Five ways to make money from property in 2023

Property investment is one of Australia’s favourite wealth-building strategies. Compared to some other investment types, real estate is relatively simple to understand and get into, and offers several avenues for aspiring investors to potentially enjoy healthy returns, in both the short and long term.

Here are some of the ways you could potentially make money from property this year, as well as some of the risks and challenges to watch out for in the current market:

Rental yields

One of the simplest ways to make money from a property investment is to collect rent from your tenants. If you receive more in rental income than you spend on your property, then you’ve achieved a positive rental yield.

A “good” rental yield can be hard to pin down exactly, though yields of 2 to 4 per cent are generally considered low, and yields between 8 and 10 per cent are considered high.

In January 2023, the national gross rental yield was 3.22%. And with vacancy rates currently low and rental prices at historic highs, many property investors could be in a position where they could benefit from positive rental yields.

Keep in mind that you may need to count the rents from your investment property as income when completing your tax. That said, you can also claim some investment property expenses as deductions on your tax returns, including interest charges on your investment mortgage.

If you end up spending more on your investment property than you receive in rental income, this negative gearing can reduce your total income, which could have some tax benefits – contact a tax accountant and/or the ATO to learn more.  

Capital growth

When the value of your investment property grows over time, this doesn’t just mean you could get a higher price if you sold the home in the future. It can also increase the amount of equity you have in the property. This could help you to sooner refinance to a mortgage that better suits your financial goals, or to secure other finance options such as lines of credit or home equity loans.

It’s important to remember that not every property will increase in value over time. It’s easy for negative circumstances, such as economic downturns or natural disasters, to lead to property values stagnating or declining. This could trap you in a “mortgage prison”, where it would cost you more in LMI charges to refinance your loan than the value of the benefits you could enjoy. In a worst-case scenario, you could find yourself in negative equity, where you owe more on your mortgage than the property is worth.  

In 2023, dwelling values have been declining for some time, as Australia’s economy recovers from the effects of COVID 19 and multiple rate rises. This may make it harder to make money from capital growth in 2023, though it’s still possible.

It’s also important to remember that while house prices may have fallen in many areas across Australia, many areas were starting for a particularly high point, with the ultra-low interest rates from a few years ago having driven many property prices upwards.

House flipping

You may have seen the TV shows about this concept, which sounds pretty straightforward: buy a property that has seen better days for a low price, spend a bit of time and money fixing it up, then sell it for a high price. What could be simpler?

Unfortunately, house flipping may not be the empowering journey of self-discovery that TV makes it look like. Restoring and improving a property that’s in bad shape can take a lot of work, and potentially a significant amount of money. This can be especially if you’re not a particularly “handy” person and would be mostly relying on tradies, or if the renovation is large enough that you’d need to call in architects, builders, project managers and more.

It may be possible to finance a renovation with a home equity loan, personal loan, or a construction loan. However, putting too much money into your reno project could see you overcapitalise, making it much harder to see large returns from your property’s sale.

Remember that the ATO will expect you to pay capital gains tax on money you make from house-flipping, unless you fulfil certain criteria. As this criteria could change, you may want to contact the ATO to confirm what’s required before you get stuck with an enormous tax bill.

Keep in mind that in 2023, while dwelling values have declined in many areas, construction costs have risen due to increased labour and material expenses. Plus, fewer government construction grants are available. Keep this in mind when making a decision on whether to try your hand at house flipping.

Developing land

A bit like house flipping, this strategy involves purchasing a piece of vacant land for cheap; building one or more properties on the site; then either selling the properties or holding onto them as investments. With vacant land generally being less expensive than already established properties, it’s easy to see the appeal of this strategy.

You may be able to use a construction loan to help finance your building project. Unlike a typical home loan, a construction loan lets you draw down the money you need in stages, paying for each phase of the construction project before starting the next. You’ll also only pay interest charges on the money you’ve borrowed so far, which could help to keep some of your early costs down.

Property development can be a challenging undertaking for an individual, with larger developments typically the work of larger professional development firms. Much like in the house flipping example, you may not start receiving returns on your investment for some time, and you’d need to take the state of the 2023 construction industry into account when planning your project and outlining its potential costs. 

Building a portfolio

What’s better than owning one investment property? How about owning two, three, or more, all potentially generating income? 

One strategy for building a portfolio is to start with one investment property and wait for it to build up equity. Once you have enough to secure another mortgage, you can purchase a second investment property. You could potentially extend this further, using the equity in each property to secure the next in a daisy-chain of home loans.

While this strategy could offer many of the benefits of owning one investment property, but on a grander scale, the risks involved are similarly grand. Stringing together multiple mortgages like this could leave you vulnerable if the financial tide turns – if you’re unable to make the repayments on one property, you could risk losing the entire portfolio. For this reason (among others), it may be harder to successfully apply for the investment home loan you need to build this portfolio.

The costs involved in maintaining a property portfolio are also significant, and as mentioned previously, there’s no guarantee that your portfolio will rise in value. Depending on the economic climate and what the RBA plans to do in 2023, you could run the risk of ending up in a challenging situation.

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