Property can be a fantastic way to build wealth, but there are many different strategies you can use to achieve your goals.
Let’s look at 3 common property investment options.
- Renovating for Profit
One popular property investment strategy is to purchase a property for a lower price than market value and then renovate it. Ideally, the renovations should improve the value, which allows the investor to sell it for a profit. This strategy is commonly known as ‘flipping’.
- Positive Gearing
Another option for using property investment to build wealth is positive gearing. This is where the rent amount you receive from the tenants in the property is greater than the costs you incur to own the property. Essentially, your rental income incurs a profit overall, so you’re generating passive cash flow.
- Negative Gearing
Negative gearing is the term used when the costs of owning a property outweigh the rental income you receive. Any outlay you contribute towards covering the shortfall in costs can be tax deductible, which helps to reduce the amount of tax you pay each year.
So, which property investment strategy is right for you? Let’s look at each option in a little more detail.
Firstly, let’s look at the strategy of ‘flipping’ a property. When you’re looking to buy a property with the intention of flipping it for a profit, there are many factors to consider. This process is often used to generate short term monetary gains, usually to then reinvest into a similar project and repeat the process.
Flipping involves buying a property that you already know needs renovating just to bring it up to standard. It’s important to research the value of similar homes that have already been renovated in the area. You’ll also need to take into account what type of renovation work is required to get the property up to scratch and the approximate costs to complete those renovations.
When you have an idea of the approximate value your completed property could achieve, you’re in a better position to work out your total budget for the project and whether it’s likely to be profitable or not.
It’s recommended that you engage the services of a qualified Building Inspector to make sure there are no hidden surprises in the property you want to buy that could blow your renovating budget out of the water.
The main features to consider for your renovation project are the bathroom and kitchen, as these are likely to have the most positive impact on the overall sale price.
The renovating and flipping process can be fun as well as challenging. Planning ahead and managing time and costs is also very important. Holding the property for too long can eat into profits, and having insufficient funds to create the outcome desired can also be detrimental to the bottom line.
The next option involves generating passive cash flow from your rental income. Property investors who use positive gearing to their advantage prefer to own and hold the property for a period of time.
There are several ways to find or create positively geared rental properties. One option is to pay down the mortgage outstanding on an investment property until the rental income outweighs the costs of owning and managing it. Another option is to put down a large deposit on the property at the time of purchase to ensure the rental income covers all your costs.
Of course, there are ways to buy positively geared properties without having a large deposit or without waiting for years to pay down the mortgage. The key is to have a solid understanding of the rental demand and market values in the area you’re considering buying into.
Know what the rental yields are for similar homes in the area and negotiate for a competitive interest rate on your mortgage to keep your repayments as low as possible. In the current market with an extremely low cash rate, this could be something to consider. The advice of a financial planner to assist is always recommended.
Finding positively geared properties isn’t impossible, but it can be challenging. This is an investment option that is perhaps better suited to an experienced investor.
Negative Gearing is the property investment option for people who do not have either the time, money or inclination to follow the first two options.
For many people, the process of buying a negatively geared investment property is usually to borrow 100% of the property purchase price and associated costs. This is usually an option for home owners, as they have the opportunity to secure the new investment loan against equity in another property.
When you borrow the entire purchase price and all the costs of your new investment property, it tends to mean the rental income you receive won’t quite cover all of your costs. The result is a shortfall that requires you to contribute an amount of money each month to cover. The shortfall amount is then used as a tax deduction from your salary or wages, which effectively helps to reduce the amount of tax you pay.
Over time, the amount of rent you receive from the property should increase, which reduces the amount of shortfall you need to cover. Of course, if the rental income increases far enough, your negatively geared property could become positively geared over time.
No matter what investment strategy you use, it is important to find property that will generate the greatest deductions. In most cases, new properties tend to offer more deductions than established properties.
Correct mortgage and tax structures are also important considerations, as you have the opportunity to maximise the effectiveness of the property. The goal is to achieve the positive geared scenario and then generate passive income as the tax deductions diminish.
All of these options for building wealth through property investment are great, but finding the right one means getting the right advice.
To work out the best property investment option for you, call us on 1300 832 554 or fill out and submit the “Enquire Now” form on this page and let us help create a wealthier YOU!
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