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Selecting Your Property Strategy

My suggestions for first time purchasers is to buy local in the areas you have home court advantage – knowledge of the best pockets, where to avoid and hidden gems. Buy something that needs work. Be as hands on and close to the action as possible. You will learn more than you think is possible. Things that don’t look so bad, turn out to be really bad and things that look really bad turn out to be not so bad. You get a good understanding of costs to make a wide variety of repairs. It will change the way you look at property and improve the time it takes to assess each deal significantly.

Why Is It So Important To Get It Right?

A lot of people spend a lot of time stressing and labouring over their first purchase, ending up in what’s known as analysis paralysis.

 

Trying to find the best area is the most common hurdle that keeps or delays first time investors from jumping in. A lot of advice in the community is to just jump in and learn as you go. I agree that the lessons learnt in the first purchase are more valuable than it’s performance. However, there is a lot of risk that comes with buying the wrong property type. Buying a property that performs a little worse than another option isn’t the end of the world - the real problem is when an investor settles on a strategy or a path way after they’ve bought properties that don’t align with their new goal.

 

Exchange costs on property are very high so selling an unwanted property type to buy another is very expensive and sometimes not possible without carrying a loss, if that property hasn’t performed as well as hoped. Holding the wrong property type can be very limiting and delay the growth of the portfolio.

 

With modern lending restrictions it’s not as simple as just buying forever. Even a positively geared property can negatively affect your ability to borrow. So, it’s more important than ever to get it right from the start.

 

You don’t have to get it perfect, things do change with circumstance and experience. My suggestion is just to swap some of the paralysing area research phase for strategy planning. This document is design to bring clarity to each of the strategies property has to offer. You will also find only certain areas suit certain strategies so you will be able to narrow focus your search before you even begin.

 

There are a lot of ways to do property and you could argue they all work eventually, if the definition of working is making money. There is no right or wrong path, some angles and strategies suit some people more than others. The variables that I think determine if a strategy is right for you or not are; long term goals, personal income, desired level of involvement, personality type, interests and dislikes.

Why is it so important to get it right

Three Questions To Ask Yourself

Ask yourself the following three questions to narrow down the strategies that financially align with your motives:

 

  1. What do I want my portfolio to do for me?

    • Do you want it to pay you profit in the form of cashflow forever?

    • Grow the most equity as possible so you can sell off properties to fund your retirement?

    • A mix of both?

    • Sell off a couple to pay out the debt on others?

  2. What will my income look like over the life of my investing career?

    • Do you have the ability to save deposits for new properties or will you be relying soley on the properties to produce equity for the next one?

    • This could mean leaning towards capital growth properties or value add through renovation or development

  3. How involved do I want to be?

    • Do you want to be hands on in the process learning new skillsets, etc?

    • Some strategies pay great returns but the work involved is high

    • Just because there’s a high return, doesn’t mean you're going to make the most money from it

    • If you hate it, don’t do it well or do it less than you would a more suitable strategy, you wont pocket as much as something you love and consistently contribute to

 

Once you’ve answered these, the process of researching the most enjoyable and efficient way to achieve the desired outcome of your portfolio should be much more simple.

Three Questions

Active VS Passive

I believe all property strategies are active strategies. Especially compared to buying ETF’s. Researching the right ETF to buy can be compared to researching the right location to buy in but after that everything from; the inspecting, negotiating, loan documents, renovations/development, ongoing repairs and management is all active.

 

It’s my opinion that the more active you are the more you will be rewarded. This is the opposite to shares where the long term ETF holders regularly outperform those who trade more often.

 

There are many strategies each requiring varying amounts of involvement. There’s no right or wrong way to go about it. It’s up to you to decide how active you would like to be.

Active VS Passive

Self Awareness Of Personal Interests

The next stage of elimination comes down to self-awareness of your personal interests:

 

  • Do you like to get hands on when with renovations?

  • Would you rather project manage?

  • Stay out of it completely and invest as passively as possible?

