Investing in property is one of the most popular investment strategies, with more than 1.7 million property investors across Australia. Yet statistics show that most are not as successful as they could be. Why is this?
For the answers, let’s take a look at four of the most common strategies.
1. Buy an old house close to the CBD on a block that has the potential to be subdivided.
2. Buy an old house to renovate in an established suburb.
3. Buy a property that generates positive cash flow, often in a resource-driven or regional town.
4. Buy an inner-city apartment.
With any property investment strategy, there are always three elements to consider: capital growth, cash flow and risk. Most people fail because they fail to consider these elements.
Take the first strategy on the list above. Generally an old house on a block that’s subdivisible and close to the CBD will have high holding costs due to higher loan amounts, low rents, high maintenance and few depreciation benefits, resulting in high negative cash flow. Over time, high holding costs usually prevent people from expanding their portfolio or prompt them to sell.
Those investors who buy a property to renovate often fail to factor in the cost of their time and don’t always realise what it’s going to take to complete the project. This often results in two possible outcomes. Either the effort, time and cost wasn’t worth the investment, particularly if they plan to sell the house once the project is complete; or the project doesn’t get finished. It all makes for a high-risk strategy that all too often fails to perform.
So what about inner-city apartments? For example, in Perth only 10 per cent of the market is looking for an apartment. Because of oversupply – often created by developers hoping to profit during good times – this can lead to long vacancies and competitive markets when selling. Again, it’s a higher-risk strategy.
One strategy that tends to get overlooked is buying a house and land package. It has significant benefits.
Adding value: This is the number one priority for an investor or developer, allowing them to produce a profit margin. Over the years, with a $450,000 house and land package, the profit margin can be as little as $20,000 – $30,000 during slow times and as much as $100,000 during boom times, allowing an investor to purchase again much more quickly and expand their portfolio.
Lower stamp duty costs: Stamp duty is only payable on the land component of a house and land package, which means the amount of money required to get into the investment is significantly less and people can buy sooner. It’s important to note that the overall cost of the project may not decrease as there are generally interest payments to make during construction that will use these funds. However, a large element of being successful as an investor is not about how much you invest, but when you invest.
Higher rents: Tenants will pay a premium for a new home with new fixtures and fittings. This helps keep down the ongoing cost of holding the investment.
Lower maintenance: Older buildings have higher maintenance costs. Every time a house needs maintenance work, it’s increasing the cost of holding that investment.
Depreciation: One of the greatest benefits of investing in property is making use of the tax advantages, not least of which is depreciation. Depreciation benefits are highest in the first five years of the investment property’s life, significantly reducing the cost of holding the property while waiting for rents to increase.
When it comes to those three key considerations – capital growth, cash flow and risk – a house and land package has it covered.
Source: Smart Property Investment