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Property Investment Strategies

 

There are many different property investment strategies used by investors in today’s current markets. It’s important before investing that you understand the risks and benefits of the various strategies and adopt one that is suitable to your situation and your risk profile. Below is a summary of some of those different strategies adopted by today’s property investors.


Finance Today has affiliations and partnerships with many experts in the property investment industry. So if you’re looking for some expert advice, please don’t hesitate to contact us and we will only be too happy to assist.


Passive (defensive) strategies are where the investor puts in a standard amount of effort and therefore the investment has a standard risk profile and standard return. They also typically require a normal deposit (3%-20%) and normal finance (97%-80%), they receive natural capital growth (3%-10%pa) and a natural yield (2.5%-8%). These types of strategies include:


  • Cash Flow vs Growth
  • Houses vs Apartments
  • New vs Old
  • High price vs low price
  • Off-the-plan
  • Special purpose


Active (offensive) strategies involve the investor making a greater effort on a more "creative" type of opportunity, which therefore typically has a higher risk profile and return. These strategies usually involve a creative deposit (<3%) and a creative finance solution (>97%). The rewards for this extra effort are instant capital growth (5%-25%) and higher yield (>8%). These types of strategies include:


  • Renovation
  • Development
  • Unconventional


Cash Flow vs Growth Strategy


Cash Flow properties

These are properties with a low capital growth profile of 4-6% and high rental yield (return) profile of around 6-10%. Occasionally though, the capital growth can be very high for a short while.


Advantages:

  • Positive or neutral cash flow;
  • Use surplus cash flow to pay down principal and obtain more equity for future investment; 
  • Small entry price – easy to get started;
  • Lower stamp duty & land tax;
  • Occasional good equity jump due to demand for high yield properties;
  • You can't lose with money in your pocket (unless you get in too late);
  • Easier to get a full-doc loan.


Disadvantages:

  • Pay tax along the way - money in the tax man's pocket is not going to create wealth for you;
  • Slower capital growth over longer term;
  • Usually regional or outer areas which can be quite sensitive to economic cycles;
  • Harder to get low-doc or no-doc loans for some regional properties due to postcode & population;
  • Lower leverage to reduce return;
  • Potential higher maintenance of property and more tenancy problems due to social economics.

 

Growth properties

These are properties with a higher capital growth profile of 7-10% (and occasionally over 12% for a short while) and a lower rental yield (return) profile of 3-5% rent (occasionally below 2.5%).


Advantages:

  • Tax benefit: negative gearing and delayed CGT;
  • Usually consistent capital growth over longer term;
  • Usually inner and high population areas which are not affected as much by economic cycles and interest rate fluctuations;
  • Easier to get low-doc or no-doc loans;
  • High leverage available;
  • Potential lower maintenance of property and less tenancy problems due to better social economics;
  • Equity increase can be available to invest further.


Disadvantages:

  • Negative cash flow if you take on a normal mortgage at a high leverage level;
  • Usually more expensive than cash flow properties – potential entry barrier for beginners;
  • Higher stamp duty & land tax;
  • No guarantee of capital growth every year – you may bet on the wrong horse;
  • Harder to get a full-doc loan to access a cheaper interest rate mortgage as your portfolio grows.


 

Houses vs Apartments Strategy

 

Houses


Advantages:

  • More consistent growth over long term in established areas;
  • You usually own the land;
  • You have greater control over what you want to do with it;
  • High land content for better future growth if it is in established areas;
  • Usually easier to get finance;
  • More room for value adding and modification;
  • Town houses are getting popular with smaller family size and retirees.

 

Disadvantages:

  • Usually lower rent as a percentage of the value;
  • Can be higher maintenance;
  • Can occasionally be difficult to get decent rent for large houses;
  • Less security and facility.

 

Apartments

 

Advantages:

  • Higher rental as a percentage to price;
  • Less hands on maintenance;
  • Good growth in fully built up areas with height limit;
  • Increasingly popular with the younger generation;
  • Meeting the demographic trend of smaller family size.


Disadvantages:

  • Less consistent growth in areas that are not fully built up;
  • Body corporate fees;
  • Less control;
  • Less room for value adding;
  • Can be hard to get good finance for company title properties and very small apartments.

 

New vs Old Properties Strategy

 

New Properties

 

Advantages:

  • Higher tax benefit;
  • No maintenance;
  • Better tenant appeal due to new design, technology, etc;
  • Easy to rent if the asking rent is not too high.

 

Disadvantages:

  • Lower capital growth in comparison to established properties in the same area for a few years;
  • Higher purchase price due to premium for being new;
  • Usually get hit first if the market slows;
  • Very little room to add value;
  • Price set by developers may be artificial or heavily influenced by organized marketing effort.


