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Property investment: To hold or to flip?
Is it more advantageous to purchase and retain a property, or to acquire a fixer-upper, renovate it, and sell it within a shorter timeframe?
When contemplating property investment, one of the decisions to make is whether to hold the property long-term or to buy a fixer-upper, renovate it, and sell it relatively quickly. There is no definitive answer; the best choice depends on your skills, available time, and financial circumstances.
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Buy and hold
This strategy is more straightforward and focuses on the long term. It involves purchasing the property, finding suitable tenants, and holding onto the property for an extended period, often a decade or more. The goal is to generate returns through rental income and potential capital appreciation.
What other considerations should I take into account?
Should I manage the property myself, or hire a property manager
If you choose to hire a property management company, they typically charge between 5-12% of the weekly rental amount. This fee covers rent collection and necessary maintenance management, with additional charges for tenant placement and inspections.
Managing the property yourself saves the weekly commission fee but requires time to oversee tenant relations, ensure timely rent payments, and coordinate maintenance tasks with tradespeople or handling them personally. Some property managers also offer one-off services like tenant placement, even if you manage the tenant yourself.
Location
Choosing the ideal property in a prime location and securing reliable tenants are crucial for a successful property investment strategy—some might argue these are fundamental to any property investment! Finding this sweet spot allows you to maintain your investment seamlessly, minimizing the need for constant tenant turnover, vacancy periods, or excessive maintenance costs.
Value Appreciation
Like any asset, including real estate, property values can fluctuate. If your property appreciates in value, you can sell it for a profit when you choose or leverage the increased equity to obtain financing for additional investment properties.
Do up and flip
Another property investment strategy involves purchasing a property that can be improved, investing in renovations, and then selling it for a profit. This is a shorter-term approach because holding onto the property longer increases costs such as mortgage payments, rates, and insurance. It's crucial to buy and sell within the same market conditions.
This strategy demands more time and expertise. If considering renovations, ask yourself:
- How can I enhance the property's value?
- Do I have the time and skills to oversee renovations or manage contractors effectively if I'm not a DIY enthusiast?
What considerations should influence my decision to purchase a fixer-upper?
Your skill set (or ability to oversee materials and tradespeople)
Are you someone who enjoys DIY and can handle tasks like gibbing, sanding, painting, landscaping, and building fences? Doing these renovations yourself can lead to significant cost savings. If DIY isn't your preference, then you'll need to manage tradespeople and contractors, especially for more substantial projects categorized as development rather than simple renovations.
Purchase cost
Make sure you don’t overpay for the property - the main profit is made when you buy the property. Especially if it’s a ‘do-up’ property, aim to get it for a good price, below the value you’d normally have to pay if it was a tidy, modern property. Remember, you’re trying to buy cheaply, add value to it and sell it for a profit.
Renovations costs
Due to a current shortage of tradespeople in Australia, it's crucial to plan meticulously when relying on their services. High demand has driven up costs and extended wait times for completing projects. Longer project durations increase holding costs significantly.
Additionally, shortages in raw building materials are also impacting construction timelines and expenses. Delays are occurring, sometimes doubling build times, and the cost of materials is notably higher compared to historical prices.
CGT Capital gain tax
Properties bought and sold as investments are subject to capital gains tax. It's essential to consider this additional cost when assessing whether the expected profit from selling a renovated property is worthwhile.
So which option is better?
As previously mentioned, there is no definitive answer. Consider whether you have the time and skills to oversee renovations for a fixer-upper or if you prefer a more hands-off investment approach. While no strategy is without risk, your personal risk tolerance and desired level of involvement in managing your investment are crucial factors to consider.