Property Investment Strategies

Property Investment Strategies

There are a number of common property investment strategies commonly in use…below is a brief explanation of the best known…

Buy and Hold

This is the most usual form of property investment strategies…you buy a property and hold on to it for the medium to long term, renting it to good tenants and claiming the interest payments and maintenance against your taxable income.

In time, the equity of the property increases to a point where you may want to sell it and pay out some other real estate debts, or conversely you may pay it down until the rental income is higher than the interest and expenses.

Another option would be to use the equity in the property to fund further property purchases, which would have the effect of leveraging the asset exponentially.

The factors that would make this successful would be the fundamentals that should be addressed when purchasing in the first place.

Location:

you are relying on strong equity growth, so a miscalculation here could find you breaking close to even. Historically, properties on average should double in value every 10 years, but the cautionary word here is on average. Some appreciate higher than this, and some much less. If you have done your homework and due diligence on the location, then the equity growth will be there….if you have purchased in the wrong area, you may find a very different story.

Tenants:

The suitability of the property for the demographic of the area is very important. If you have invested in a studio apartment in area with no student population, then suitable tenants may be few and far between. Check the demographic of the area and see what kind of property is in demand – gaps of weeks or months between tenants are very bad for cash flow. A good property manager to vet and manage tenants is a worthwhile investment also!

Property:

If you bought an established property with some age on it, you may find that your maintenance costs blow out more and more the longer you own it. If the property is an old colonial with weatherboard construction, you will need to consider periodic painting and carpentry work; whereas if you purchased a new brick tile family home, you would have few issues.

The Figures:

Do the math! You have to ascertain if the property is a viable investment right from the start, and you have to build in factors for interest rate changes, maintenance, fees, charges, rental vacancies and so on. If you bought on an emotional level, it’s unlikely you gave adequate consideration to the economics.

Renovate

The idea here is to buy a property that would increase in value with the addition of some renovations, either as simple as a coat of paint, or possibly a complete refurbishment. The value after renovation should be much more than the cost of the property plus the renovation costs; sometimes investors turn the home over and cash out, or else they may hold on to it and refinance to access the equity for the next property.

Considerations

You need to find a property that is basically sound but in need of a little TLC, rather than a money pit that needs a complete rebuild. Have an expert inspect the property so that you have a good idea of what is going to be required to make the improvements, and that you don’t get caught out with something like needing to restump the property or replace the roof!

If the renovation is on the large side, you would need to keep a tight rein on costs, as these kinds of projects tend to get away from you, eating up any profit you thought you might make. These kinds of projects are generally only profitable if you intend to do all or most of the work yourself, so make sure you are capable of finishing what you started!

Flips

In this scenario, you sign a contract to buy a property then sell it to another party before you have to settle, for example, finding a well priced property for $390,000 and selling it to another investor for $480,000 with both contracts settling on the same day.

Issues

Finding The Property

The first problem is finding a suitably undervalued property and being aware enough to realise the true value! Bargains in an active market are generally hard to find; it may be that you have some industry contacts or have been fortunate enough to come across some kind of opportunity, but you would need to be a pretty switched on operator to do this with any regularity.

Finding the next Buyer

You are basically acting as an agent or go between, so you would need to have access to a pool of investors who are aware of what you are doing and are still happy to do this kind of a deal; you must also be aware that you have signed a contract and one way or another you will be expected to fulfill it, so if an investor to sell on to cant be found, you would have to have the financial wherewithal to complete the deal yourself!

Lease Options

Some times called Rent Buy in Australia…there are a number of variations of this arrangement, but in essence it works like this:

The tenenat has a residential lease oevr the property…due to the unusual kind of arrangement that it is, this is usually higher than the normal markert rent that would be paid. The tenant is also responsible for the repairs and outgoings.

The tenant has paid an option fee to purchase the property in for example a 5 year time frame…if he exercises this option, a portion of the rental that has been paid to date will be applied against the purchase price. If the tenant decides not to proceed with the option, then his payments are treated as normal rent.

By John Benson

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