Buying an investment property seems like a fancy thing to do for cashed up individuals. You may think it’s totally out of your league but if you’re new to the world of investment, a low budget, entry level property can be an excellent starting point to get some runs on the board before making a larger commitment you might want to live in.
You may have been saving hard for years, and working even harder, but that probably still won’t afford you the ability to buy whatever you want. Maybe you’re even struggling to imagine how you’ll afford to buy in the location you actually want to live?
So instead of continuing to add to your savings account with no particular plan, and with the constant temptation to treat yourself to some ultimately frivolous consumer items, you might want to consider buying an investment property that fits within the budget you have rather than the one you’re aspiring to have.
Why Buy An Investment Property?
There can be some snobbery around the words ‘investment property,’ especially considering the fluctuating rental shortages that occur in most of Australia’s capital cities.
There is clearly a gigantic difference between buying an entry level investment property as your avenue into a difficult and expensive housing market, and holding many investment properties when you already own your primary residence. One is a necessary leg up, while the other has become the domain of those who ‘have,’ rather than the norm for those who ‘have not.’
Please don’t worry, buying an investment property doesn’t make you greedy or a ruthless capitalist. If anyone uses the word ‘bourgeois’ when you tell them you’re planning to do this, then you’re well within your rights to start referring to them as ‘comrade.’
Frankly there are no get rich quick schemes in this world — Ponzi, Crypto, and Pyramid are all great names for cats, and that my friends, is where it ends. You need to be shrewd and set achievable goals for yourself. If you’re savvy enough to work your way into the property market any way you can, then bravo!
So this leaves you with a choice: buy an investment property or hold out for an actual home in your preferred postcode?
The reasons for buying an investment property and the strategy you implement to action it are entirely personal. A good place to start is to think hard about where you’re wanting to be within a foreseeable timespan and what you’re hoping to achieve financially.
Once you’ve established your goals, it might be useful to look to some of the following popular investment strategies to work out which aligns best with your circumstances. In their simplest form, these are as follows:
- Buy & Hold: The buy and hold strategy involves purchasing a property with the ultimate goal of holding onto it long enough to generate capital growth.
- Negative Gearing: Negative gearing occurs when you borrow money to invest in property, but the income you make from it through the rent earned is less than your expenses.
- Renovate & Hold: The objective of this is that by renovating and holding your investment property, you maximise your property’s earning potential.
- Flipping: Instead of waiting years to see a profit, some property investors search for old, broken-down properties to renovate or ‘flip’ and then sell at an increased value.
- Rentvesting: This involves purchasing an investment property in an area that isn’t your preferred residential location but that suits your budget. At the same time, you rent a property in an area that fits your lifestyle but is in fact well outside of your budget to buy.
Now that we have this nice, easy-to-understand, nutshell version, let’s dive a little deeper into each of these options.
Buy & Hold An Investment Property
This is a popular choice for many investors, as the common assumption is that the property market is a pretty stable bet over time.
Your ‘buy and hold’ investment property may start out being negatively geared for the first years of your loan. The goal here is to reach the point where you’ve paid down enough of the mortgage that the rent you’re receiving from the property covers the mortgage repayments. This strategy is often taken by buyers hoping to see natural capital growth over a number of years.
With this strategy, the component that can cause difficulty is the ‘hold’ portion of the arrangement. While the property is slowly increasing in value with both its rental income and capital growth, the rise in interest rates and potential periods where the property may be untenanted can really put a pinch on cashflow — especially with the associated costs of owning a property. By this, we’re talking maintenance costs, agents fees, water and sewage supply, rates, strata fees, and land tax. It’s a lot, and it can really spike your cortisol levels on a daily basis if you’re not prepared for costs outside of your control.
For most buyers, this strategy might feel more like ‘buy and hold on for dear life,’ but that’s just the way the cookie crumbles for many passive income generation strategies. At the end of the day, being able to buy the dream home is the gold vein that many are mining for.
