Looking to begin investing in bricks and mortar?
We give you tips and tricks for building your wealth through real estate.
There are several ways to make money by investing in property.
Check out these top five tips to get you started.
Arguably the most common means of property investment is to become a landlord and rent out your property to a suitable tenant.
“Generating passive income from investing in property should be every passive investor’s strategy,” says Ben Kingsley, chairman of Property Investment Professionals of Australia (PIPA).
You name it and there will be someone out there seeking to rent it â€“ homes, shopfronts, offices, storage units, car parking spaces, factories and warehouses, rural land … you can pretty much invest in any type of property. However, it’s important to do your research first.
“Not every property makes for a good investment. They must be ‘investment grade’, meaning any property you are considering must be in a highly desired location and appealing to prospective renters,” Mr Kingsley explains.
Developing new properties may not be for the faint-hearted, but if done well it can generate healthy profits for savvy investors. Property development could encompass anything from investing in large-scale projects, building your own properties or even simply subdividing land.
“The attractive aspect of this is that profits can come in the form of selling one or all of the properties to realise your profits, or you can potentially sell some and retain one or more of the properties to provide you with regular income,” Mr Kingsley says.
“[However] I’ve seen some developments that should have never been undertaken. Anyone considering developing property should do considerable due diligence to assess the risk versus reward. There is far greater risk with developing property so the rewards need to be appropriate for such risk.”
Flipping for profit
Rolling up the sleeves and working for your money can generate healthy shorter-term rewards in the right conditions.
“Within the property investment industry we call this ‘equity harvesting’, which refers to realising the best land-utilisation strategy and/or the best improvement-to-the-dwelling strategy to achieve the best financial gains possible,” says Mr Kingsley.
There are full-time renovators, such as Cherie Barber of Renovating for Profit, who make an excellent living this way. Yet there are also untold investors who use this process as a secondary source of income.
Be sure, though, to avoid the temptation to do too much, Mr Kingsley warns.
“The classic trap is incorrect judgement of the final value-to-market expectation at the completion of the project, which results in vastly smaller profit than what had been projected when starting out.”
It tends to be the investor with a longer-term view of their investment who seeks to cash in on capital growth. Yet even the family home, if located in an area where values are expected to rise strongly over time, can be viewed as a long-term investment.
“There are no real traps if you get the right location and right property, but if you don’t select correctly then this is where the pain begins,” advises Mr Kingsley.
“Picking the right location and right property is a science and requires real effort to give you the best chance of striking property gold.”
It’s crucial to research the best towns and suburbs for capital growth before making the plunge.
This tip may not be a type of property investment, but no matter how you decide to play the property game, reducing the tax liabilities of any investment you make is crucial to maximising your profits.
One example, as Mr Kingsley points out, is that, “Many investors might not realise the amount of depreciation available in their investment property so they opt not to do a depreciation schedule, which means they are missing out on possible tax deductions that would improve their cashflows and investment returns.”
Be sure to have your accountant explain to you the ways in which negative gearing, income tax on earnings, depreciation and tax-deductable allowances work so that you minimise the amount of tax payable on your investment proceeds.
Investing in property has long been viewed as a sound strategy for building wealth. Knowing exactly how to do so in a way that suits your lifestyle and budget, as well as maximises your returns, is the real key to investment success.
17 February 2015