Strategy is the single most important aspect to successful property investment. Irrelevant of how much money you begin with, a well thought out, tailored strategy would ensure you transform initial capital into financial freedom.
Many Australians own a property, however the reason many people do not possess multiple properties is they do not fully understand the strategy behind successful investing. Residential property investment is an all-encompassing phrase. It begins with understanding financial institutions, and how they are a necessity to getting your portfolio off the ground, it then encompasses all aspects the property investment process, takes input from accountants and financial planners in terms of purchasing entities and tax saving methods, and finally understanding renovation, value adding, and ongoing equity creating activities.
Some typical strategies are touched on below, however it is vital to note that Pinnacle selects the strategy based on a thorough examination of ones current profile and position, as well as their future financial, emotional, and lifestyle goals.
The most common strategy used amongst investors today. It is also one of the most misunderstood and abused strategies amongst investors. A typical ‘buy and hold’ strategy often leads investors to purchasing a stock standard 2-bedroom apartment in a capital city for an affordable price. They do not however understand the financial implications of units, the lack of value adding potential, the importance of timing cycles, the general lack of quality in the construction of unit buildings, and the difficulties involved with being part of a strata scheme. A capital growth strategy is as much about creating equity in the initial 3-5 years of the asset, as it is trying to double your money every 10 years. Buying the right type of property for a buy and hold strategy, will ensure that equity is created in the short term in order to finance a second and third purchase, thus building a portfolio.
Purchasing and developing land that is currently not fulfilling its highest and best use is another strategy for long-term or short-term capital growth. This is an effective way to create immediate equity or cash flow, however requires an intimate and extensive knowledge of financial lending criteria and funding requirements, as well land uses and construction requirements. Developing land can be used for a short-term growth strategy, should you sell the dwellings on completion, or can be held as a long-term income generating strategy.
Renovation is a popular short-term capital growth strategy. It is becoming one of the most diluted and dangerous strategies for the uneducated to enter into. Popular reality TV shows are glorifying and romanticizing residential renovation to the point where anyone feels that they can renovate to make money. Our rule here is, that if you don’t feel confident to renovate for a client, that is, have the knowledge, the accountability, the management skills to do it professionally, then you shouldn’t be doing it for yourself. If you lack the knowledge of how to renovate for the required market, and the knowledge of materials and finishes, then you will compromise the product and could mean a significant loss of time and money.
Subdividing is an effective way of creating short term profit, however again requires an extensive knowledge and analysis of council zoning and subdividing requirements, i.e. minimum lot sizes, minimum boundary widths, sewer line positions etc.
Generating income out of residential property requires increasing the yield to above the cost of interest and ongoing running costs. In short, developing land that is currently not fulfilling its highest and best use and constructing dwellings that maximize this use is the best way to go about generating income. This again requires a thorough understanding of council criteria, and design and construction processes. It also requires patience and time.
Investing in commercial real estate is also a way to generate a higher yield. There are significantly higher risks when investing in commercial real estate, and these would always be discussed and analyzed when considering this route.
Self-Managed Super Funds
SMSF’s have become an increasingly popular and effective way to invest in property. There are many advantages and disadvantages to investing through a SMSF, and you must be careful that you do your homework on whether a SMSF is the right strategy to suit your age and financial profile.
Advantages of SMSF’s
CGT and rental income earned are taxed at 15%, which drops to 10% after 12 months ownership; If property is held until after retirement and you qualify for the pension phase, there is no tax payable on capital gains or rental income; diversification of your portfolio as well as the direct control over the asset.
Disadvantages of SMSF’s
Cannot borrow against the equity created to finance other purchases; cannot borrow funds to renovate, develop, or subdivide the property; often higher fees in establish purchasing entities, and higher loan costs; you cannot live in the property, neither can family or friends.
Managed Funds, or Property Super Funds
The most passive, low risk, minimal input strategy. Involves trusting a financial institution to invest your money across a range of investment options in order to supply you with a return. The gains are generally smaller, as are the risks.
Land Banking, or Group Purchasing
This is a strategy whereby a consortium is formed to purchase 4 to 5 lots of properties together, i.e. side by side, or on a corner, in order to pool this land to develop or increase its use. It is a successful strategy if there is trust and patience amongst the consortium. Often takes time to form the land block and also takes willing sellers in order to sell the land, so is often high risk and difficult to execute.
An important aspect behind strategy is the purchasing entity that the investment will be held in. Often trusts are formed, or companies, in order to maximize tax benefits, both ongoing and at the time of sale. This discussion is always held in unison with the individual’s personal accountant or financial advisor.
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