Looking to buy an investment property, or expand your current portfolio?
Understandably, the market has seen quite a few ups and downs in the last twelve months. From record-low interest rates to a COVID-19 disruption, it can be a little unclear which direction to take.
We’ll guide you through a number of trends investors have used and are adopting in these interesting times.
Rentvesting is a strategy for those who want get on the property ladder sooner, but choose to make that purchase as an investment – rather than a live-in home. Rentvestors continue to pay rent for their place of residence.
There are a number of reasons people choose to rentvest instead of purchase their first owner occupied home. Like many strategies, there are also pros and cons to consider if it’s the right choice for you.
Pro: flexibility of renting
Some investors enjoy the flexibility and freedom of being able to move when and where they want in a rental, while gaining return on their investment property.
Moving for work, lifestyle, facilities, schools or family are common reasons one may choose to purchase an investment first.
Pro: tax benefits
Unlike owner occupied properties, investors can claim tax on holding costs and some of the initial set up costs including stamp duty and legal fees. Yearly depreciation costs can also be claimed. However claimable costs will depend on each individual situation.
Con: It’s not yours
As we know, renting has a few restrictions. If a touch up or renovation is needed, the renter must always ask the landlord for approval. If the house was your own, you could add your own personal touches at will.
Con: Capital gains tax
Since rentvestors are purchasing for investment, if they choose to sell they will be required to pay capital gains tax (CGT). Owner Occupied property sales are exempt from CGT.
Notably, deductions can be made if the rentvestor has actually occupied the property over a period of time. CGT is only applicable for capital gain accrued during the period the property was rented.
2. Subdividing land
Subdividing one lot of land into multiple lots is becoming a popular investment strategy for up-and-coming communities in development.
Limitations of lot subdivision can vary greatly depending on local council and government restrictions. Such limitations include minimum land size or building density zoning. Investors must take care and consult their local council when looking to subdivide.
Pro: Increase rental income
Subdividing one lot allows the investor to build multiple rental dwellings, thereby increasing rental yield on that one block of land.
Rather than settle for one standalone property, duplexs, triplexs and multiple smaller freestanding dwellings offer the potential to double, or more than triple rental return.
Pro: Almost instant capital gain
Some older properties and lots of land are screaming for a facelift, particularly in developing suburbs.
As Australia’s population grows, the need for more residences in urban hotspots does too. Converting an old run down 1970’s house into a sharply-finished modern duplex can instantly increase the value of the property.
Of course, CGT must be considered on the back end of that.
Con: Cost of subdividing
Subdividing lots means multiple dwellings.
Be sure to crunch the numbers before deciding to subdivide land. Along with construction, other costs such as council subdivision charges, increased infrastructure such as plumbing and sewerage, and a number of government taxes can apply.
It is recommended that investors seek professional advice and conduct a feasibility analysis before charging headstrong into a plan to subdivide.
Construction loans are available to assist with financing a subdivision and build. Consider reducing the cost with a low rate construction loan.
3. Investing in a fixer-upper
Buying a fixer-upper can be a high risk, high reward property investment strategy – but it’s not all that uncommon. As the name implies, you’ll need to put in the hard yards in doing some renovating to maximise rental yield and future sale price.
Pro: Lower purchase price
Investors can expect to pay a lot less for a fixer-upper than a property in move-in condition.
Purchasing at a lower price enables more room for renovation costs, and greater potential to raise equity
Pro: Buy in an otherwise unaffordable area
It can be difficult to get your foot in the door of a high-profile suburb with rising property prices. However, since fixer-uppers tend to be cheaper to buy, they allow you to purchase in suburbs otherwise considered unaffordable.
This way, investors could renovate a cheap fixer-upper in an area with fantastic surrounding amenities, schools and transportation. Ultimately, investors gain more in rent, without stretching finances too thin.
Con: Potential hidden problems and costs
Renovations can reveal more problems than your initial inspection reveals. With hidden problems comes hidden costs, and the renovation project can end up costing you far more than purchasing a ready-to-live property.
To avoid such problems, it may be worth investing a bit more on thorough inspections to save far more in unexpected costs.
Con: Takes time
Most fixer-uppers are not move-in ready and are sold with the expectation that the buyer will renovate before moving in/renting out. Depending on the condition, renovations on a property can take weeks or even months before it is in a liveable state.
Understanding that, investors will need to wait out the time it takes to renovate seeing any rental return on the property.
Before looking to purchase an investment property, it is important to seek professional advice on what strategy may suit you.
Any statement/s are general in nature and do not take into account your financial personal situation, objectives or needs. You should consider whether any statement/s is suitable for you and your personal circumstances. Before making any financial decision, consider your circumstances and the product disclosure statement.