
Each investor will initially contribute about 20% of the end value of the unit as a deposit.
After which the project will be funded through lending.
The benefit to the investor is a purchase price usually 5-20% under market value in lieu of funding the project.
This can be a great way to start investing for a beginner provided the development figures work.
20. Property Development – Low-Rise: Developing under 10 houses, townhouses or units.
A development can be a very profitable process for a beginner.
There is financial risk.
Often better advised to start off with a renovation, subdivision or dual occupancy.
These projects can take anywhere from 6-24 months in planning and through council, up to 1-6 months for the sales phase and a further 12-24 months for the construction and settlement phase.
21. Property Development – Medium-Rise: Developing 10-30 townhouses or units.
Larger in scale and scope compared to a low-rise project.
Often greater financial backing and skills are required to successfully undertake this strategy.
Timeframe can take anywhere between 19-54 months.
Long Term Investment Strategies
22. Property Trust/Property Fund: Investors buy ‘units’ in a ‘listed’ or ‘unlisted’ investment property, which are managed by a fund manager.
Typically a lack of leverage is the biggest downside to property trusts.
23. A-REIT: Australian Real Estate Investment Trusts are another form of pooled investment.
Similar to investing in a share or stock on the ASX:
“The major benefit of A-REITs is that they can provide access to assets that may be otherwise out of reach for individual investors”.
The issue with A-REIT’S is the lack of leverage and compounding you achieve from the investment.
24. Rentvesting: A growing term particularly among beginner investors, relating to buying investments whilst renting.
Underlying is the goal to accumulate a portfolio of properties whilst renting in locations you want to live in, without the upfront expenses of principal home ownership.
25. Buy And Hold – Established Investment: Buying investment properties whilst owning a principal place of residence.
Many Australians amass wealth over a 10-20 year period through this strategy.
The gradual accumulation of properties, rising property market cycles and rising rents create a diversified portfolio.
Investors tend to mix-up properties with some positive cash flow, negatively geared properties and properties with potential for value adding.
26. Negative Gearing: When income from your property is less than the expenses to hold the property.
A tax deduction occurs based on the negatively geared amount.
Very topical in the media in 2017.
A medium to long-term buy and hold strategy.
It is a key reason why many investors, particularly high income earners, invest in property.
27. Positive Gearing: According to MoneySmart:
“Positive gearing occurs when you borrow money to invest and the income from your investment is higher than your interest and repayments”.
In many instances after tax the property is neutral or negatively geared.
28. Positive Cash Flow: When income and depreciation is higher than the property expenses.
Often confused with positive gearing.
The most desired cash flow strategy for many investors.
29. Principal Home Ownership: Owning and living in your own home.
The most common method of home ownership is also an indirect beginner investment strategy.
For many the principal home is the only property they will buy.
Any appreciation would be highly desired and be a valuable source of wealth.
More than 61% of Australian wealth is made from non-financial assets according to the wealth report.
30. Principal Home Ownership & Sub-letting: Owning your own home whilst renting out a portion of it.
Many home owners use professional real estate agents or platform websites like Airbnb to rent out a portion of their property to short and long-term tenants.
This helps many beginners into home ownership by providing a secondary income to help towards mortgage repayments.
Currently there are over 31% of households renting around Australia.
31. Holiday Home: Buying an investment property in a holiday destination.
Usually used a few weeks a year by the owner and rented out for the rest of the year.
Investing in a holiday home can be risky for a beginner.
Many holiday markets have price and rent volatilities due to seasonal demand from tourists and locals.
32. Defence Housing: Providing suitable housing opportunities for those in the defence forces.
The underlying goal is to help maintain service levels in the defence industry by providing housing options which meets their requirements.
33. Off The Plan – Buy And Hold: Buying property before construction and renting it out once complete.
The potential is for capital growth during the construction period.
Plenty of time to prepare for the first tenancy before settlement.
Newly constructed property generally have higher depreciation levels, generally experience higher rents and higher resale values compared to established property.
34. Principal Home Ownership & Dual Occupancy: Buying a home to occupy with the view to add a secondary dwelling.
A fantastic method for a beginner who has cash flow issues.
Often the secondary dwelling can subsidise the mortgage repayments, whilst adding value to the properties value.
Commonly duplexes are developed.
Secondary dwellings less than 60m2 called ‘granny flats’ are another relatively straight forward option.
Depending on the type of secondary dwelling will determine costs.
Generally ranging from an extra $100,000 for a granny flat to over $700,000 for a duplex.
35. Principal Home Ownership & Subdivision: Buying a home to live in with the view to subdivide the property in the future.
This is usually a long-term strategy requiring sufficient land to warrant potential subdivision.
An approval process will need to take place.
Often times owners sell to developers to realise the profit.
Land is often located on the fringes of the capital city.
36. Land Banking: Buying land and waiting for a period of time, usually over 5-20 years, until prices rise.
A more advanced strategy as capital outlay is large.
You will have zero rental income to support the holding costs.
Typically the areas chosen are in growth corridors with strong fundamentals for price rises through potential re-zoning and increased development.
37. Tiny Home: A small affordable home on land.
Not regarded as an investment method, a tiny home could provide a start for a beginner.
Relying largely on land appreciation to achieve capital growth.
This strategy is a long-term option used in a rising market similar to land banking.
You would reside in the tiny home over a 5-10 year period.
It’s a strategy of investment which gets you out of the rental market and into the home ownership market for a lower price than owning a normal sized house.
Here is a video explaining tiny homes in further detail.
38. Commercial Real Estate: A commercial property is primarily focused on cash flows and ‘yields’, often associated with ‘office buildings’ and service industries.
