Finding an investment strategy that gives you the best results and the biggest profits can take some trial and error. Your strategy could be based on what you want to achieve, the risks you are willing to take, and your future needs.
For the 2019 Property Investment Sentiment Survey conducted jointly by Your Investment Property magazine, Michael Yardney’s Property Update, and CoreLogic’s On The House, more than 1,800 investors shared their preferred strategies. Here’s what we discovered!
A long-term approach to investment remains the numero uno strategy for investors.
Forty-nine percent of those surveyed said long term capital growth is their preferred investment strategy. Sophisticated investors know the only way to be financially free through property is to build a substantial asset base, according to Metropole Property Strategists CEO Michael Yardney.
Capital growth or having a substantial asset base is the only way out of the rat race, he adds.
Meanwhile, 19% said they would buy a property, add value, and hold for the long term.
Sarah Megginson, Your Investment Property Magazine’s editor, says it’s interesting that long-term capital growth remains the number one strategy for investors.
“It’s really hard to own a property in a market where the headlines are screaming at you every day that property prices are tanking and the sky is falling. It can be really hard to stay the course and not panic,” she explains.
“That’s why taking a long-term view and having a clear strategy is so important – it keeps you on track during challenging times.”
The results show that people still see the value in holding and having a long-term view of their property portfolios.
Gearing for profit
Gearing to generate some cash flow is another tactic that investors prefer.
The survey found that 16% of the respondents use positive cash flow as their strategy. Thirty-seven percent of the respondents also mentioned that their portfolio generates positive cash flow.
“It’s always best for (an investment property) to be positively-geared meaning that the rent is more than the outgoings so that (you won’t have) to supplement it with another income. Generally, most people supplement it with their wages. However, most positively-geared properties—not in all instances—but a lot of positively-geared properties don’t show the same capital growth as negatively-geared properties”, explains Ed Chan, co-founder and non-executive chairman of Chan & Naylor.
Some properties are negatively geared because their capital value is quite high as proportioned to the investor’s income. The demand for the property pushes the value up, with the return going down because the capital value has increased.
The survey also found that 33% of the respondents have a negatively geared investment portfolio.
Negative gearing has been a huge issue in 2019 when labour suggested the idea of tinkering with it, according to Megginson.
“There’s a massive misperception that negative gearing is giving landlords these massive deductions, ruining the property market. In reality, the majority of landlords are mums and dads trying to get ahead. Not to mention that negative gearing is available on any investment—it’s not just properties, it’s on shares, too” she adds.
The government introduced negative gearing to encourage more people to purchase houses and accommodate more people. If it is abolished—together with landlords—the number of available properties for people to rent would considerably shrink, forcing the government to come up with more accommodations.
However, Yardney warns that negative gearing isn’t an investment strategy.
“People seem to think it is sometimes. Now it's just the way you finance your property at a particular period of time. The fact that a lot of the investors in our survey had substantial property portfolios would suggest they've had them for a while and it's quite likely that they started negatively geared,” he explains.
“When you start, you borrow as much as you can to get into the market, but over time you slowly either pay down the debt or the loan to value ratio drops as the value of your property increases. It's just a point in time and the way you're funding it as opposed to an investment strategy.”
The flip side of investing
Only 5% of those surveyed said they buy, add value, and then sell a property.
Megginson shared that when she started investing 15 years ago; this strategy was a really good way to make money. In fact, it’s how she got started—she would buy apartments on the cheap, renovate them quickly and cosmetically, and sell them to make a quick $25-30,000 off each one.
But these days, this tactic is becoming harder to implement, as entry and exit costs are soaring high.
“By the time you have the stamp duty on the way in and the real estate commission on the way out, and then you pay capital gains tax on your profit, plus the cost of your renovation, buy, add value, and sell is a really hard strategy to pull off these days,” she says.
However, it could still depend on what you do with the reno, said Yardney.
“Structural renovations, adding rooms, adding on the suites can make a significant enough difference to overcome those hurdles of tax, stamp duty and selling costs and holding costs,” he mentions.
But they take longer to do and require development approvals.
Investing for tax benefits
While typical frowned-upon, some still use investing for tax benefits as a sort of strategy.
Two percent of those surveyed said tax benefits is their preferred strategy, while 4% said they don’t really have a tactic.
“Investing for the tax benefits is just taking two steps back and one step forward,” Megginson cautions.
Adds Chan, “often people will say ‘Oh, I’m saving tax on this so I’ll go and buy a property’. That should not be a reason why you invest. The reason that the tax refund is good is because it reduces the cost of holding the property, and the thinking behind it is if I have got to pay a thousand dollars a week in tax anyway, I can redeploy some of that money into the property instead of sending it all to the tax man. But you need to invest in a quality asset, for it to grow in value over time.”
At the end of the day, having a strong strategy for your portfolio is essential.
The people who have become successful are the ones who just kept going and didn’t panic during the stressful moments.
“Having a long-term strategy and (sticking) with that through difficult times is so crucial,” Megginson says.