  • Are you creative?

  • Do you love data?

  • What is your appetite for risk?

  • Disciplined saver?

 

Choosing a strategy you enjoy but is less profitable than another will pay you more when you execute it over the one you don’t like.

Self Awareness Of Personal Interests 

Cashflow VS Capital Growth

Cashflow or Capital growth are the two general directions we can choose from. The rest are  sub-strategies that relate more to your personal interests and desired level of involvement.

 

Yes it’s possible to have both, but it’s almost never perfectly weighted 50/50. Each property/location leans one way to either favour growth or cashflow. The investors and guru’s who talk about having both are usually cashflow investors hoping for growth.

 

Growth focused investors buy blue chip locations with significantly reduced cashflow. It’s possible for an area that currently produces great cashflow to experience significant growth in the near future but you’re not going to get 10% growth PA and 10% net income PA over 30 years - it’s important to decide which side you would like to cater towards more.

 

“What do I want the portfolio to do for me?” should help provide clarity.

Cashflow VS Capital Growth

Cashflow

The strategy of accumulating high cashflow properties that produce profits from the rental return alone. High cashflow properties usually come at the cost of lower capital growth.

 

Cashflow properties suit:

  • Low risk

  • Generational wealth with a cashflow machine

  • Investors disciplined to save multiple deposits if the capital growth isn’t there to generate equity for new deposits.

  • Disciplined required to not spend the excess cashflow feed it all back into the properties or future deposits 

  • High cashflow helps serviceability

Cashflow

Capital Growth

High growth properties are located in areas with high owner occupier appeal. Generally, the growth is fuelled by emotional home buyers. Buying and holding capital growth focused properties usually comes at the cost of a lower rental return.

 

Negative gearing is higher risk - a change in the market or employment could mean needing to sell the property before it reaches its potential.

 

Set and forget – high growth properties are usually high quality properties that don’t require much maintenance. Located in premium areas, attracting high quality tenants that don’t create problems and turn over less often.

 

High growth means more equity, sooner – translating to deposits for more property.

 

Low yield means less serviceability and potentially less borrowing ability, even with lots of equity.

 

Forced savings - if you spend your money on lifestyle expenses and don’t make your repayments, the bank will take it which is pretty effective motivation.

Capital Growth

Buy & Hold

Buy and hold (Set and forget):

Buy higher quality, low maintenance property with minimal effort and involvement required.

 

This is the most common strategy, almost a default strategy.  It’s the easiest, least involved and requires less capital.

 

Where you buy is up to you – either focusing on cashflow or capital growth.

 

Pros:

  • Simple

  • Hands off approach

 

Cons:

  • Complete reliance on the market

 

Potential to combine with:

  • Hotspot Hunting

 

Level of involvement required:

  • Low

Buy & Hold

Reno & Hold

Renovate and hold to force the property's value up. This manufactures equity immediately, while also increasing the rental return. This equity can be re-financed to fund more purchases or can be left in the deal as a buffer.

 

This strategy can be applied to both cashflow and growth focused properties.

Pairing it with cashflow gives you a combination of equity and servicing.

​

Completed hands on if that’s your cup of tea or project managed from a distance, depending on your preference.

 

Pros:

  • More control

  • Increased rent

  • Ability to refinance out equity at completion of reno

  • Attract higher quality tenants

  • Less maintenance over time - Warranties on new appliances 

  • Can be used as an offensive or defensive strategy depending what you do (or don't) do with the equity.

  • Option to be hands on if you want to leverage your own skills and labour

 

Cons:

  • Cash required for the renovation

  • Time required to execute or manage the renovation 

  • Dealing with trades can be frustrating without pre-existing relationships

 

Potential to combine with:

  • Hot spot hunting

  • Short term rentals

  • House Hacking

  • Commercial

 

Level of involvement required:

  • High

Reno & Hold

Hotspot Hunting

Hotspot hunting is crunching the numbers and sifting through data to identify a market you believe is next to take off.

