- Property investments are a relatively low-risk investment strategy to build wealth, earn passive income through dividends and generate rental income.
- Some popular property investment strategies include home flipping, rental properties, REITs, superannuation, and crowdfunding.
- You can extend your investment strategy beyond Australia, although investing in the U.S., U.K., and Canada may come with some restrictions and complicated taxes.
Compared to crypto, stocks, and other volatile investments, property investments are a relatively secure way to build wealth through appreciation and passive income. There’s a variety of factors to consider, such as budget, risk tolerance, cash liquidity and time commitment.
From REITs to rental properties, there’s a property investment option for almost anyone. Review this list of the best property investment opportunities to determine your ideal investment strategy.
Shows such as “Flip or Flop” and “Fixer Upper” helped popularize home flipping, but it’s not always as simple as it appears on television. Flipping is an investment strategy that involves buying undervalued properties and performing renovations or repairs to increase the home’s value. Flippers can then sell the property at a significant profit.
Although flipping can have a great ROI, there’s a few considerations before committing to this strategy. Renovating can be timely and expensive, and unexpected fixes or unfavourable markets may hurt your bottom line. High mortgage interest rates can also pressure your finances if you can’t sell the property quickly.
Flipping is a high-risk and hands-on property investment. If you’re a rookie to flipping, research your options and carefully plan your strategy.
Investing in a rental property is a great long-term investment, but there are important pros and cons to consider. Although you can generate monthly rental income, you’ll likely need to pay a higher down payment to secure a mortgage. Keep factors such as property taxes, schools, job market, average rent, and amenities in neighborhoods you consider in mind as they can affect your investment’s success.
Since you’re responsible for managing tenants, performing maintenance or repairs and other tasks, rental property investments aren’t technically passive income. Houses generally require more attention than condos, but condos come with strata fees to cover maintenance or repairs. Hiring a property manager for a fee can relieve you of most of the responsibilities involved with rental properties.
Superannuation is a way to save money for retirement, but Australians can also use a self-managed super fund (SMSF) superannuation to buy property. The SMSF acts as a deposit to secure a loan for an investment property that you don’t plan to live in.
With this strategy, the government caps capital gains tax for properties purchased through an SMSF at 10 percent. Any interest accrued on your loan is tax-deductible. First-time buyers can also use the First Home Super Saver scheme to save for a deposit with their superannuation.1
The property investment must comply with strict SMSF rules. You can’t acquire it from a relative, and it must provide retirement benefits to the buyer.2
Real estate investment trusts own and manage real estate. Some invest directly in properties and earn rental income, fees, and other gains, while others invest in mortgage and mortgage-backed securities. Some specialize in certain property sectors, such as healthcare, resorts or retail centres.
When you invest in REITs, you’re pooling your money with other investors. You trade REITs on the stock market, and they are highly liquid and diversified, which means you can get exposure to the real estate market at low cost and risk. REITs pay out most of the taxable income as dividends to investors.
Some of the largest REITs in Australia include:
- Goodman Group (ASX: GMG);
- Scentre Group (ASX: SCG);
- Dexus Property Group (ASX: DXS), and;
- Stockland (ASX: SGP).
Real Estate ETFs
REIT ETFs are stakeholders in REITs that own properties generating rent, such as commercial spaces or apartments. These exchange-traded funds are passively managed and invested in equity REIT securities and other derivatives.
Investing in REIT ETFs is a simpler way to get exposure to the real estate market and REITs without managing various complexities, although investors might not get direct control over which REIT shares they purchase. Investors tend to favour REIT ETFs for their high dividends.
Some top choices for REIT ETFs are:
- Vanguard Australia Property Securities Index ETF (VAP);
- VanEck Australian Property ETF (MVA), and;
- SPDR S&P/ASX 200 Listed Property Fund (SLF).
Crowdfunding refers to raising capital through the public, and it’s become a popular means of real estate investment. Real estate crowdfunding platforms match investors with developers and other real estate professionals to fund property investments. Though they function similarly to REITs, crowdfunding investments are usually privately held.
Although it carries more risk than REITs, real estate crowdfunding is a relatively low-risk option to get market exposure with minimal upfront investment. Investors generally receive higher dividends than REITs, reflecting the higher risk of this strategy. Crowdfunding investments have less liquidity than REITs but offer access to unique property investment opportunities.
Real Estate Funds
Real estate funds are a type of mutual fund that you invest in stocks offered by public real estate companies, including REITs. These funds are professionally managed and require a relatively low minimum investment. You purchase real estate funds directly from a company or brokerage, which aren’t traded on the stock market, meaning they’re less liquid than other investment vehicles.
Investors don’t earn short-term dividends from real estate funds as they do from REITs but instead gain value through appreciation and are a good long-term strategy for building wealth.
Typically, a brokerage manages funds invested in an IRA account. A self-directed IRA gives you more flexibility in your investment choices, including real estate. Investors can use the funds from a self-directed IRA to secure a loan or pay the full price of an investment property.
Although this strategy can help you enter the real estate market, it comes with risk. You’re committing a chunk of your retirement fund into a sometimes volatile market, which can affect your cash liquidity. If property values drop and you face significant maintenance or repair costs, your income and IRA may not cover the difference.
Real Estate Bonds
Real estate bonds are fixed-income investments backed by tangible properties. Investors can invest in real estate bonds through mortgage REITs, crowdfunding real estate bonds, government real estate bonds and commercial real estate debt funds. Even Australians can invest in U.S. government real estate bonds, although they may need to do so through an international stockbroker.
This strategy offers passive income and capital growth for low risk. Investors get exposure to the real estate market and diversify their portfolios.
Investing in Australia
Real estate investments in Australia don’t have the growth as crypto or stocks but are a reliable choice for building wealth. Property price increases have slowed in 2022 since rising 23.7 percent in 2021 but have still consistently gained over the last few years. Investors can also take advantage of low-interest rates and government incentives to enter the market.3
Australia also offers a diverse market. Perth and Sidney have fast-growing markets, but development in the Sunshine Coast, Bendigo and other areas make for competitors in the real estate market.
Investing in the U.K., Canada, and the U.S.
Residential property prices are currently rising in the U.K., growing 13.4 percent in 2021. Australians can purchase investment properties in the U.K., but stamp duty, capital gains tax and a 20 percent tax credit can undermine the investment yield.4
Canada has no laws prohibiting foreigners from buying property, but there are some conditions. For example, a nonresident speculation tax can climb up to 15 percent of the property’s assessed value, and Canada taxes nonresidents 25 percent on any income received from rental properties.5
Nonresidents won’t have any restrictions for buying property in the U.S. but will face a few tax challenges. It taxes rental income at a higher rate for nonresidents, and nonresidents may be subject to a 15 percent withholding tax on gross sales from real estate.
Investing in Other Countries
Investing in real estate overseas is a lucrative option for investors who don’t want to limit their property investments to Australia. Countries such as Germany and Iceland may present more stable growth rates or rental income over time, while Brazil, China and India offer lower entry costs and barriers.
Keep in mind that global politics, currency risks, taxes and real estate regulations may affect your ability to invest in properties outside of Australia. Banks are less willing to lend to nonresidents, and you may need to visit the country to secure the property.