They can go through periods of high vacancy and low tenant demand.
Investors typically enter commercial property to diversity their portfolio after multiple residential investments or to own and operate their own space instead of renting.
39. Retail Real Estate: Another form of commercial real estate investment.
Retail properties are used to sell and market goods and services to consumers, typically through ‘shop front’ locations.
Consumers typically shop in retail stores on a daily basis.
These range from single stores to large chain shopping centres.
Typically investors purchase retail property once they have a number of years of experience in the residential sector.
If the incorrect property is chosen, vacancy rates can be high.
40. Industrial Real Estate: Classified as small, large or enormous buildings.
This strategy is another type of commercial real estate associated with ‘warehouses’.
One of the more advanced investment strategies, a beginner would be wise to focus on more novice strategies.
Investing in industrial real estate is arguably the riskiest strategy in the commercial space.
Many industrial properties have very specific uses, resulting in some going through long periods of time with no tenants.
41. Child Care Centre: A development and hold strategy to cater for child care.
In many instances, houses are purchased and often knocked down and re-built.
Centres must meet local council guidelines for occupational health and safety.
Can be a very profitable advanced strategy requiring significant capital outlay, running costs, licensing regulations and business management skills.
42. Retirement Villages: A development and hold strategy to cater for Australia’s ageing population.
Projects generally vary between low-rise houses to medium-rise townhouses / villas and high-rise units.
By 2050 the growth in residents over age 65 are forecast to double.
43. Property Development – High-Rise: Developing 30-500+ units / apartments.
Largely considered to offer the highest profit levels whilst having the highest risk.
Significant capital outlay and holding costs.
High levels of skill and expertise are required.
Typically a beginner investor would start on low-rise projects and gradually progress to high-rise.
“How Can I Apply These Strategies For My Own Investing?”
Such a substantial list is hard to fully take in after a single read.
Bookmark this page and come back when you need to refresh your memory.
Below we have answered some of the most common questions asked about property investment strategies.
Why Do You Want To Invest In Property?
A big misunderstanding of investors is simply investing to have more money!
There are much deeper reasons driving investors.
What do you want to invest for?
If you were to survey investors they would have varied reasons why they need a successful strategy:
- Creating a better retirement? Besides just working for your whole life, you want a nest egg.
- Sending children to private schooling? Many parents invest to provide a better lifestyle for their children.
- Having more money to go on holidays? Some love travelling and can’t find the extra funds.
- Paying off your mortgage sooner? A major reason many invest is to pay of their mortgage sooner.
- Creating a passive income? Through positive cash flow investors create a secondary income, which could eventually replace their primary income over years of successful buy and hold investment.
Why Is The Correct Property Investment Strategy In Australia So Important?
The correct property investment strategy:
- could build your wealth faster and
- make your limited funds stretch further, and
- offers options in rising and falling property cycles
The investment timeframe strategy will affect the potential returns of your investment.
What Is The Best Strategy For You?
The timeframe of your investment caters towards the style of strategy used.
If you are looking to accumulate in your early working career a long-term strategy of buy and hold might be right for you.
If you have accumulated a large amount of capital and want an income, then a positive cash flow strategy might be correct.
If you are more risk adverse and desire the potential for manufactured capital growth a development strategy might be for you.
How Much Money Can You Make By Using The Best Strategy?
Depending on the strategy used would determine the potential of profit from the investment.
A short-term strategy could be as profitable as a medium or long-term strategy if market forces and some luck went your way.
Risk varies between short, medium and long-term strategies from low to high.
Returns could vary from a few thousand dollars in a sub-letting strategy to a few hundred thousand dollars in a knockdown rebuild or duplex.
In the medium and long-term returns could increase to a few million dollars with medium or high-rise development projects.
Returns Are Never Guaranteed
An investor must understand that returns are never guaranteed.
There will always be risk associated with any investing strategy.
Understanding this actually helps you minimise the risk.
How To Minimise Risk And Maximise Returns
Minimising risk entails dealing with investment levels that are manageable for your own situation.
Only you and your mortgage broker can work this out.
Once you understand the maximum levels of your risk and borrowing then you can work out what sort of strategy suits your profile.
In order to maximise returns the correct chosen strategy should match your risk profile and desired returns.
The Simple Question Worth Hundreds Of Thousands Of Dollars
Why hasn’t it already sold!
If you have an INVESTMENT OPPORTUNITY which is just waiting for you to buy it, then something is wrong.
The best investments are the ones which get snapped up within a matter of days after release.
They are in high demand because they have all the drivers for growth whilst being limited in supply.
How Lending Changes Will Affect Your Strategy?
In 2017 the government’s APRA are putting in place measures to create further stability in the lending system.
Some banks are also implementing stricter lending practices.
In the medium to long-term these practices are welcomed as they will create a more stable property market based on sound fundamentals.
BEWARE HIGH PRESSURE SEMINARS
An old English proverb states “if something sounds too good to be true, it probably is” cannot be a better representation of many tricks used by companies to lure unsuspecting and uneducated investors into a false sense of security to make a fast decision on what may be the biggest financial decision of their lives.
Property Investment Companies Who Promise Capital Growth Are Lying
Unless you have a contractual agreement stating actual increases in the price, no company can promise you a property will DEFINITELY grow in value.
No one knows exactly which way the property market is going.
The Property Market has so many variables that are totally out of your control.
This means you can reduce risk as much as possible, but nothing is guaranteed.
Be wary of companies promising guarantees.
The only promise and guarantee we can make at 37 Property Group is to work hard, base decisions on numbers and do the very best we can to select locations based on compelling research.
Feel free to contact us about our Property Investment services for any budget.