Which investment strategy is best for you?
Sophisticated investors are typically well educated when it comes to the different types of investment strategies, but they all started somewhere. Our mission is to empower more people to understand and use the wonderful resources around them to build wealth – so this article is going to cover four of the most common property investment strategies and what they really mean. This way, you can get a better idea about what strategy best suits you and your unique position.
Buy and hold
The buy and hold strategy is one with a long term view. There is an acquisition phase, in which you purchase a number of properties, then there is a hold phase. The hold phase typically lasts for a minimum of 15-20 years to receive a valuable return. For most people that use this strategy, the cash out comes just before retirement. They sell up a portion of property, buy a home for retirement outright, keep a couple for some extra income and enjoy a cash reserve with the proceeds of the other sales. The downside is management of multiple properties at once for a sustained period of time can be labour and time intensive, but it comes with great reward as the value of land will almost be a complete guarantee of increasing over that period.
This is a strategy that is very time and labour intensive and to do it well, it takes a bit of experience – and perhaps a few mates who are tradesmen. In theory it’s quite simple. Find a property in original condition that is in need of some renovations, do the renovations and sell it for a profit! But there’s a few technicalities… Firstly, you have to do your research before the purchase. Think about the renovations required, do some cost analysis and work out what the sale price needs to be for a profit to be made. Then, you have to think about how you renovate. It’s not a chance to put flare, creativity and your own style on a place, because you have to create a canvas for someone else’s life. While it is time consuming and tricky, it can pay off in a big way depending on where you buy and how long the renovations take.
Positive Cash Flow
This is a strategy with good returns. Research and select a property based on the ability to generate income. Generating a passive income occurs when the income from rental payments is greater than the outgoings from expenses. This means each month there is income to go towards the mortgage, reinvest in other investments or to spend on enjoying life. The positive cash flow strategy when applied well, with a long-term view allows people to generate a large portfolio with reduced risk, so in the long term it becomes a high value portfolio.
This strategy involves purchasing a property where the income is less than the expenses, so at the end of each financial year you are out of pocket, but you hope to make the difference back in the value growth of the property. The benefit of this approach is that you can offset the loss against your other income which ends up being better for the tax man, however you are still facing a loss on the investment until you sell it.
So there’s four of the most common investment strategies used by Australian property investors. Selecting an investment strategy can be difficult, so we can help you out by providing a free investment strategy session – it means that you’ll know the best way forward for your situation. Click here to book a session.
If you have any other specific investment topics you would like us to cover, please leave them in the comments below.