 

For the data lovers. If numbers, trends and patterns are your thing there are plenty of figures available for interpretation. You can follow the clues to which location is most likely to take off next. The idea is that you’ll be able to enjoy significant equity in a short period of time, effectively beating the overall market. Like buying an individual stock with expectation that it will outperform ETF’s. That equity can be used as a deposit for the next purchase in the next hot spot.

 

Pros:

  • Near term uplift in price

  • Many markets to choose from

  • Data heavy for the excel lovers

 

Cons:

  • Timing the market

  • Lack of local knowledge

  • Reliance on the growth could be a problem if the market doesn’t perform as predicted

 

Potential to combine with:

  • Buy and hold – Set and forget

  • Reno and hold

  • Holiday Rentals

​

Level of involvement required:

  • Medium

Hotspot Hunting

Short Term Rentals

Holiday homes leased for short stays on places like Air BnB

This is the most creative option.

Suit interior design driven people. Freedom to not only design the property but also style it with furniture. Opportunity to create an experience - not just provide shelter. Marketing the experience is more involved and more rewarding if done correctly. Also more punishing if not done well.

 

Pros:

  • Very high cashflow when booked

  • Chance to create and experience for guests

  • Creative outlet 

  • Opportunity to implement marketing strategies 

 

Cons:

  • Influenced by the seasons 

  • Uncertain income – potential for periods of vacancy

  • Expensive running costs – Cleaning costs after every stay

  • Expensive and intensive property management process

 

Potential to combine with:

  • Reno & hold

  • Hotspot hunting

  • House Hacking

  • Developing

Short Term Rentals
House Hacking

House Hacking

Buying a home and renting out either another unit, granny flat, or rooms within the home to generate and income and reduce the cost of living.

 

It’s important to note a principal place of residence (PPOR) that produces an income often forgoes the benefits of being a PPOR, but I have heard it’s possible when renting out rooms - as always, it’s important to talk to an accountant to get all of the relevant details. If the amount expected to be generated is less than the benefits of being a PPOR, it’s not worth doing. If it can generate more, it’s up to you to determine how much more you would need to make it worthwhile for your situation.

 

Pros:

  • Reduced living expenses

  • Potentially free accommodation and an extra income

 

Cons:

  • Forgoing benefits of a principal place of residence

  • Splitting bills in the cases where separate metres aren’t available

  • Living with others is a con in my eyes but could be a pro for some.

 

 Potential to combine with:

  • Short term Rental

  • Reno and hold

​

Level of involvement required:

  • Medium

Flipping

Flipping is buying properties below their potential, renovating to another level and selling for profit.

 

It’s important to point out the difference between flipping and other strategies:

  • Flipping is more of a job than in investment strategy.

  • There is more knowledge and effort required and you are rewarded for your skill level.

  • Investing is a place to park money.

  • Even if it is a job, I would rather work an extra job in the property space.

  • Every transaction improves your negotiation ability, relationship with agents, renovation skills, project management skills and relationship with trades.

 

Adding value means you have a buffer if things don’t go to plan, like costs increasing or the market dips. Short turn around times mean you’re in and out before the market can fall too far.  

 

PPOR flips are another option where an owner buys the property as their principal place of residence, claims any deductions and benefits on the purchase, lives in the property while renovating for over 12 months and then sells for a tax free gain. Less than 12 months is deemed an investment with intention to profit. It’s important to talk to the relative professionals as I have heard the ATO cracking down on flippers who do this every 12 months almost to the day. The downside of course is living in a construction site, however, the upside is tax free profits and that’s the best kind of profit.

 

Flipping is great for those with capped incomes and work hours. It’s a way to add an extra income and the profits can be rolled into other longer term strategies. Flipping is up there with short term rentals for opportunities to express creativity. The renovations are usually done to a high level, appealing to home buyer tastes.

