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Investing in property typically involves having plenty of upfront capital and a good understanding of how the property market works. But things are changing! As new property investment strategies crop up, a new breed of investors has risen to take a shot at the rental property game.
From rentvesting, to fragmented investment groups, there are plenty of ways to score the keys to your first investment property (without a huge amount of capital or a first home under your belt).
To help you kick off your investment journey sooner than you might think possible, we’ve rounded up a stack of emerging property investment strategies you need to know about.
What are the traditional property investment strategies?
Property investing has traditionally been dominated by older, wealthier investors who have plenty of property buying experience. That’s because the key to securing a property is having a sizable deposit ready to go and knowing where the best places to invest in real estate are.
When we talk about traditional property investment strategies, there are a few main methods that spring to mind:
- Capital growth strategies (e.g. negative gearing): this is the approach taken by the majority of Australian investors, and involves purchasing a property that costs you more in expenses than it generates in rental income.
- Cash flow strategies (e.g. positive gearing): on the flip side, a positive cash flow strategy is all about purchasing an affordable investment property that generates solid monthly returns that are higher than your regular expenses.
- Purchasing to renovate and flip: plus, some investors choose to ‘flip houses’ (a.k.a. Buying undervalued properties, renovating them and selling them for a profit).
What do these property investment strategies have in common? Well, in all scenarios an investor would need to have hundreds of thousands of dollars saved up for a deposit. If not, they’d need to already own a property and tap into its equity to finance a new property purchase.
Plus, there are big risks and lots of money on the line if these traditional property investment strategies don’t go to plan. That means the investor would need to have plenty of property buying experience to make sure they’re making a smart investment decision.
Ultimately, it can be challenging for a younger investor to crack the market using these traditional property investment strategies. But, there are new opportunities opening up for the next generation of investors that is levelling the playing field.
What untraditional property investment strategies are emerging?
But these traditional investment strategies aren’t your only way to kick-start your real estate investing career. In fact, there are two key strategies emerging that give first-time investors tangible ways to get into the market (without owning a property or having a huge deposit ready to go).
What is rentvesting?
First up, let’s walk you through a new property investment strategy known as rentvesting. As the name would suggest, this approach involves a tenant purchasing an investment property with the view to rent it out (while they continue renting at the same time).
With rising housing prices, many first home buyers are unable to purchase their dream home in their price range. Instead, they’ll purchase an affordable home that can be turned into an investment property and will continue renting their dream home where they want to live.
Take this example.
Let’s say you want to buy a three bedroom house in the inner city suburb of Newtown in Sydney. On average, that will cost you $1,875,000 as the suburb is in such high demand. Unfortunately, you’ve only been approved for a mortgage up to $1 million, meaning this property is out of your range.
Instead, you decide to try the new property investment strategy of rentvesting and buy a two bedroom unit in Parramatta for around $592,500.
That means you’ll be able to lease a three bedroom house in Newtown for $850 per week. Plus, you’re able to rent out this Parramatta apartment and earn $420 per week in rental income.
Rentvesting is a trend on the rise, with the ABS revealing that 340,000 Australians are rentvestors (working out to be roughly 15% of all private tenanted houses).
Are you thinking of buying an investment property while renting?
There are heaps of reasons why investors choose to take advantage of rentvesting and important things to consider, too. So, let’s run you through the rentvesting pros and cons.
Rentvesting pros and cons
- Get your foot in the property door sooner: by investing in more affordable properties, many buyers are able to get into the market sooner (rather than waiting years or even decades to save up a large deposit to secure their dream home).
- Retain the lifestyle you want: plus, these investors are still able to live in their dream home in the meantime and live in close proximity to everything they love.
- Build wealth and equity: rentvesting means you’re building equity in property through an affordable investment property and earning rental income, all while living in your ideal property type in the perfect location as a tenant.
- Score tax deductions: best of all, you can score lucrative tax benefits by purchasing an investment property (especially if you’re following a negative gearing strategy). Essentially, you can offset your taxable rental income with property expenses.
However, there are important things to consider before deciding to follow the property investment strategy of rentvesting. First up, you’ll still need to live as a tenant in a rental property (meaning you’ll have less security if your landlord decides to sell or raise the rent).
You can also miss out on first home buyer grants and you’ll also need to pay capital gains tax when you decide to sell (as you’ve bought an investment property not a home you’re living in).
How does rentvesting compare to traditional property investment strategies?
Many younger home buyers are choosing to take advantage of rentvesting as it allows them to get into the property market at a more cost-effective price.
Unlike traditional property investment strategies, rentvesting is seen as a stepping stone for first home buyers to help them build enough equity to purchase their dream home.
It also has the added advantage of helping first time property buyers score their first piece of real estate with a much lower deposit than they’d need for their ideal home. By picking a good property in an affordable area, buyers can start building wealth through property much sooner than otherwise possible.
What is fragmented buying?
Another new property investment strategy is what’s known as fragmented buying. Essentially, instead of buying an entire property, a fragmented property investment involves buying a portion of a property for a smaller initial investment.
How? Well, you need to go through a micro property investment platform that are selling portions of properties to investors. Just like buying an entire property, you’ll be considered a true owner of the property (complete with your own title deed, unlike a fractional property investment).
There are a few key types of investors who are adopting a fragmented buying strategy, including:
- Experienced property investors who are looking to diversify their portfolio, but don’t have the capital to take out a new home loan.
- Owners of self-managed super funds who want to put their funds directly into property assets.
- Younger property inventors who are trying to get into the property market for the first time with a small (or no) deposit.
For investors looking to try the fragmented buying approach, they’ll need to go through a marketplace or property investment platform.
One of the most popular options in Australia is Bricklet, which lets inventors buy, own and sell ‘bricklets’ (a.k.a. Portions of a fragmented property) at any time through an open market.
Bricklet also allows investors to own parts of multiple properties at once, giving investors the chance to diversify their portfolio at a fraction of the cost of purchasing multiple properties outright.
The cost of each bricklet depends on the total cost of the property you’re buying a portion of. Typically, you’d expect to pay around $20,000 per bricklet, which is a fraction of the cost you’d need to pay for even the most affordable home loan.
How does fragmented buying compare to traditional property investment strategies?
The biggest advantage of a fragmented buying strategy in contrast to traditional investing methods is its low upfront costs and ability to diversify your portfolio in a cost-effective way.
However, it’s important to consider that many lenders don’t offer home loans for fragmented platforms and properties. Plus, there are fees associated with using fragmented buying marketplaces that you need to factor in when deciding if this approach is right for you.
Ultimately, the fragmented and rentvesting property investment strategies can be a smart way for investors to get around the high capital hurdles of traditional real estate investing. With low upfront costs and the ability to build wealth through property, these approaches give a new breed of investors a tangible way to get into the real estate market for the first time.
Want more insights into the world of property management and real estate?
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Disclaimer: The views, information, or opinions expressed in this blog post are for general information purposes only and should not be relied upon. We have not taken into account specific situations, facts or circumstances, and no part of this blog post constitutes personal financial, legal, or tax advice to you. You should seek tax advice from your accountant, specific to your situation.