Real Estate Investing - A Complete 2024 Guide To Getting Started in Australia

This guide covers everything you need to to get started as an active investor in rental properties or flipping houses, or a passive investor in REITS or other funds.

In the past century, 90% of the world's millionaires have built their wealth through real estate. Even more in Australia!

Of course, most real estate investors don't get rich overnight. I've come to call real estate the "ultimate get rich slow scheme," as it takes years for property investments to compound and generate significant wealth.

However, once your portfolio starts generating significant cash flow, it gets easier and easier to buy more — and your wealth will start to snowball.

I experienced this first hand with my own investments. That being said, the two primary real estate investing strategies are:

• Active investments where you take a hands-on approach to real estate
• Passive investing where you do nothing but provide capital

This article provides an in-depth analysis of different ways you can invest in real estate actively or passively, and the associated pros and cons.

Pros and Cons of Investing In Real Estate

Investing in real estate has a ton of positives, but there are some serious drawbacks that are often overlooked. The chart below highlights some of the major pros and cons and provides a baseline for discussing passive and active investments later in the article.

Pros

• Real estate appreciates in value over time
• Real estate offers stable monthly cash flow
• Real estate investing offers the the ability to get creative to improve your returns
• Investing in real estate has incredible tax advantages
• Real estate lets you use leverage (debt) to control more real estate than you could otherwise afford
• Real estate is a great hedge against inflation

Cons

• Investing in real estate can be expensive, and your capital isn't liquid
• Investing in real estate often requires personally guaranteeing large quantities of debt
• Being a landlord in Australia is hard work, and you might have to get your hands dirty
• Real estate returns take a long time to materialise
• Real estate investing takes hundreds more hours than stock market investing
• You may have to invest out of your city or even state to get the returns you want

4 Ways To Generate Wealth Through Real Estate

When most people think about real estate investors making money, they picture a landlord going door to door to collect rent. While rent is one way an investor generates wealth, there are actually four key drivers of wealth you should be aware of.

1. Appreciation

Over time, real estate appreciates in value — and usually outpaces inflation. This means the longer you own real estate, the more equity you build. Most investors earn the bulk of their wealth through the value of their real estate, not from rent.

2. Rental Income

Cash flow is king, and rental income is the engine that lets real estate investors grow their portfolios. The fastest way to build a large portfolio is to buy properties with positive cash flow. This lets investors use the cash flow from one property to buy another. I recommend using our rental property calculator to model your investment properties and forecast your cash flow.

3. Leverage

This one is controversial — and not every investor uses leverage — but personally, I'm a big fan of what leverage can help you do.

For most investments, the bank only requires a 20% down payment and will lend you the rest of the capital needed to purchase a property. Right now, I can borrow money for 4% from the bank then turn around and purchase deals with an 8% cap rate.

This means I can get a positive return from the money I borrow in terms of cash flow. This doesn't account for the appreciation of the property I purchase as well. This further compounds the returns on the money you borrow, and makes leverage a very appealing way to rapidly grow your portfolio.

4. Taxes

If you ever hear an Aussie real estate investor joke that "real estate is rigged" — taxes are a big reason why. Real estate investors can deduct the following:

• Depreciation
• Mortgage interest
• Capital gains tax concessions that may reduce or eliminate CGT for eligible properties.
• Deferral of capital gains tax when replacing investment properties under certain conditions.
• Cost of repairs, maintenance, and upkeep
• Property management and legal fees
• Utilities
• Travel costs
• Property tax deductions

Active Investing - An Overview

Active investing is any type of real estate investing that requires continuous work from the investor to keep generating returns. Even if you have a property manager, you still have to manage your property manager to generate the best returns.

House Hacking

House hacking offers an attractive entry point into the Australian real estate market, enabling investors to leverage owner-occupier financing options and rental income to build wealth. By purchasing a multifamily property and residing in one unit while renting out others, investors can significantly reduce housing expenses and accelerate property ownership.

One of the key advantages of house hacking in Australia is the availability of specialised financing options tailored for owner-occupiers investing in investment properties. Lenders may offer low deposit home loans or favorable interest rates, making it easier for first-time investors to enter the market with minimal upfront capital.

Moreover, house hacking provides investors with firsthand property management experience, fostering a deeper understanding of tenant relationships, maintenance responsibilities, and rental market dynamics. This hands-on approach can be invaluable for novice investors seeking to develop essential skills and knowledge in real estate investing.