 

Pros:

  • Good cashflow from profits

  • In and out in a short timeframe

  • Minimal impact on serviceability

  • Possible capital gains free profits

  • Manufacturing value

  • Opportunity to be hands on 

 

Cons:

  • Capital intensive

  • Labour intensive

  • No long term cashflow or growth

 

Potential to combine with:

  • N/A

 

Level of involvement required:

  • Very high

Flipping

Developing 

Developing is to create new. Create a new building or new block(s) through subdivision. That’s my definition anyway.

Like flipping, development is a job, not investing. They’re still great property strategies but require a different approach and set of expectations.

 

Project management is the most valuable skill here - Working with councils, chasing them up, organising trades and overcoming challenges.

 

There are many different land and property types to choose from – small & large lot subdivisions, houses, units, townhouses and all types of commercial (from cheap investment stock all the way up to high end luxury builds).

 

More often than not, developers in Australia build to sell. 

 

Some developers like to mix in investing by retaining part of their project after selling the rest off. The sales cover the costs of the project and the unit or two they retain is owned outright and rented out long term. Equity can be drawn on these properties and used for future projects. Essentially buying them from themselves at cost price.

 

Build to rent has been more common in other parts of the world and is starting to get some attention in Australia. It’s an area I’d personally like to transition to in the future (large scale residential).

 

Pros:

  • Manufacture equity

  • Multiple standards to develop to - from cheap investment stock to high-end luxury

  • Creative licence

  • Fun Challenging 

 

Cons:

  • Long time frames for approvals etc could mean market conditions completely change between the purchase and sale date

  • Capital intensive

  • Labour intensive

  • Regular problem solving

  • Often stressful

 

Potential to combine with:

  • Syndications

  • Commercial

 

Level of involvement required:

  • Very high

Developing

Land Banking

Buying a parcel of land in an area you expect to see considerable growth then waiting for that to happen. It may occur through a zoning change or expansion of a city/town.

 

Buying land on its own and holding on until there is a significant shift in demand for the property is the most extreme example of land banking.

 

Land banking can be as simple as buying a house on a block with subdivision or townhouse/unit potential and not developing immediately. Instead, “banking” it for future use and collecting rent from the existing house in the meantime.

 

On a larger scale again, some buyers may do something similar with farms. Buy with the expectation that zoning will be improved at some point in the future and receive income from the farm which will offset holding costs.

 

Pros:

  • Potential for gains multiple times the purchase price

 

Cons:

  • Expensive to hold

 

Potential to combine with:

  • Commercial

  • Buy and hold

 

Level of involvement required:

  • Very low

Land Banking

Commercial

Commercial property has its own set of rules. Finance and leases are quite different from residential. The commercial banner covers a wide range of industries and property types including; industrial, retail, office, development sites, hotel and leisure, medical, farming and rural.

 

It’s a different world, requiring a lot more knowledge but can be more rewarding for those who take the time to learn. The world of business is wrapped in red tape, so ensuring everything is up to code and compliant with council can be challenging. The level of complexity involved is dependant on the industry. For example, industrial sheds are a lot more simple than medical clinics.

 

The draw card for commercial is often cashflow. In a lot of cases, tenants pay all of the expenses related to the property and regular increases are built into long term leases.

 

Often residential property value is tied to its appeal to a home buyer. In commercial it’s more aligned with the income. This creates an opportunity to significantly increase the property’s value by bringing on a higher paying tenant or negotiating an increase. The risk of course is losing a tenant, the value can fall dramatically and long periods of vacancy are common.

 

Some investors use residential property to build an equity base and then transition into the more expensive world of commercial that requires larger deposits. The cashflow from commercial becomes their income stream later in life.

 

Pros:

  • Ability to service an industry you have an interest in

  • Good cashflow 

  • Long term leases with favourable terms

  • Own and operate if you have a business 

  • Variety of options

 

Cons:

  • Potential for long vacancy periods

  • Value can fall dramatically

  • Large deposits 

  • Complex leases 

 

Potential to combine with:

  • Buy and hold

  • Development

 

Level of involvement required:

  • Medium

    • More to do and learn initially, but very little required once a long term tenant is secured.

