Everyday Australians are currently dealing with a double whammy of inflation and interest rate hikes. For those on a fixed income, it’s not been an easy road as costs of living and mortgage payments have both increased.
Across the board, the money in your pocket is worth less. The only way to offset inflation is to earn more income. You are probably thinking “That’s easier said than done,” right? Unless your boss is handing out 10-15% salary increases, or you can pick up a side job, your options to earn extra cash are extremely limited.
However, it is possible to earn extra money through property investment. Investing in real estate brings long-term gains, but those won’t help you in the current market. There are investment options that can bring returns faster and that are more accessible to everyday Australians.
Why conventional property investments aren’t going to cut it.
For most Australians who are thinking about where to put their money in real estate, what we consider conventional property investment – homes, house & land packages, or apartment units – are not an option. They aren’t able to afford it, and the returns won’t be substantial enough until interest rates start to recede or level out.
- Housing prices are too high. The housing boom saw prices increase by 23.7% nationwide from 2021 to 2022, with some suburbs seeing increases closer to 30%. This record increase priced many would-be investors out of the market, with only a slight decline of 7.9% over the last year.
- Borrowing costs are too high. The 10 consecutive rate hikes have increased borrowing costs at the fastest pace since May 2012, with mortgage payments increasing by thousands of dollars every year. Since the first rate increase in April 2022, repayments on a $500,000 loan have increased by $969 a month or $11,628 a year.
- Rental yields are too low. Both housing prices and lending rates have increased more than rental yield. As housing prices have increased, rental yields have held steady at around 4% over the last year.
While these challenges are present, there are also opportunities. Instead of typical investment properties, don’t buy more of the same. Until you can afford it, and until the returns are more favourable, you should consider other avenues of real estate investment. You need to find properties that are cash-flow positive.
What does it mean to be cash-flow positive?
It means that the property can earn you rental income that is more than your monthly mortgage payment and expenses. As I mentioned before, average rental yields are currently not enough to cover lending rates and the rising costs for the property. In order to earn income in today’s market, you need to find properties that earn higher than average returns or have lower entry points or both.
Alternative property investments that can bring inflation relief
The right property investment can help you offset rising costs by bringing you a steady, passive income. We already know that for many, buying a house or apartment unit isn’t an option. So we need to look at less traditional options.
Below are five options that you can consider, even if you are a first-time investor or you are looking to diversify your portfolio with a variety of assets.
Dual Key. Dual key properties are in high demand at the moment, and for good reason. If you can find available granny flats, duplexes, or a single house with separate entrances and living spaces to buy, it would be a solid investment choice.
Pros: Dual key properties generate double the rental income within a single dwelling, so the opportunity to earn positive cash flow is plentiful. Not only that, there is an endless stream of tenants searching for affordable rental accommodations.[Text Wrapping Break][Text Wrapping Break]Cons: You would be buying a full property, so the price may be higher than average. Additionally, the steady demand leads to higher prices as well.
Co-living. Co-living properties are a growing trend in Australia. Co-living is a modern form of communal living where three or four residents have a private bedroom along with shared common areas. In contrast to shared houses, each room has its own lease, and each tenant is responsible for his or her own rent.
Pros: Investors can earn a significant increase, sometimes 3-4x, in weekly income if all of the rooms are full. Also, if there is a vacancy, the other rooms are still generating income for you. Demand for these accommodations is also high, especially around universities, hospitals or metro areas.
Cons: Like dual-key, you have to purchase the entire dwelling, and the brand-new purpose-built properties will have higher prices. Buyer demand is currently high, with some developers having waiting lists for upcoming stock.
Hotel/resort rooms. You might not know this, but hotels or hotel brands often offer opportunities to invest in upcoming hotel or resort projects. You can buy a unit or multiple units, much like buying shares of a company, and earn returns as the hotel is occupied with guests.
These units typically come with a lower price point than apartments, with starting prices under $100,000. The best part about these investments is that they are hassle-free. The hotel operator is responsible for the furnishings, maintenance, cleaning and dealing with tenants or hotel guests. Investors can sit back and relax, and collect passive income.
Pros: With the lower price, small-scale investors can get into the market or diversify their portfolio with a single unit. Additionally, the costs associated with this investment are much lower and don’t eat into your returns. The passive income is guaranteed by the hotel operator. Hotel brands also offer benefits like returns during build phase or buy-back options after a certain period. Investors also have the added perk of staying at the hotel with discounted stays throughout the year.
Cons: Opportunities to purchase hotel units aren’t as prevalent in Australia. It’s a more common practice in Europe or the UK. Investors also only make money if the hotel is profitable. So when considering this type of investment, you must ensure that the hotel operator has done proper forecasts and has a strong track record of success.
Overseas holiday destinations. There has never been a better time to invest in property overseas. International travel bounced back from the pandemic in a big way, with global reports predicting the industry reaching 80-95% of pre-pandemic levels. Popular locations for Australians, such as Bali and Thailand, are on pace to welcome record numbers of international tourists by 2024.
Investors can capitalise now by buying properties in holiday markets. Property prices are lower than Australian properties, with a high potential for steady income through tourist traffic. The supply of brand new off–the–plan villas and apartments in Bali is currently overflowing, with modern spaces in tourist-rich Seminyak and Canggu starting at AUD 250,000.
Pros: The booming tourism industry can bring strong ROI through rental returns. Overhead costs associated with buying, owning and maintaining the property in these countries are typically lower when compared to Australia. Depending on if you self-manage or use a property manager, potential returns can be up to 20-25%.
Cons: Naturally, many Australians hesitate to put their money overseas, foreseeing additional risks. There are legal restrictions for international property ownership in Indonesia and Thailand, and there is an element of uncertainty when dealing with foreign agents and lawyers. Many Australians are also hesitant to buy overseas because they cannot afford to pay for a property with cash upfront.
To combat these fears, I can assure you that there are reputable, professional agents working with international investors on a daily basis. For more peace of mind, you can also choose to invest in global hotel brands, as mentioned above. Our team at Geonet Properties and Finance Group also has, through our Australian banking partners, financing options available for international investment.
Fractional. Fractional ownership is now a growing trend, partly due to the rise of investing through NFTs and blockchain technology. Fractional investment in property, as it states, is buying a slice or fraction of a property instead of the entire asset. It allows for a significantly smaller initial buy-in, making it more accessible for younger or less established investors.
Pros: You can invest as little as you want, depending on the product offering, and still share in the benefits from returns and the increasing property values. Newer or younger investors can get on the property ladder now without having to wait and save for years to accumulate a larger deposit.
Cons: Fractional property ownership is a trend that is in its infancy in Australia due to restrictions by the Australian Securities and Investments Commission (ASIC) that prohibit the centralisation of trading funds. Recently, however, there are a number of proptech companies emerging with safe, ASIC-compliant platforms for fractional investors.
Current conditions in the market have made property investment unattainable for millions of Australians. Fortunately, the property market is cyclical. The interest rates will eventually come down, and property prices will level out.
Until that happens, there are still ways to get on the property ladder, diversify your portfolio, and start earning returns to put extra income in your pocket. Accumulate these assets now, and you’ll be in a better position when the markets bounce back in a few years.
By Chad Egan
About the author
A native of Melbourne, Chad Egan has lived the last 10 years in Bali and is Co-Founder and CEO of Geonet Properties and Finance Group. GPFG is an innovative, tech-driven property investment and real estate company, specialising in property markets in Australia and Southeast Asia. Our expertise across multiple services and markets enables us to provide an end-to-end approach for property investment, from marketing to property search, as well as finance options.