Negative Gear An Investment Property
This is what often happens during the ‘buy & hold’ years. Many investors whose objective is long term capital growth don’t expect to make their money from rent. The good news is that the Australian Taxation Office (ATO) allows property investors to deduct any losses they make on their investment property from their taxable income. So, while we wait to realise that growth, our taxable income can be reduced and the rent we do get can contribute to paying some of the aforementioned property expenses.
Renovate & Hold An Investment Property
The main purpose of renovating and holding is to increase the rental income of your investment property by increasing the property’s value. This is probably not the go-to strategy for most first-time investors. While there are clearly merits to improving or maintaining your rental investment, and there are associated tax claims you can make by renovating, as with any other skill or endeavour, this needs to be learned and practiced. Yes, even if you pay someone to do the renovating — actually, especially if you pay someone to do it! It’s a large outlay of time and money for long term gain so probably not something you want to enter into as a first-time property venture.
Which brings me us to the on-steroids version of renovating, and that is flipping.
Flip An Investment Property
The world has been obsessed with the idea of flipping for about a decade now with the advent of TV shows like The Block and the myriad of all too easy DIY tutorials that show us, somewhat synthetically, just how ‘easy’ the road to profit is.
The idea of flipping is that that you buy some dilapidated former squat and magically (i.e., quickly and cheaply) turn it into something worthy of housing a gaggle of Hemsworths. Simultaneously netting enough profit in a short period of time to avoid having to ever work that hard again — well, that’s often the goal here.
Much like ‘renovate and hold,’ this is not for the faint-hearted and requires many skillsets to pull off successfully. It’s a pipe dream for many and once again, it’s for people who have a bunch of capital and/or a back-up plan (perhaps a trust fund, for example?).
Rentvest An Investment Property
Rentvesting is the ultimate portmanteau and most likely the best answer to the question of ‘why buy an investment property first?’
If you’re ready and able to buy your first place but you can’t afford to do this in the area you’re currently living and working in, then rentvesting is what you’ll be doing if you buy an investment property.
Taking this avenue allows you to use your ‘city’ income (the income you’re able to earn in a larger city with more opportunities versus the potential pay cut that may come from moving to a less populated area) to bolster your mortgage repayments. This will see your portfolio strengthen quickly and get you to into a better position where further options may be available to you down the track.
There is no right answer as to whether buying an investment property or a home first is better. The idea of owning a property but still having to pay high city rents, seems to most like throwing money down the toilet, but you need to consider the stage you’re at in your personal life and career. Holding on to your job and lifestyle might be a reasonable sacrifice for having to pay both rent and a mortgage.
Rentvesting offers a flexibility that being an owner-occupier does not: it enables you to make strategic investment decisions based solely on financial considerations rather than emotional attachments to a particular property or location. This means you can focus on looking for properties with strong rental yields or high growth potential, potentially maximising your investment returns. Real estate websites are constantly promoting ‘up and coming’ suburbs all across Australia. With some clever research, the information you’ll find about housing trends and making a clever investment in one of these locations will transform the options you previously thought you had.
But ‘where will I live,’ you ask? With rentvesting, you can live anywhere. You can even move countries for awhile knowing that whoever’s renting your property is not undermining all the work you’ve put into creating your actual home.
Not only does rentvesting make it easier for you to keep acquiring assets (because that property will eventually be income-producing), but you’ll see improvements in your cash flow much faster than if you had to also pay off your own home at the same time.
Plus, you can keep renting in an area that offers you the lifestyle you truly dream of, all while building a strong real estate portfolio.
Buying An Investment Property — Your Next Step
Hopefully you’ve now gained a better understanding of why buying an investment property as your first step into the housing market might be both a viable and sensible option. With any big life decision, it’s always wise to not only to do thorough research but also to seek council from a friend, family member, or mentor. Seeking out people with experience in investing can alleviate some of the concerns you may have, and employing one of the strategies outlined in this article could see you hitting your investment goals sooner than you expected.