You know you want to invest in property. That’s great. But unfortunately, just knowing isn’t enough.
Do you know why you want to build a property portfolio?
Do you know what you want it to look like?
Do you know how you’re going to do it?
There are many factors to consider and the most important is your strategy. That is, the type of purchases you will make to achieve the goals you want. Your strategy will have a set of clear purchasing rules and you need to stick to them. Look at it this way … you wouldn’t go for a job that you weren’t qualified to do, nor would you buy a pair of size 6 shoes, when you know you’re a perfect size 7! That’s why you’ll only invest in property that is a good fit for you.
In my first year of investing, I remember looking at many different ways to invest and thinking that all of them would work for me, but in the end it gave me too many choices and confused me even more!
What I needed to do was take a step back, write down my financial goals and determine what I wanted to achieve by investing in property. This then narrowed down my purchasing options and I could focus on becoming an expert in that area.
I also looked at what I could personally contribute. The skillset I could use that would make the process much easier. The following factors may also influence the strategy you decide to use to get your property portfolio started:
1. What type of person are you?
If you love meeting new people and talking on the phone, then you may like to spend a great deal of time sourcing properties through real estate agents. However, if you much prefer the company of your own shadow, then you’ll probably prefer to ind the leads and let someone else do the negotiating.
2. How much time do you have?
This was a huge factor for me because with 2 little girls aged 3 and 4 and a corporate job, there was very little time for me to spend researching properties online and driving around every weekend looking at open houses. I was very time poor (as are most women these days) so I decided to use a buyers advocate to find my first property. He bought the deals to me, we discussed them over the phone and via email and I made a decision without leaving the house!
3. Where do you live?
For some people, it doesn’t matter where you live because almost everything in relation to purchasing a property can be done electronically (don’t you love technology!). Although depending on the strategy that works best for you, the location of where you buy may be a factor. If you need to inspect and manage properties yourself, then stay relatively close to home … because no-one has time to be driving all over the country!
Here is a list of the different types of investing strategies that could possibly work for you:
1. Buy and hold
Purchasing property and keeping it in your portfolio for a long time. These properties are likely to be costing you money to hold on to but will increase in value over the long term.
The rental income from the property increases over time and will eventually cover the mortgage repayments so that any extra money goes straight into your pocket.
Ultimately, you sell some of the properties, pay down the debt on the remaining properties and live off the cash flow.
2. Renovate and hold
Buying a property and adding value immediately through either a makeover (cosmetic renovation) or a larger structural renovation (adding/removing rooms etc) so that you can have it re-valued at a higher price and ten hold it in your portfolio. This then allows you to rent out the property at a much higher price and use the increased equity to invest in a new property. By holding on to these types of properties you’ll have a portfolio providing great rental returns.
3. Buy, renovate and sell
Buying a property that needs a little (or a lot) of love, giving it a makeover, selling it for a higher price and then moving on to the next one. This is not for the lazy investor nor for the faint hearted.
I know this sounds like it would suit a lot of people, but the reality is that it’s very far from spending time in designer stores choosing tiles and cushions. You need to be able to cope with fast pace, project management, lots of people, number crunching and potentially giving up your day job. In saying that, this strategy allows you to build equity fast and make some ‘now’ money if done successfully.
4. Buy, hold and sell
Buying a property, letting it sit in your portfolio for some time (perhaps 10-15 years) and then selling it at a higher price after it has increased in value over that time. If you’re able to afford the property whilst you hold on to it, this is a great way to profit your investment.
5. Joint venture
Investing in property with other people. You may find yourself without the money to invest or without the skills to know what to do. By partnering with someone else, they can contribute to the deal what you can’t – whether that be money, time, knowledge, experience or connections. A rock solid contract needs to be in place outlining the agreement between everyone involved so that should things go down hill, you are protected. The downside to this strategy is that people can change, plans can change and personalities can clash. On the positive side, this can work really well and could possibly be the way to get you started on your investment journey.
Buying a property or piece of land, applying to the local council to have it split up into smaller blocks and essentially creating new pieces of prime real estate. You could choose to sell off the new section/s of land, keep some of it and sell the rest or build new properties on the newly created blocks (and keep or sell those properties). So many options with sub-division!
7. Property development
Buying a property or piece of land and building a new property on it. This is generally for a more experienced investor and involves larger scale constructions such as town houses, duplexes or blocks of units. By this stage you are likely to have a larger portfolio and a couple of year’s experience under your belt to undertake such a project. This is not something you attempt for your first investment but rather something you aspire to work towards as you build your own portfolio of properties. You can create significant equity this way and earn great money if done well.
8. Positive cash flow
When you buy a property and from day one it’s making you money. This is when the rental income is more than the mortgage repayment and property expenses combined. You’ve just created an income stream for yourself without needing to work a single hour for it! In my eyes, and one of the main focuses of my personal investing, this is the ultimate portfolio – full of positive cash flow properties!
Over time the rent will increase and you can continue to pay down the mortgage until there is nothing left and you get to enjoy living off the rent paid by tenants.
9. Commercial investment
Investing in a commercial property usually requires a higher deposit but it will often bring you much bigger returns. The good thing about commercial property is that most of the expenses are paid by the tenant (utilities, maintenance etc). This reduces the need for you to personally contribute to the repayments and increases the amount of money you receive in return.
10. Using your Super to invest
A somewhat easier way to invest in property is managing your super on your own through a Self Managed Super Fund and deciding how you would like to invest it. I’ve done this personally and used my own super funds as a deposit to purchase a brand new unit in a large scale development project. It’s low key and very minimal work on your part, BUT there are very strict rules and regulations that you need to abide by. You’ll need a very good accountant or financial planner to assist you with this approach.
There is no right or wrong strategy when it comes to investing in property … it comes down to what works best for you and your situation. Some people utilise multiple strategies throughout their investing journey, and others stick to the one that best suits them because it works. Chat with other investors who are active with the strategy that you’re considering and always go with the one that will move you closer to your financial goals and and living your ultimate lifestyle.