There are several ways that investors make money through property investment and real estate. Here we will summarize the most common investment strategies and provide a brief outline of some of the things to consider.
1. Invest for Income
There are many property investors who primarily focus on the yield that a property will deliver. The yield is the income generated through rent and it provides a measure of how much rental income a property will generate each year. For those looking to make money through property by investing in properties with a high yield, it usually means that the total income generated exceeds the total expenses paid to hold the property, which means that the property is positively geared.
Typically, higher yielding properties have lower rates of capital growth over the longer term.
Often they are houses, units or dual key type properties aimed at the investment market which makes up just 30% of the total portion of property buyers throughout Australia. This may limit the potential on-sell to other investors, thus reducing the number of potential buyers when it comes time to sell, and also increasing the liquidity risk in a market downturn.
Whilst it is great to be able to make money through property by generating an additional income source straight away, an investor also needs to be aware that high yielding properties may mean that the income generated may be taxed. It is best to seek professional advice before jumping in to this type of strategy, so you are aware of any tax planning implications that may apply.
On the upside, because the property does generate additional income, this may suit some investors who can use the additional funds to pay down debt, therefore increasing their share of the equity in a property.
2. Invest for Capital Growth
The most passive form of how investors can make money through property often results in the greatest creation of wealth, but it is slow and boring. Investors who buy in areas which have high capital growth, and hold on to those properties for a long period of time, usually enjoy the compounding effect of their equity multiplying.
Generally, areas where capital growth is consistent, are located in larger cities where employment is plentiful and there are several drivers of demand for housing including population growth, wages growth, infrastructure development and economic growth. It is generally not difficult to pick outperforming locations, providing you focus on land locked areas in close proximity to the major employment hubs in the larger CBD’s within Australia.
Even though markets will move up and down in the short term, the longer-term trend is up and historical data has consistently confirmed that property investment delivers similar results to long term stock investments.
3. Invest to Manufacture additional Equity
Buying property that can be renovated or developed, by adding extra value, is a great way to make money through property by accelerating the rate of capital growth in any market. Renovations can be as simple as a cosmetic make-over, through to a structural reconfiguration of a property. Furthermore, development can also take on many forms from knocking down an older home to build new, through to land subdivision and multi-unit dwelling builds.
It is important not to overcapitalise when spending money to improve a property through renovation and development, so you do need a good understanding of an area and what the completed product will be worth.
Many who use this strategy, end up selling the completed project, and then paying tax on the profits. Some prefer to re-finance the project and hold the completed property for the longer term – therefore getting the benefits of the instant equity created as well as the opportunity to build long term wealth through capital growth. There are also benefits in holding the property because you get a premium rent upon completion which improves cashflow, and there are huge depreciation benefits when the work is completed under your ownership.
I hope this helps to explain the various strategies available to make money through property investment. If you would like any help in understanding what the right strategy for you might be, please feel free to get in contact with us today. We look forward to hearing from you.