Investing in real estate gives you countless options. Contrary to popular belief, you don’t need a lot of money to build investment wealth, as long as you are smart about your choices and are willing to go the distance, this is a viable avenue for anyone to take.

 

If you are looking to increase your income, we have some great strategies and options for you to consider with property investments. 

 

Real estate can be a worthwhile investment to consider. 

 

 

• It gives you a steady income – As well as owning an asset that will likely increase in value with time, you also receive a steady and reliable income through monthly rental payments. Most tenants sign on to 12-month contracts that can be renewed so you can forecast your yearly income.

• There are tax benefits – Your rental income will be taxed but you can claim returns on every aspect of your property expenses from insurance and maintenance repairs to legal fees and interest.

• You build equity – As you meet your loan repayment obligations, your home equity increases. The equity of your home is the balance remaining when you subtract the current value of the property from the purchase price. In regular markets this value will climb as you continue to pay off your mortgage, improving your credit rating and giving you leverage for future investments.  

 

 

When it comes to how to generate income in real estate, there are two ways to earn property income. These are determined by the strategy you implement:

 

1. Passive income. Passive income comes when you buy property and hold onto it. You can receive passive income through tenant rents and lease payments which are small and steady.
2. Active income: Active income comes from buying property and selling it rapidly for profit. In some cases, you pay to renovate and repair an older property and sell for a much higher price, in others the same property can be sold for profit without changes just by the right marketing position and utilising stronger marketing campaigns.

 

Active income can actually increase in the long run, provided the property investor engages in the appropriate income-generating strategies. We’ll go through those in more detail for you here.

5 income-generating strategies for property investors 

 

The type of property you buy and the type of investment strategy used will depend on how much you are looking to invest and what your skills are. So a tradesperson will be well placed to flip a property as they have the skills and connections to do repairs and renovations with lower labour costs. If you are highly organised and have great multitasking skills you might enjoy the role of landlord to house tenants. Someone who doesn’t want to invest a lot of money or doesn’t want the commitment of owning a property (either short or long term) can jump into real estate trusts.

 

Here is a quick guide to the different kinds of strategies available for real estate properties and how they can benefit you as an investor. 

1. House flipping 

Flipping houses; taking an older, cheap home that isn’t in the best condition and completing renovations and fixes to make it modern and more appealing, can be very profitable. It has gained a lot of attention over the past few years with a number of dedicated renovations style reality TVs shows, including Melbourne’s The Block.

 

In the case of flipping houses as a real estate investment strategy, the property investor buys with an exact intent to sell the property on again quickly (usually within 12 months). Renovations can be part of the improvements made to reap a bigger profit. Modernising a home to give it upgrades or creature comforts (or just improve the aesthetic) makes it a lot more appealing to a large number of buyers who are looking for low maintenance ready to move into properties.

 

In other situations the property might be repackaged for development, earning huge profits without any work to the property, or even just waiting for the property to ripen if you know how to find a good deal in a great location.

 

Properties are typically purchased with cash or a short-term loan. Permits are obtained to carry out works and licensed, skilled professionals will carry out refitting the property. Typical workloads include re-wiring, roofing, extensions, kitchen renovations, bathroom renovations, plumbing, landscaping and decking. In terms of interior design, painting is normally necessary as well.

 

It’s important to know the local market trends to make changes that will be desirable to the largest number of property hunters possible and drive up prices.

 

Having trade skills or knowledge of construction is best as you can make sound decisions on the property you purchase, as well as know in advance the cost of the work to come.

 

The biggest trap here is buying a property that has the flexibility to carry out what you need to do. A property that is structurally unsound may cost more than it’s worth in repairs. It’s important to be eligible for building permits, as having a heritage listing or being too confined by property restrictions might make it hard to flip effectively.

 

Typically a flipped home won’t be sold for an excessively high price, rather it will be in line with market value. Generally, the resale of these properties is enough to cover expenses plus a tidy profit for the flipper to invest and flip again. For them, having a fast sale is more important than getting the best price.

 

This is a strategy that allows you to maximise capital gain as quickly as possible, bringing the flipped property back into the market for purchase by an occupier or long term investor. 

1. Short-term buy and hold

 

Short-term buy and hold is a hybrid of flipping and long-term rental. With short-term buy and hold strategies, you buy an undervalued property, flip it to make it appealing to tenants and rent it out for 2-5 years.

 

It’s got some great advantages for the right investor as you can get passive income on your active income investment to help recoup some costs while your asset gains market value.

