When starting out in property investment there are so many options to choose from. But what is the right strategy for you? A poor choice can have some negative consequences such as lost time, money and increased stress. But the right strategy can achieve you financial independence dreams and be extremely rewarding in the process. In this edition we share with you the main property investment strategies and the key considerations for each.
Buy-and-hold
This strategy is where you acquire properties then hold on to them for ideally at least two cycles of the property market. Later in life you can sell some of the properties and use the after-tax profits have a tidy nest egg to enjoy your retirement years.
For people that are time poor and are prepared to take advice from others this is a good strategy. It can generate great rewards for very minimal effort if the right properties are purchased. To help with cash flow you can adopt financial strategies to make it more affordable, such as using your taxable income for the investment and claiming tax back through depreciation of the asset. You can also purchase buy and hold properties through a self-managed superannuation fund (SMSF).
Buy, renovate and sell (aka ‘flipping’)
This is a strategy for the very experienced and those that can handle the fast pace of buying an un-renovated property, then quickly renovating and selling for a much higher price. In an inflationary market this can work because your buying costs, holding costs and selling costs can be covered by your selling price. However, the failure rates for this strategy are very high and to succeed you will need to give up your day job and do this full-time. You also need to research and buy well, be an impeccable project manager and tightly manage budgets. It is worth noting that there are costs which are sometime forgotten in this strategy. These are capital gains tax which will you will be liable for on sale of the property, buying and selling costs (such as agents fee and marketing), holding cost (including bank fees and interest) and stamp duty.
Renovate and hold
This strategy is only for those who can survive living in renovation projects, living transiently and not having a fixed address for many years at a time. In undertaking the strategy you grow a portfolio of properties but the kinds you acquire are ones that need work. You either move into them and renovate while living there for six to 12 months, or you project manage them until completion. Instead of selling, you hold the property and rent it out for a much higher rental return than it originally offered. Over time you may grow a portfolio of renovated properties that provide excellent rental return. However keep in mind you are sacrificing in these projects time that you could be spending with friends and family, and any potential extra income that you could be earning.
Property development
This strategy we can generalise by saying that it would consist of buying a parcel of land and developing units or townhouses. It goes without saying that this strategy is one that only those with high capital to invest can even contemplate. Banks are very shy to lend to inexperienced developers as the strategy can be very risky. Those that consider this option are mature investors who have been building portfolios over many years. To start on a development you will need to have picked up skills, contacts, and capital to make a large scale development even feasible. Despite all of this, the complexity of property development is very high risk and can unhinge even the most experienced and savvy investors. So a word of caution here, it is not for the faint of heart.
In working out the most suitable property strategy for your individual situation you must keep in mind your available resources in terms of time, money and skills. You also need to consider your current and future family and lifestyle situation. The perfect strategy will match your objectives and your desired outcomes and set you on the path to achieve your financial independence dreams.
