If you want to build a property portfolio but are not sure how to get it off the ground, or if you have already bought one house and you now want to start building a property portfolio, then here are some strategies to take the next step.
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The Rent-vesting Strategy:
This term is becoming more common these days. The rentvestor is someone who buys their first home as an investment property and continues to rent a house to live in themselves (rather than move into their own home). Many people do this as they cannot afford to buy a property in the location they want to live, so they rent where they want to live and buy elsewhere to get a foot on the property ladder.
Rentvesting can also be a sensible investment strategy if the rent they are paying is less than the cost of owning the home. As the costs of owning a rental property become tax deductible, the rentvestor can end up in front. And many rentvestors continue living at home with their parents, in which case they may able to finance a much larger or better first home than they otherwise could if they were to move into the house themselves.
The Negative Gearing Maximising Strategy:
This strategy is for people on very high incomes who want to take advantage of the negative gearing benefits of investing in property and reducing the amount of tax they pay upfront. As the investor is making a cash loss upfront, the strategy heavily relies on the investor obtaining capital growth over the long term. This is a higher risk strategy and requires the investor to have long term investing time frame, high risk tolerance, and to maintain a relatively stable and high income over the medium term.
The Positive Gearing Strategy:
This investor is looking for properties that generate a rental return higher than the cost of holding the property (including mortgage interest). While in some countries this strategy is quite easy to implement, in Australia it can be very difficult to find properties that fit this criteria (unless you have a large deposit). The advantage of buying positively geared properties is that you are able to finance a much greater amount of debt than under the negative gearing strategy, as every property you add to your property portfolio increases your net income.
The main disadvantage to this strategy is that properties than can be positively geared tend to be properties that may not experience much capital growth (small apartments or houses located on the outskirts of the big cities) or are located in areas that have strong economic cycles with small populations (eg. small regional centres and mining towns). Many people also employ this strategy by buying holiday apartments in various beach towns.
The Renovator Strategy:
Often the hardest thing when trying to build a property portfolio is building up enough equity so that you can buy your next property. The renovator strategy is based on people buying a house that is lacking a bit of attention (and in need of a cosmetic overhaul), or a renovators delight (the house that needs major structural and cosmetic work). Once purchased, the renovator sets about adding value to the property with the aim that the renovations cost less than the value that is added to the house.
The renovator can then use that increased equity as security on their next property purchase, and so on. The renovator can also take advantage of increased rent on the property as a result of the renovation to help fund the next purchase.
A variation of this strategy is the flipping strategy, whereby the flipper renovates a property and then tries to immediately sell the property and cash out the value increase they have created. They then just continue this process on the next property and so forth. The disadvantage of this strategy is that with buying and selling, costs are very high (eg. stamp duty, real estate agent fees etc), so it can be difficult to turn a profit every time.
So there are four strategies you might be able to employ to build a property portfolio. And of course there are any number of other permutations and combinations as well. Whilst it can be more difficult to buy property in Australia whilst living abroad, let alone trying to build a property portfolio, speaking to and employing experts in buying property in Australia for expats will help get you started.
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Disclaimer : This information is for educational purposes only and does not constitute financial or taxation advice. As this information is not advice and has been prepared without taking into account your objectives, financial situation or needs you should, before acting on this information, consider its appropriateness for your circumstances. Independent advice should be obtained from an Australian financial services licensee before making investment decisions, and a registered (tax) financial advisor/accountant in relation to taxation decisions. To the extent permitted by law, we exclude all liability for any loss or damage arising in any way.