What investment strategy to employ?

What investment strategy to employ?

Yes, there is more than one strategy.

So, you’ve decided to investment. You begin looking at the different properties, areas, strategies, and dream of big money and future early retirement.

But, then you hear about different strategies. Yes, there are more than one different strategies you can employ in your investment journey.

Which one do you choose? Well it depends on what type of portfolio you are looking to put together. It depends on your current cash flow situation, your ability and the time you have afforded to you.

There is no one way to invest, and one strategy may be the road to riches for one party, but not for another.

It is important to analyse the different types of strategies that a property investor can take, and it is important to identify what works the best one for you to employ.

There are no real limits to how many strategies and investment types there are out there. You can even really come up with your own. But here are some of the main strategies people employ, that you may have heard from.

Cash Flow

A cash flow investment is one primarily where you are ‘Positively Geared’. In most cases, your expenses are vastly lower than the income you are making. The general rule of thumb here is any property can be a ‘cash flow’ investment and it can be dependent on the amount you are financing.

Effectively, this type of investment can be moulded into some of the other categories, so on it’s own, it is not necessarily a strategy, but rather a type.

Some people aim for cash flow because they do not have the cash readily available to stump any shortfall between the income and expenditure, and would rather have a safety net income to cover the costs of any issues or to live off the income (where the amount that is being made is sizable).

Capital Growth

Capital Growth investment are generally in major areas with large future potential. There is a concept that property will double in value in the space of 7-10 years, and while there is data to back up that claim, it is generally mutually exclusive to blue-chip locations in major capital cities.

Capital Growth investment’s as a general rule of thumb are the opposite of Cash Flow. Cash Flow investments are often in locations where there is a high number of tenants, and can often be driven by single factors, such as a single industry without a permanent population. (Bare in mind this is just one example).

These locations, as rental rates are high, property does not transact nearly as much, meaning potential for growth is much more limited.

Capital Cities however, while rental rates are comparatively lower, have more transactions, infrastructure, thus, more potential growth in Capital Values.

The goal of a Capital Growth Investment is to increase the value, and use the equity in the property to purchase the next investment or to fund your lifestyle.

Flipping

Flipping revolves around the concept that you are creating ‘wealth’ or ‘value’ in the property. If you’ve ever watched ‘The Block’ or a similar show, the madness and frantic nature of a quick ‘flip’ is not one for those who do not like stress. The idea is that you pick up a property with some potential, or favourable layout in a good location, and do a quick renovation to create extra value in the property.

While this is a game of hands on work in most cases, it is also a game of fine cut throat figures. Often the profit margins are slim, especially for the high amount of work involved, and the numbers can be reliant on presumptions and indicative values.

Play it safe. Renovate to suit the style of the area, and be conservative. Many who find value in flipping are undertaking it as their full time job. Save on those labour costs by jumping on the tools yourself!

Development

Not for the faint hearted, and not for the brash and gung-ho types. This is the next real big step up from the idea of flipping is the idea of developing. Creating new housing. This is a whole new ball game in itself.

Effectively, this is really only for those who really knuckle down and know what they are doing. There is an art to buying the right property, maximising it’s development potential and then taking the property into the marketplace correctly to ensure you are able to deliver your development efficiently and within a specific time constraint.

Development isn’t easy for a million different reasons. Finance is a lot harder. When banks clamp down, it’s your mid-tier developers that suffer the quickest and most. One simple error could mean the difference between profit or heavy losses. Every risk must be incredibly calculated, methodical and mapped out.

Holding costs are also far higher. It is not for the faint hearted. If your time-frame blows out by 6 months, you may be looking at shaving 15% off your estimated profit margin. And it’s often out of your control. Once you submit applications and twiddle your thumbs, your project is in the hands of the council.

This is for the experts. Anyone looking to undertake a development should really take advantage of professionals who know and understand the field, and also the area. Surround yourself with the right amount of funding, mitigate your loss, and take advantage and advice from paid professionals who know how it all works.

 

Author

Michael Turner is a Property Development and Analytics Specialist operating in Sydney's Growth Centres and corridors. He is a Director of YPI, along with several roles at property development firms and agencies. He can often be heard on various radio mediums talking about Football and Property. You can find him on Twitter @mturnerypi or email him directly at m.turner@youngpropertyinvestor.com

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