However, investors should be mindful of regulatory considerations and strata laws governing multifamily properties in Australia. Understanding zoning regulations, occupancy limits, and strata by-laws is essential to ensure compliance and mitigate potential legal risks associated with property ownership.

Rental Property Investment

Investing in rental properties remains a popular wealth-building strategy in Australia, offering investors a steady stream of passive income and long-term capital appreciation potential. Rental properties provide investors with the opportunity to generate rental income while benefiting from property value appreciation over time.

One of the primary benefits of rental property investment is the ability to leverage other people's money (OPM) through mortgage financing. Australian lenders typically offer competitive interest rates and flexible loan terms for investment properties, allowing investors to maximize returns through leverage.

Additionally, rental properties offer various tax advantages for investors, including deductions for property expenses such as mortgage interest, property management fees, repairs, and depreciation. These tax deductions can help offset rental income and reduce investors' overall tax liabilities.

However, rental property investment requires careful management and ongoing maintenance to ensure optimal returns. Investors must be prepared to handle tenant screening, lease agreements, property maintenance, and rental property marketing to minimize vacancies and maximize rental income.

Turnkey Rentals

Turnkey rentals present an attractive investment option for investors seeking a hands-off approach to property management. These properties are typically renovated and leased by third-party companies before being sold to investors as fully managed investments, offering convenience and peace of mind.

One of the primary benefits of turnkey rentals is the passive income generated from rental payments, allowing investors to enjoy consistent cash flow without the hassle of day-to-day property management. Turnkey rental properties are ideal for busy professionals or passive investors seeking to diversify their investment portfolio.

However, investors should exercise caution when selecting turnkey rental providers and conducting due diligence to ensure reliability and transparency. It's essential to review past performance, customer testimonials, and industry accreditations to assess the credibility of turnkey rental opportunities.

Moreover, investors should carefully evaluate the financial viability of turnkey rental investments, considering factors such as rental yield, capital growth potential, and ongoing management fees. Conducting thorough research and seeking professional advice can help mitigate risks and optimize returns in turnkey rental investments.

Short-Term Rentals (platforms like Airbnb)

Short-term rentals, such as those listed on platforms like Airbnb, offer investors the opportunity to generate high rental income and capitalise on transient accommodation demand. Short-term rental properties can yield substantially higher returns compared to traditional long-term rentals, especially in popular tourist destinations or high-demand areas.

One of the key benefits of short-term rentals is the flexibility to adjust rental rates based on market demand, allowing investors to maximize rental income during peak seasons or special events. Additionally, short-term rental properties offer the potential for greater rental yield compared to long-term leases, providing investors with a higher return on investment (ROI).

However, short-term rental investments come with unique challenges and considerations, including regulatory compliance, property management responsibilities, and market volatility. Investors must navigate local zoning laws, strata regulations, and short-term rental registration requirements to ensure legal compliance and mitigate risks.

Furthermore, short-term rental properties require ongoing maintenance and guest management to ensure guest satisfaction and positive reviews, which are essential for maintaining high occupancy rates and maximising rental income. Investors should budget for additional expenses such as cleaning fees, furnishing costs, and property maintenance to ensure profitability in short-term rental investments.

Flipping Houses

House flipping presents investors with the opportunity to generate substantial profits through strategic property renovations and resale. Flipped properties are typically purchased below market value, renovated to enhance their value, and sold for a profit within a relatively short timeframe.

One of the primary benefits of house flipping is the potential for high returns on investment, with successful flips often yielding significant profits within a short period. House flipping allows investors to leverage their renovation skills and market knowledge to identify undervalued properties and capitalise on market opportunities.

However, house flipping comes with inherent risks and challenges, including renovation costs, financing constraints, and market volatility. Investors must accurately estimate renovation expenses and resale value to ensure profitability and mitigate the risk of financial losses.

Moreover, house flipping requires careful project management and oversight to ensure renovations are completed on time and within budget. Delays or cost overruns can erode profit margins and impact the overall success of the flip, underscoring the importance of meticulous planning and execution in house flipping ventures.

Passive Real Estate Investing - An Overview in Australia

If you're interested in real estate investing but aren't too thrilled about all the work involved in active investing — or you want to diversify some of your investments outside your local market you currently invest in — passive investing might be for you.

Passive investing offers other ways to get into real estate without the hands-on work of active investing; however, it almost always offers lower returns than what you can achieve through active investments — although passive investments often offer more liquidity.

