SLOW AND STEADY WINS THE RACE

As with any fitness program, you don’t start jogging by running a marathon! There’s a process to getting into shape and there are multiple ways to keep fit, through a variety of sports or exercise programs. Likewise, anyone who wants to get fit can see the value of a personal trainer: they help you achieve your goals faster and prevent you from making painful mistakes!

Investing in property is exactly the same. The right techniques, experience and industry knowledge can save you a lot of effort, heartache and pain. So here’s the first half of our guide to the most popular property investment strategies to help you find a method that best fits you and your circumstances.

Slow and steady wins the race

These four strategies are excellent performers if you’re just starting out or seeking a solid, stable and consistent investment option. These methodologies are excellent vehicles if you wish to add one or two properties to your portfolio, and for beginners to use to establish their property credentials.

Executed correctly, they’ll do the heavy lifting for you, as long as they fit with your overall plan. But they’re not sexy strategies, they’re workhorses! It’s all about numbers, profit and growth; not high ceilings, pretty architraves, ocean views and swimming pools.

Positive gearing

Positive gearing provides surplus income over and above all expenses to allow investors a buffer over the outgoings. This strategy can assist with borrowing for more property, as lenders can see that the cashflow position exceeds expenses.

However, often investors will choose a property based on its cashflow outcome rather than its investment fundamentals and so may not end up with the best long-term investment. Also, a positively geared property may not remain that way as interest rates, repairs and other expenses affect the cashflow position over time.

Negative gearing

Negative gearing provides significant tax advantages for buying an investment property, allowing you to save on tax yet still hold an asset. In addition, lenders are often able to ‘add back’ some of these on-paper losses to their loan-servicing calculators, so you may continue to borrow despite having a loss, potentially helping to build a portfolio faster. Short term negative gearing can also be offset by capital growth if the asset is held long enough.

However, cashflow drain can kill an otherwise healthy portfolio, and investors with negatively geared property are more sensitive to interest-rate rises and potential changes to tax laws.

Established residential property

An obvious positive here is that you can see the property before purchasing and you know exactly what you’re getting. Established housing can also be improved to add value, through renovation, subdivision or further development. Second-hand property can also be bought, settled and tenanted relatively quickly.

However, purchasing a second-, third-, fourth- (or more) hand property means you could also be buying a building with hidden faults, and ongoing repairs and maintenance can affect your cashflow and slow down portfolio growth. In addition, tax depreciation benefits are massively reduced or non-existent and, combined with repair bills, can cause a big hit to your financials.

New or off-the-plan residential property

New properties include completed houses, townhouses, villas or apartments that have been released by a developer at the completion of a project.

This is a solid strategy because it provides an upside for investors wanting to fast-track their portfolio, without as much fuss. New and off-the-plan property can rent for a higher price, has fewer repairs and maintenance requirements, comes with a warranty and provides excellent tax depreciation benefits, allowing you to direct funds towards building your portfolio, instead of maintaining an older property.

However, sometimes off-the-plan properties can be delayed, and valuations can also come in below the purchase price at settlement, meaning that between buying and settlement you may need to chip in some more money. This is particularly common in areas that are oversupplied, or in high-rise buildings. In addition, off-the-plan contracts aren’t normal property contracts, so you need a legal professional who can look out for any issues.

Commercial property

For most investors, fitting a commercial property into your portfolio is something that should only be considered after building a rock-solid residential portfolio. You need to take a relatively hard-nosed approach when dealing with commercial properties – it’s a cold, hard numbers game but, if done well, it can translate to healthy dollars.

Commercial property offers stability as rents typically come in on time and all other expenses are generally covered by the tenant. Commercial rents are often higher than residential too, and in many cases are cashflow positive. In addition, tenants often sign longer term leases, typically two to five years (or more), with built in rent increases and options to extend.

Both the sale and leasing of commercial property is linked to external economic factors and businesses can fail, causing inconsistent cashflow or lost rent for extended periods of time. This can destroy cashflow and so it’s advisable to retain a larger financial buffer as a contingency - as these funds could be deployed elsewhere, there is an opportunity cost in maintaining this buffer.

That wraps up the first four strategies - keep an eye out for our next article, covering off on strategies that lift the lid on what’s possible at the riskier end of the investment ladder. They come with more caveats, and you need to proceed with caution. Having said that, they offer fantastic opportunities to build your portfolio, as long as they fit your long-term objectives and risk profile.

Or, if you’d like to get your property portfolio in shape for financial freedom sooner rather than later, visit www.propertyfitbook.com.au to purchase Property Fit by Luke Harris, CEO of The Property Mentors. This easy-to-read, practical book takes you through the groundwork you need to cover before you start investing, then explores all the ways to invest in property, including mentor tips and mindset insights, as well as proven strategies that seasoned investors, or those just starting out in property, will find invaluable.