Property investment strategies: which is one right for you?
This article is part of The Homeowner’s Journey series, featuring case studies from homeowners and property professionals.
If you’re looking to invest in property, it’s worth making time to research different property investment strategies and consider what approach is best for you. Kate Forbes, the National Director of Property Strategy at Metropole Property Strategists, introduces us to a few of the most common strategies and gives her top tips for investing successfully.
Whether you’re a first home buyer or are looking to buy your second, third or fourth property, the formula for smart property investment is the same: focus on location, buy the best property you can afford, add value, and hold onto it or trade up. There are a variety of ways you can do this, and which one you choose largely depends on what your goals are.
Choose your strategy
Before you buy an investment property, it’s important to get your strategy right. Property is an illiquid asset class with high entry costs, and potentially higher exit costs, so choosing a poor strategy can be very costly. Some of the most common property investment strategies include:
Buy and hold
“Buy and hold” is perhaps the most popular investment strategy among industry advisers and professionals, and it’s the most straightforward. It refers to acquiring property with the goal of generating long term capital growth. Usually you buy a property (using borrowed funds) that appreciates in value over time. You can either live there yourself or have live-in tenants to help you pay off the mortgage.
As property values go up and rents increase, “buy and hold” investors often parlay their equity into purchasing the next property in their portfolio. Then in future, they may sell some of the properties to reduce debt and emerge with income generating assets. With good asset selection and the benefit of time, “buy and hold” can be a very effective and low-hassle strategy.
Buy, renovate, and hold or sell
Renovating a property is a way of creating equity. It allows you to fetch a higher rent, or sell the property in a process known as “flipping”.
While renovating may sound simple, by the time you factor in your hard costs – plus the cost of any time and labour – it’s relatively challenging to make money over and above what you could make via other investment strategies. Nevertheless, some investors are very skilled at renovation and are able to turn it into a lucrative investment model.
Property development involves supplying money to a property developer, who then develops a property project, which in turn creates equity. Passive property developers provide funds but get someone else to carry out the project. This strategy can be considerably faster and more lucrative than more conventional strategies such as “buy and hold” – but it also entails more risk, such as the risk of the development not going to plan. Developed property can then be sold, or held and rented out to tenants.
Common property investment mistakes
Unfortunately, in a lot of cases, property investment can go wrong. Statistics show that 20% of property investors sell up in the first year, while 50% sell in the first 5 years, and most property owners never get past owning one or two properties. This is because,
"success hinges on a range of factors, some of which are in your control and others which aren’t."
Watch out for the following:
Poor property selection
Buying the right property is essential to a successful investment. While you may be set on buying a house, your focus should actually be more on location than property type. For example, a boutique apartment within 10km of the city could experience much more growth than a three-bedroom house in the outer suburbs, so fixating on a property type rather than on location could land you with significantly lower long term returns. Once you have identified the right location, then you need to pay particular attention to what you are purchasing and whether the property type is a fit for the location.
Poor cash flow management
Organising your finances correctly and having a cash flow buffer in place is another property investment essential. The property market is out of your control and there’s no guarantee which way it might turn. Ensure that you set up your structures correctly, and seek professional advice on how to ensure you don’t fall short.
Buying an investment property off-the-plan is purchasing property that has yet to be built. For many reasons this can be a risky purchase.
While it’s possible to make money buying off-the-plan, many investors find that the value of their completed property is considerably less than the contract price. Some investors have to wait a long time before they see any capital or rental growth. You’re often better off buying established rather than new.
Bad property management
Another way that investment properties can ending up draining money rather than building it is through poor property management. This can happen if you try to save money by using a cheap property manager or by self-managing your property.
A good business owner recognises that they can’t do it all themselves. It’s worth spending a bit extra to get a professional, experienced property manager to effectively manage your interests and generate the best possible profits for you.
Being hit by life’s ups and downs
Holding onto properties over time yields the greatest benefits for owners. So it follows that whatever you purchase needs to be something you can comfortably hold onto, through rain or shine.
"Make sure to leave an adequate financial buffer or cushion that provisions for unforeseen expenses so that you can avoid being forced to sell."
Bear in mind that there are external factors that you will have no control over (e.g. interest rate hikes, the economy etc.), as well as personal factors that you may have control over but still need to provision for, such as any reduced income due to maternity leave, illness, redundancy or increased expenses like private school fees.
Top property investment strategy tips
1. Define your goals
Figure out what you want to achieve first. You can’t hit the target unless you know what you are aiming for. Then, fit the strategy to your goals, relative to where you are now.
2. Get advice
Successful investors build a great team around them, so don’t be afraid to pay for good advice. It pays for itself many times over and drastically shortens the time it takes to achieve your goals. Do your due diligence and work with trusted professionals who are unbiased, have a proven track record and can provide references.
3. Be patient
Don’t buy the first thing you see, and do extensive research before you buy. Once you’ve invested, allow time to work its magic.
The information is intended to be of a general nature only. We do not accept legal responsibility for any loss incurred as a result of reliance upon it – please make your own enquiries
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