updated 4th October 2016
As a general rule, brand new properties don’t allow much room to add value by renovating as all the work has already been done by the developer, so unless an investor has purchased at well under market value they will need to wait for the natural capital growth to occur
One of the many benefits of investing in property is the full control you have on your investments. However, your success hugely depends on what strategy you adopt and how you implement it.Property investors are a unique breed. Investors in many other types of assets (like shares, managed funds, indirect property, deposits, super etc.) play a relatively passive role in the investment decision making process. The majority of these type of investors allow their advisors (fund managers etc.) to take the drivers seat and make their decisions for them.Direct property investors on the other hand are fully responsible for their success and failure, not a fund manager or share broker. The property investor is fairly and squarely in the driver’s seat.
Types of Strategies
It is a difficult role to play, and an even more difficult role to do exceedingly well. I believe there are 3 different types of systems a property investor needs to master to be effective:
- Property Systems
- Money Systems – your capital, cash flow and finance plan
- People Systems – your team and self management
In this article I will deal only with the first system: Property Systems. In my opinion there are generally two different types of residential property investment strategies;
- Passive (or defensive) strategies and
- Active (or offensive) strategies.
Passive (defensive) strategies
This is where 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:
Active (offensive) strategies
This is whereby the investor puts in more 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 (97%). The rewards for this extra effort are instant capital growth (5%-25%) and higher yield (>8%). These type of strategies include:
So what are the major advantages and disadvantages of these various strategies? And which one will suit your situation?
Which one is the best?
Each of the above strategy has its own unique characteristics and none any better than the other. We have clients that make good money out of all of these strategies. Some focus on just one and become very efficient at doing just that. While others will spread themselves across a number of different strategies and do equally as well.
But which one suits you? Are you better off with a Passive (Defensive) or Active (Offensive) strategy?
I think the best piece of advice I can give any investor is…there is room for both.
Firstly, you always need to have a passive strategy in place. A passive strategy will ensure that you get more predictable results – you are guaranteed ‘not to lose’ in a sense. If you incorporate this type of strategy into your property system you will ensure that you are less emotional and more consistent. It also means you will always be making good use of your TIME which has to be a major consideration for any investor.
Secondly, you should use active strategies at the right time. If you start with nothing or very little, you can start with more active strategies to build your equity and/or cash flow, and be good at one thing first.
My advice would be to focus on one strategy initially and become very good at it. This is your best bet to make serious money before become diversified and defensive.
Be careful though. When considering adopting an Active strategy to take advantage of a great opportunity, the time to do it is only when you are sure it will not affect your overall financial stability.