Commercial

Syndicates

Pooling funds together with other investors to take on bigger real estate projects. You can split the workload or have a group of professionals execute the project on your behalf.

​

Pros:

  • Completely passive

  • Exposure to larger scale projects

​

Cons:

  • Less control over the outcome

  • Other investors needing to withdraw funds 

  • Complex legal structures 

​

Potential to combine with:

  • All of the above by investing in a syndicate that specialises in a strategy

 

Level of involvement required: 

  • Very low

Syndicates
Real Estate Investment Trusts

Real Estate Investment Trusts

REITs are publicly traded real estate companies that own large portfolios. They pay high dividends compared to other stocks based on their performance. You don’t own a direct share in the properties themselves, but you do earn a return in relation to their profits.

 

Similar to syndicates but you’re further away from the action and never an owner of actual property.

​

Pros:

  • Liquidity

 

Cons:

  • Lack of ownership

 

Level of involvement:

  • Very low

Option Brokering & Wholesaling 

Wholesaling is a more common strategy in America. In Australia, it's better know as options trading but still not a well known or commonly used tactic. It's the process of securing a property at a certain price and then finding a buyer at a higher price before you complete the transaction. The property never goes in your name and you don't have to come up with the financing for settlement. You secure the option to buy a property at x price with x terms and then sell that option to another buyer.

 

The most valuable piece of any property strategy is the deal itself and the hardest part is arguably finding the best deal. People will pay good money to avoid the hunting process.

 

It’s a process of contacting and connecting with property owners through any means necessary until you find someone willing to sell at a price less than you believe someone else will pay for it. Securing an option to buy it within a certain time frame at a certain price and terms then gives you the chance to go and find a buyer at a higher price. Similar to a more common practice of a buyers agent but potential for more significant profit as BA’s usually charge a capped fee or % of the purchase.

 

This is a way to get started if you have no money or skills in the space. Once you have the money and skills, it will be more beneficial to execute the projects yourself.  It’s also a great way to build relationships with investors, flippers and developers. You may even be able to negotiate equity in the deal or an inside look at the project as it develops.

 

Pros:

  • Potential for significant upside per deal

  • Relationships

  • Low or no money required

​

Con:

  • Low volume – not everyone is willing to sign options

  • Expensive time investment

​

Level of involvement required:

  • Very high

Option Brokern & Wholesaling

Summary

My suggestions for first time purchasers is to buy local in the areas you have home court advantage – knowledge of the best pockets, where to avoid and hidden gems. Buy something that needs work. Be as hands on and close to the action as possible. You will learn more than you think is possible. Things that don’t look so bad, turn out to be really bad and things that look really bad turn out to be not so bad. You get a good understanding of costs to make a wide variety of repairs. It will change the way you look at property and reduce the time it takes to assess each deal significantly.

 

The most important professionals you can talk to early on to help set your sail are an accountant and a mortgage broker. The more clear and detailed your long term vision is, the more valuable they will be. 

 

The broker will be able to asses your current situation and provide detail around your borrowing ability. Also using some assumptions to project out future moves based on theoretical incomes, equity and rental return. 

 

The accountant will be able to suggest the right ownership structure to ensure all the purchases are made in the right entity. There are a lot of complex structures that are unique to each individual’s situation. Getting it wrong can be costly to correct later as changing requires you to actually sell the property at market value to the new entity, pay capital gains on profits and pay stamp duty etc on the purchase.

​

None of this is financial advice of course. Its only intention is to provide some insights into the daunting and sometimes scary, unknown world of property investing. Discussing your theories with professionals qualified in their respective field will be able to give you an insight into the more specifics of your personal situation and connect them with your goals.

 

Remember to be cautious when talking with those recommending an outcome they are incentivised by.

 

I’m always happy to chat property with others that have a genuine interest. Feel free to reach out on your favourite platform.    

Summary
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