Are you thinking of jumping into the Australian real estate market as an investor? If so, you’ll want to give some thought to a couple of different investing strategies you could use for building your real estate portfolio and your wealth.
The Traditional Home Flipping Investment Strategy: Buy a Home, Improve It and Resell It
In the past few years, the accelerating Australian real estate market created an environment that encouraged the investment strategy of home flipping. Legions of investors were buying homes, creatively renovating them and then selling them at a profit. This was and is a viable strategy for turning a profit, but recent market dynamics have rendered the strategy riskier and less profitable for many investors.
Downsides to the Home Flipping Strategy
- You assume a massive amount of risk in proportion to the probable rewards. While it is possible to make an acceptable profit on a home you flip, under the current market conditions, it is also likely that you will only break even or perhaps even lose money.
- The opportunity costs are significant. You’ll have a huge sum of your money tied up in the home and its ongoing improvements. Much or all of your available cash flow will be directed at renovation projects. When better prospects for investment opportunities arise, you may not be able to take advantage of them if all your money is already invested in a home.
- Housing prices can plummet quickly, slashing the profitability of your investment.
- Stamp duty, home loan interest payments, real estate agent fees, conveyance fees and other costs can also eat up a significant portion of your profits.
These downsides are not insurmountable. However, you need to plan carefully to ensure you don’t foolishly waste your money and time on a flip that will not earn enough to be worthwhile.
The Up-and-Coming Real Estate Investing Strategy: Buy a Home, Renovate It and Rent It Out
As the Australian real estate market shifts and evolves, some Aussie investors are investigating whether it is worthwhile to adapt their old strategies to increase their profitability. One important new trend in the real estate market is the emergence of a surprisingly robust rental market. This creates the ideal environment for a different wealth-building real estate strategy based on buying, renovating, holding and renting out properties instead of flipping them.
Holding onto your property allows you to save the cost of capital gains tax and the myriad other costs associated with selling a home. If you negotiate a monthly rental fee that more than covers your mortgage payment, renting the property to tenants allows you to hold the property whilst maintaining a positive cash flow. This is a strategy that has the power to create substantial wealth in the long term.
Short-Term Peer-to-Peer Rentals Are Profitable for Some Real Estate Investors
A recent report posted at Deloitte.com gives us some fascinating insights into the short-term property rental market in Australia. Up until recently, the short-term vacation rental market has been a challenging one to succeed with. Peer-to-peer rental platforms such as Airbnb.com have changed the dynamics of that market, enabling growing numbers of new rental income opportunities for Australian property owners. In 2015 and 2016, there were 2.1 million travelers who chose to take advantage of short-term rental accommodations offered by private Australian property owners. This growth in the vacation rental market came at the expense of the hotel and hospitality industry.
The existence of short-term rental platforms makes the prospect of buying and holding real estate that much more attractive. It opens up additional options for property owners who cannot quickly locate high-quality tenants to occupy their homes. In areas of Australia that are popular with vacation travelers, it could possibly even be more lucrative to rent property on a short-term basis than it would be to rent to long-term tenants.
Many Aussie real estate investors are making the decision to keep their properties rather than flip them. Real estate investment expert Cherie Barber expresses the idea that home flipping is trending down in Australia now. She asserts that fewer Aussie real estate investors are choosing to flip their properties and more are choosing to buy property, improve it and rent the improved property at a profit. So if you’re thinking of investing money in real estate in Australia, this is an up-and-coming strategy you’ll want to consider.1