Old Properties

 

Advantages:

  • Purchase price usually set by individual vendor without commercial manipulation;
  • More solid growth than new properties due to heavier 'land content' component;
  • Less price fluctuation than new properties in the same area;
  • Potential to add value.


Disadvantages:

  • Higher maintenance;
  • Not as appealing to tenants;
  • Future requirement for renovation;
  • Lower than usual rent if the property is too run down.


Higher vs Lower Price Property Strategy

 

Higher Price Properties

 

Advantages:

  • Less number of properties to deal with;
  • Less ongoing soft costs such as bookkeeping, etc;
  • Less work looking for them;
  • Usually in expensive suburbs that have solid growth performance;
  • Better quality tenants.


Disadvantages:

  • Luxury items get hit first during bad times;
  • High price properties in low price suburbs may have slower growth due to lack of demand;
  • Harder to get finance – lower leverage;
  • Higher stamp duty and land tax costs.


Lower Price Properties


Advantages:

  • More stable performance closer to the suburb's median price;
  • Lower price properties in established suburbs can handle downturns better;
  • Better diversification for rent and resell;
  • Lower stamp duty and land tax costs.


Disadvantages:

  • More work finding them;
  • More ongoing soft costs such as legal and accounting expenses;
  • Not as appealing to tenants;
  • Lower than usual rent if the property is too run down.


Off-The-Plan Strategy

 

Advantages:

  • Potential gain before settlement if you get it right;
  • Stamp duty saving;
  • Available to overseas investors;
  • Little money down through bank guarantee, deposit bond or builder's terms.

 

Disadvantages:

  • Potential loss of deposit plus gap if you get it wrong;
  • Buying site unseen;
  • Purchase price can be set artificially;
  • Purchaser can be influenced heavily by organized marketing effort;
  • Area and products may not be tested – performance unknown.


 

Serviced Apartments

 

Advantages:

  • Hassle free;
  • Usually higher rental if managed properly;
  • No need to worry about tenants and maintenance yourself;
  • Desperate sellers.


Disadvantages:

  • Harder to get finance due to commercial contract;
  • Can be hard to resell;
  • Growth is tied into yield and how well it's operated, not necessarily reflecting local property prices;
  • Value of the property is affected by the financial viability of the operator.


Display Home


Advantages:

  • Usually built to a better quality spec;
  • Higher rent guaranteed for the contracted period;
  • No need to look for tenants or do any maintenance.

 

Disadvantages:

  • Can be over priced to compensate for guaranteed rent;
  • Can be hard to get finance from some lenders due to valuation and commercial arrangement;
  • Display operator's financial viability can affect the guaranteed rent;
  • Property usually in outer areas with slower long term capital growth.


 

Student Accommodation (Managed)


Advantages:

  • Higher rental if managed properly;
  • No need to worry about tenants and maintenance yourself;
  • Affordable purchase price.


Disadvantages:

  • Can be hard to resell sometimes due to its special purpose;
  • Growth is tied into yield and how well it is operated, not necessarily reflecting local prices;
  • The value of the property is affected by the financial viability of the operator.


Renovation Strategy


Advantages:

  • Instant increase of equity for further investment or better risk management;
  • Most money paid to the 'land component' to ensure solid future growth;
  • Instant increase of rent for better cash flow;
  • More efficient use of funds;
  • Great tax benefit;
  • Lower town planning and building risk;
  • You can buy under market value sometimes.


Disadvantages:

  • Lots of work if you do it yourself or a lot of management if done by others;
  • Takes time to find the right property that can make the numbers work;
  • Easy to underestimate the time, cost and work involved in a renovation;
  • The increase of equity and rent may not be obvious enough to justify the cost and effort.


 

Development Strategy

 

Advantages:

  • Excitement and pride - you can call yourself a developer!
  • Potential good profit above cost;
  • You create the equity instead of waiting for it;
  • Potential to get finance and capital based on the deal instead of your own capacity;
  • Allows a lot of creativity to create value;
  • Multiple exit strategies to make money.


Disadvantages:

  • Inefficient use of your money due to long processing time;
  • Easier to make a loss if you don't know your craft;
  • Planning risk, building risk, finance risk and selling risk;
  • Require larger capital base (than estimated usually);
  • Require lots of commercial and people skills;
  • Lower income while holding the site for permit.


 

Unconventional Strategies - Wraps, LPO, Rent to Buy, Vendors Term, JV, options

 

Advantages:

  • Very little or no money down;
  • Positive cash flow;
  • Instant equity on entry and/or exit;
  • Can combine other property strategies.


Disadvantages:

  • You have to think hard and work hard;
  • You have to spend more time learning;
  • You need to be very entrepreneurial;
  • Difficulty in managing investor, vendor, real estate agent and tenant/purchaser;
  • Extra legal and accounting expenses.
 

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