 

Because you have newly renovated the property there is likely going to be no need for any tenant maintenance in that short time period, making it easy for you to manage. Investors using this strategy also get the benefits of short interest terms, so you’re not paying for years of accumulated interest on a long-term investment.

 

Holding a property any longer than five years is considered a long-term buy and hold. This is different to a property that was intended for long-term investment and needs to be sold again within five years due to unforeseen circumstances. Because selling quickly was not part of the strategy, you are liable to lose money as your loan terms would have been set up for long term ownership and it’s likely that the property hasn’t appreciated enough to recoup your costs. 

 

Buying a short-term property needs to be planned in advance in order to create a situation (particularly around the property locations and price) that allows this to be profitable.

 

This strategy is especially well suited to multi-unit apartment buildings as well as high-rent districts with low appreciation rates and high cash flow. It utilises forced appreciation (raising the rent to market) to raise income by making the property more appealing to higher-paying tenants. 

1. House rentals

House rentals are a popular choice for first-time property owners investing in real estate. These are residential properties that are leased or rented to individuals, couples and families as their private residence. In areas of high tenancy it makes a steady, stable and predictable income that can see you earn profits over time.

 

Historically, residential real estate is less affected by economic downturns, with tenants remaining in rental properties even when the economy is down, perhaps even more so if they are pushed out of the buyers market. Residential investments are not classed as commercial investments, even though you are owning them for profit. 

 

The type of residential property you choose will depend on how much you want to invest. You can select from houses, duplexes, apartments and condominiums that give you a wide range of prices and tenants types. 

 

You will need to have adequate funds available to make a rental investment as there are higher land taxes in most cases and no concessions. You also need to be ready to pay for out of pocket expenses to cover maintenance and vacancies, although you can claim some expenses back come tax time.

 

Over time the cash flow from rental agreements can earn you a substantial income, as well as the wealth earned when you do decide to sell, as the property appreciates.

1. Wholesaling

Wholesaling is the perfect option for those looking for short term investments with quick turnarounds. You also don’t need a lot of capital to make this work. What wholesaling involves is an investor acquiring a selling contract for the property and passing it on to a buyer.

 

The profit comes when the selling contract is undervalued and the investor is able to sell it for a higher price, netting them a “finders fee” for being able to grab the right buyer.

 

So if Joe wants to sell a property for $350,000 and Stan thinks the property is worth more than that (or will be once it’s been fixed up and repainted) Stan can offer to hold the contract. Stan knows property flippers who would love the house and can manage the workload and so he offers it to them and adds a $10,000 finders fee. The flippers buy the house for $360,000, put in the renovation time and money and sell it again for $630,000. It’s a win-win for all involved.

 

It’s a risk-free strategy because at no time do you buy the property yourself, you are only scouting out a buyer who is going to pay better than the asking price.

 

This works well for deceased estates. A lot of times when an elderly person passes away there is a lot of work to do on an old home, and a lot of work for family members packing up and clearing out. The last thing they want is the headache of property negotiations, staging and long sales processes. Offering them a fair deal gives them a sale quietly and discreetly.

 

Property flippers are typically the best buyers to be selling the contract to as these properties are usually in a run-down state. Having contacts that you can market to is what is going to make this one a winner.

 

1. Real Estate Investment Trusts (REIT) 

 

Real Estate Investment Trusts (REIT) are an alternative to direct property investment. In this case, you buy a share of an investment portfolio of properties that you own alongside other investors.

 

The benefits are that you have no ties or commitments to property ownership and you can sell your share whenever you like. You can also decide how much you want to put in, which is different to property purchasing where you need to invest in the market value. 

Your investment is in a diversified and professionally managed portfolio so you don’t need to do any work, maintenance or have any investment skills to achieve a profit.

 

These low risk, stable investments have been part of the Australian stock exchange since the 1970s, so you know it’s a trustworthy source. 

 

You will need to compare returns and the type of investments available to make a choice that’s right for you and check to know their minimum investment requirements to know what your obligations are. You also need to be sure that the exit terms match your needs so that you can pocket your profits at a time that suits you. 

 

REITs are far more liquid than owning physical real estate. Publicly traded stocks give you all the advantages of owning and profiting from capital growth, without the headaches of holding property.

 

There is plenty of wealth in property, enough to satisfy a range of different investment buyers and investment needs. Which one is right for you will depend on how much you are looking to invest and what your skills and talents are. No matter what property strategy you choose (or maybe mix and match) it’s important to understand the benefits and risks involved so you can check that the property will meet your needs and expectations.

 

If you have any questions about Melbourne property investments, contact Nicholas Scott Real Estate for information or a list of available properties.