Real Estate Investment Trusts (REITs)

REITs are publicly traded companies that own, operate, or finance income-generating real estate assets. In Australia, REITs are known as Australian Real Estate Investment Trusts (A-REITs) and are listed on the Australian Securities Exchange (ASX).

Investing in A-REITs provides investors with exposure to a diversified portfolio of real estate assets, including commercial, retail, industrial, and residential properties. A-REITs offer liquidity, as shares can be bought and sold on the ASX, providing investors with flexibility and ease of entry and exit.

One of the primary advantages of investing in A-REITs is the potential for regular income distributions, as A-REITs are required to distribute the majority of their taxable income to shareholders. Additionally, A-REITs offer diversification benefits and may provide capital growth opportunities over the long term.

Real Estate Managed Funds

Real estate managed funds pool capital from investors to invest in a portfolio of properties or real estate-related assets. These funds are managed by professional fund managers who make investment decisions on behalf of investors.

In Australia, managed funds may include unlisted property trusts, property syndicates, or real estate investment funds. These funds may focus on specific property sectors, such as commercial, retail, or residential real estate, offering investors the opportunity to diversify their investment portfolios.

Managed funds typically have minimum investment requirements and may offer regular income distributions and the potential for capital appreciation. Investors should carefully consider the fund's investment objectives, strategy, and fees before investing, and conduct due diligence on the fund manager's track record and experience.

Real Estate Crowdfunding Platforms

Real estate crowdfunding platforms offer investors the opportunity to participate in property investments with lower investment minimums, this means access to a diverse range of real estate projects.

These platforms enable investors to contribute to specific real estate ventures, such as developments or renovations, alongside other investors.

In Australia, several crowdfunding platforms cater to investors seeking opportunities in property development, commercial real estate, and residential properties.

These platforms allow investors to diversify their portfolios and potentially earn attractive returns while mitigating the risks associated with direct property ownership.

Some of the top real estate crowdfunding platforms in Australia include:

1. BrickX: BrickX offers fractional property investing, allowing investors to purchase shares in residential properties. Investors can choose from a selection of properties listed on the platform and invest in shares corresponding to specific properties. BrickX handles property management and provides regular updates to investors on property performance.
2. DomaCom: DomaCom specialises in fractional property investing and offers a range of investment options, including residential, commercial, and agricultural properties. Investors can invest in specific properties or property portfolios listed on the platform, with options to invest in both debt and equity-based structures.
3. VentureCrowd: VentureCrowd offers a range of investment opportunities across different asset classes, including real estate. The platform provides access to property development projects, commercial properties, and residential developments, allowing investors to diversify their portfolios with alternative investments.

Investors should carefully evaluate each crowdfunding platform's offerings, fees, and track record before making investment decisions. Additionally, it's essential to conduct thorough due diligence on each investment opportunity, including assessing project fundamentals, market conditions, and potential risks, to ensure alignment with investment objectives and risk tolerance.

How Do I Get Started Investing In Real Estate?

If you're reading this guide and you're looking for the best way to get started, I'd recommend:

• House hacking for active investing
• Real Estate investment platforms for passive investing

House hacking will let you get started for just 5% down (you may be required to get LMI with this reduced deposit). I was able to purchase a $820,000 house for less than $80,000 all in with this strategy, and the wealth I generated from this purchase fuelled the rapid growth of my portfolio.

Which Strategy Is the Best For You?

When it comes to investing, there's generally two schools of thought:

1. Modern portfolio theory
2. Specialisation

Modern portfolio theory teaches that a good investor diversifies their portfolio to mitigate risk. Following that theory, I would advise that you invest in several of the strategies in this post — both active and passive — as well as more traditional investments like stocks and bonds.

This strategy aims to minimise your exposure to asymmetric risk, where only one class of asset declines, and the rest increases. For most investors, this is the strategy I'd recommend.

The other strategy is specialisation. This theory of investment states that if an investor has proven a process to generate outsized returns in a specific asset class, they should invest heavily in that class. It also offers the potential for higher returns, but also brings far more risk than modern portfolio theory.

Personally, my partner and I are following the specialisation strategy, as the large majority of our net worth is invested in rental properties and startups — like the site you're reading this post on!

We believe that with our knowledge in real estate, we can generate outsized returns while we're in our 30's, then shift to a more conservative approach like the modern portfolio theory later in life.

This strategy is not without its risks, of course, but we have the benefit of time to recoup our losses if things don't go our way.