There are 5 major ways that investors can invest in real estate.
Buy & Hold
We all know the first way, which is a buy-and-hold strategy. This is the most straight-forward way to invest in property: you buy a property as an investment, and rent it out.
There are two ways that a buy-and-hold strategy can make money. The first way is that the rental incomes are higher than the ongoing costs of owning a property. This is rare in Australia, and most property investors rely on tax breaks to break even from rental income.
The second way is capital growth. You hold onto the property while it grows in value due to market values, and you sell it for a profit. This second method is more common in Australia, and so buy-and-hold strategies, out of necessity, are a long-term investment.
Buying-and-holding is a tried and true method, with consistent growth and lots of Government support. But it’s almost impossible to make a profit in the short term, and requires you to manage your cash flow throughout the holding period.
House Flipping
The second major strategy is house flipping, popularised by many reality TV shows. The goal of a house flipper is to buy a cheap, run-down property, quickly renovate it to drastically improve it’s value, and resell it for a profit.
House flipping can be an excellent way to make a profit if you know what you’re doing, but there’s also a lot of effort involved. Renovating a house takes a lot of work, so house flipping is less of an investment, and more like a second job. It also requires a lot of upfront capital, to buy the property and pay for the renovation. But if you’re proficient at it, you can make a lot of money in a short amount of time.
REITs
Real Estate Investment Trusts are a way for investors to indirectly invest in a large number of properties at once. A trust fund collects a large amount of capital, and uses that money to buy a portfolio of real estate assets. Investors receive dividends from the profits that the Trust achieves.
A Real Estate Investment Trust is like investing in an index fund, but you make money when the property market goes up, rather than the stock market going up.
REITs are great for investors who want to diversify their investment portfolio, but don’t like the downsides of directly owning an investment property. REITS also have a much lower barrier to entry.
Property Development
At the most basic level, the objective of a property development is to take an existing property and turn it into a better one, with a bigger price tag. It’s kind of like house flipping, but on a much larger scale.
A property developer might buy a lot of vacant land, and build thirty townhouses there. Or an apartment tower with hundreds of homes.
A successful property development project is incredibly lucrative, but it requires a large amount of capital and takes a lot of work to complete.
Property Syndication
Which leads into the fifth method: property syndication. Rather than doing a real estate development yourself, you can invest your capital into someone else’s, and make a profit that way.
Property syndication allows an investor to front up the capital, let someone else do the hard work, and make a return on their investment when the project is completed and sold. But because the money is spent to complete the project, investor capital is illiquid throughout the investment term.
Investing in a property development project allows an investor to benefit from the lucrative nature of property development, without needing any knowledge or expertise. ∎
