Investing in real estate is often touted as an easy, foolproof way to get rich quick. But with terms like passive income, negative gearing, subdivision, and capital gain bandied about, it’s not an investment suited to complete novices. There are several different approaches to making money with property – from a slow and steady approach, to picking up a bargain and flipping it for a quick buck. Let’s look at the most common ways to make money in property and how they work.
Paying rent is essentially paying someone else’s mortgage, so if you’re in a position to jump on the property ownership ladder, becoming a homeowner is a great way to invest. You’ll reap the benefits of any improvements you make, and while you’re not generating any revenue, it’s a smart first step. Most people don’t walk straight into their dream home, they start at the lower end of the market and move up as their property increases in value. Getting started – a large debt is naturally frightening, but if you’re paying rent and can use that exact money to pay your mortgage, it’s unlikely you’ll ever look back. Think of the debt you’re paying down as forced savings.
Property developers make their money by realising the true potential of land. For example, they might buy a large property with a single home on it, knowing that the zoning allows for multiple units to be built on the land, which can then be subdivided and sold off individually. Given a developer doesn’t make a cent until the development is finished and the properties sold, the upfront investment is significant. Developers also rely on years of experience to identify opportunities and avoid risks which can make or break a project – meaning this isn’t for everyone. Consider – does your property have space to accommodate a self-contained granny flat or allow for land sub-division? Subject to council approval and zoning, you may be able to add a separate dwelling to your site or subdivide and sell to get your property development portfolio going.
Also known as generating positive cashflow, income from rent of either residential or commercial property is the classic way of making money from real estate. People are always going to need a place to live or a commercial property to utilise, which makes this a relatively safe investment. There are plenty of ways to get started as a landlord, from buying land and building a rental property, to buying neglected properties, renovating, and renting them out, or simply purchasing a turnkey property (one that is essentially ready to go). Regardless of which type of property you purchase, becoming a landlord is typically a long-term strategy for wealth generation. Consider – rather than searching for rental properties in the main centres, check out real estate trends in other towns with more affordable housing and good returns. Locations like Kalgoorlie and Mildura are worth considering. That way you can rely on income from the rent to cover expenses opposed to banking on the property increasing in value long-term.
Flipping houses for a living.
This is probably the quickest way to make money in real estate – if you get it right. As seen on TV, real estate flippers buy a home, pay for it to be renovated and repaired, and then quickly sell it for a profit. This is all usually completed within a three-to-six-month period. While it might look like fun on TV, flipping houses isn’t without its risks. If you’ve underestimated the cost of repairs and renovations, or uncover unknown problems along the way, costs can spiral, and profit margins dwindle. While it can be tempting to DIY, this can often take more time (unless you’re a skilled renovator/builder or tradie) and there’s also a risk that work you do won’t meet relevant codes or buyer expectations. Understanding the market you’re planning to sell the property to is crucial, as this sets the tone for renovation and gives you an indication of the money to be made. Pro flippers look for properties that need purely cosmetic repairs, but these are increasingly rare. Getting started – start small, consider a home that may have been in your family for generations and is going on the market and just needs some love. Provided you don’t over-capitalise, this can be a great way to get a taste for flipping property.
The capital growth chaser.
Capital growth essentially involves buying low and selling high. The whole goal of this type of investment is to purchase a property that will increase in value over time. This can be through improvements you make, but is typically just due to the market changing and values going up over the long-term. It’s one of the most popular types of property investment in Australia, as a lot of properties are negatively geared – this means it’s returning less in rent than the expenses – so you’re really hoping its value will increase to cover the variance. Getting started – due to a reliance on long-term gains, investing in property for capital growth can mean large amounts of money tied up for an extended period. If you’re looking at a shorter-term gain, you’ll need to start by doing your homework.
Land is a limited resource here in Australia (unlike in countries like Dubai where they can build their own islands), and while it’s playing the long game, land-banking is a popular investment strategy. As the name suggests, this involves purchasing a block of land or farmland and holding onto it for the medium to long term. As the area develops or the land goes up in value, it can be sold off to a developer or subdivided. Outskirts of growing cities are popular purchases for land-bankers, and just think, people used to privately own the desert wasteland that is now the thriving city of Dubai! Consider – land banking is essentially parking your cash and can take decades to pay dividends.
The smaller scale investor.
There are plenty of other ways to invest in property without shelling out a huge upfront investment. Things like real estate investment trusts (A-REITs) allow you to invest in large scale commercial property that you wouldn’t otherwise have access to. While mortgage-backed securities, (MBSs), mortgage investment corporations (MICs), and real estate investment groups (REIGs) are options for investing in private mortgages. Consider – these are a great way to start small and dip your toe in the property sector without the need for a significant amount of capital.
As with most investments, the property sector does require plenty of upfront research prior to diving in. Those that are making huge gains in the sector often have years of experience, and with that, comes industry knowledge. Property is not without its risks, but as is the case with most investments, the ability to make big gains always come with an element of risk!
The advice provided is general in nature and does not constitute for professional or financial advice. Please see your financial adviser or tax practitioner for professional advice.