Part 1: Renovations & Flips
The future is unpredictable. As much as we try to foresee future events, the plain truth is that we can never be certain of what will happen years from now. This is why creating wealth and protecting it through asset protection strategies are crucial.
When it comes to wealth creation, investing in property is one of the most reliable, time-tested ways. Today, more and more Australians are making a smart move by purchasing investment property first and accumulating wealth from it, thereby obtaining the funds they need to buy other types of property.
But as with all types of investments, this comes with risks. To avoid risks there are several factors you need to consider, and one of them is the type of investment property strategy you choose.
There are several types of investment property strategies, the most common of which are the following:
- Holiday Property
Each of these strategies have one goal, and that is to increase value and consequent profit. But the way they go about it is different. Below, we briefly discuss the first two types to give you a better idea of which one would be ideal for your current situation.
By far the most common among all investment property strategies, renovations involve purchasing a property and renovating it to increase its value. Renovations can include everything from a simple repainting of walls and replacing of tiles, to the breaking down of walls and addition of extensions.
By increasing the value of property through renovations, investors can increase rent and earn equity. They can then have it refinanced to gain access to the extra equity.
When opting for renovations, there are several key things you need to consider. Firstly, you should find the right property. Not all properties are worth renovating. If they involve too much work, such as a full roof replacement, rewiring, plumbing, or pest problems, forget it.
Secondly, you need to negotiate a longer settlement period alongside early access to the property. This way you can start working on the property long before you have to start paying interest.
Thirdly and perhaps most importantly, you need to assess carefully the approximate cost of renovations and the price for which the renovated property will sell. You have to be sure that the costs do not exceed certain limits, and that you do not get greedy and oversell, as this may backfire and leave you with significant holding costs and a long unsold property.
Flipping essentially involves the purchase of a property by one buyer, who subsequently sells it to another buyer at a higher price before the original purchase is settled. In some cases, this is done with renovations. In others, the original buyer simply doesn’t have the money to close the deal, but knows of another buyer who can and is willing to purchase it for a higher price. The original buyer then becomes an intermediary, and can earn a substantial profit from the deal without having to pay much, other than the initial deposit, renovations (if any), capital gains tax and other fees.
When opting for this strategy, you need to find undervalued properties. This can take time as undervalued properties are difficult to come by. If you don’t have a lot of time or resources to search for these properties, then it would be better to choose another investment strategy.
You also need to have a sure and immediate buyer, because you need to resell quickly. If you don’t, you might end up with a property you’re unable to afford.
These are just two of the most common and preferred investment property strategies. Learn more about the other two, wraps and holiday property, in our next post, along with how you can benefit from an appropriate property investment structure for improved asset protection, flexibility and control.
For more information or to discuss with a Senior Partner or property tax accountant on your preferred strategy and how we can assist with appropriate structures or tax advice, please submit your enquiry to request a 10-15 minute free phone consultation.
Disclaimer: This article contains general information. Before you make any financial or investment decision you should seek professional advice to take into account your individual objectives, financial situation and individual needs.