Eight strategies for residential property investment
The phrase “residential property investment” means, to most people, simply looking at a house or an apartment as an investment decision. As they say, “Your home is your greatest investment”, which is true, but the truth is that residential property investment is an all-encompassing phrase, referring to an ever-growing list of investment strategies, with the common link being that all strategies have the objective of growing financial wealth to secure one’s future.
Today I thought it best to run you through some of the major strategies out there, and some emerging ones that are growing in popularity.
1) Home ownership While owning your own home is the most basic of property investment, it is a strategy that most property owners employ, and go no further with. And this is perfectly fine; providing that you are employing other tactics along the way during your life to ensure you are building a nest egg beyond just the home you live in. While your home will no doubt appreciate in value over 30 or 40 years, singularly, the ownership of just this asset will not secure your retirement, you’ll need more than this. Unless, of course, your home happens to be a palatial Miami mansion and you then comfortable to sell up and downsize to a studio apartment during your retirement (a scenario that few would find themselves in, I’m sure!).
2) Buy-and-hold This is where you grow a portfolio of numerous properties during an acquisition phase, then hold on to them for at least two cycles of the property market (so, at least 15 years, but ideally longer) and then later in life you cash out most of the portfolio (sell say 90%), using the after-tax profits to buy your home to retire in (outright) and also have a tidy nest egg of money put aside to enjoy your retirement years with.
3) Buy, renovate and sell (aka ‘flipping’) Not a strategy for the inexperienced or those who do not like/cannot handle fast-paced madness, buying an unrenovated property, then quickly renovating and selling for a much higher price before quickly moving on to the next one is not for the faint-hearted. The failure rates are quite high, in the respect that many who set out on their first ‘flip’ property never attempt their second. Some have made lucratively successful careers out of this, such as Renovating For Profit founder Cherie Barber. To succeed long-term with this strategy, you pretty-much have to give up your day job and make this your full-time job. The problem for most people is they envisage a lifestyle where you get to pick out cool fixtures and fittings and personalise a property the way you like it. The reality is the complete opposite; you instead become a site project manager and make decisions based on the bottom line and not personal taste.
4) Renovate and hold This one mixes the above two strategies together (sort of) and works well for those happy to be quite transitional themselves, and not have a fixed residential address for many years at a time. Basically, you continue to grow a portfolio of properties held; but the kinds of properties you acquire are ones that need work. These could be basic cosmetic work, or full-on structural-and-cosmetic projects. Either way, you either move into it and renovate while living there for six to 12 months, or you project manage it until completion over three months or so, but instead of selling, you hold the property and rent it out for a much higher rental return than it originally offered. Over time you may grow a portfolio of renovated properties that provide excellent rental return.
5) Managed funds and/or property super funds This kind of investment is the most passive, minimal risk, and minimal, well, work! But it is also very separate kind of investment strategy. This approach relies heavily on trusting a financial institution to invest your money in property shares and portfolios, to produce financial growth for you. Whilst the gains are nowhere near as lucrative as the wealth you could manufacture by running your own strategies; they are also less risky, cumbersome, and use minimal time. A good strategy to use as a tactic in unison with other investment approaches. It is not one I’d use singularly on its own.
6) Group family buying This is less a property investment strategy as it is more a strategy to create greater efficiencies when it comes to home ownership. We must actually give thanks to the modern multicultural landscape of Australian society, because without multiculturalism, Australia may have never become privy to this strategy. This is a common strategy in some Mediterranean, Asian, and South American countries, and one that many Western societies is fast adopting and learning from. The strategy essentially focuses around weddings. Both families come together to contribute funds towards the newlywed couple’s first home purchase. Usually, those contributing go beyond just the immediate family relatives. Yes, cousins, second cousins, close family friends, great aunts, etc all pool contributions together. The idea is you get 30 to 40 contributors all giving say $1,000 each, and the new couple have their home deposit ready to go. The couple also work to save their own deposit, which means that some couples purchase their first home on just a 60% or 70% mortgage. The idea works on a “pay-it-forward”/karma approach; in that the contributors know that when it’s their time to purchase a home; all others in the network will share their little kick-start back to them too. To work effectively, this strategy does require a lot of trust within families and their extended family connections.
7) Co-investment with friends/relatives Different to group family buying, in this strategy a partnership of two, or perhaps three/four, people band together in order to achieve their investment objectives. This strategy can be great for those on low incomes, limited resources, and those with limited time, to work on a project together and see a gain. Positives then, are that much less start-up capital is required to invest, plus you have a second opinion all the time, which can help protect against making poor investment decisions (but not always!). Co-investors also have the benefit of being able to share skill-sets, connections/contacts, and experience, to strengthen their plans. Cautions for this strategy though are plentiful: with difference of opinion, personality clashes, and long-term strategy shifting being the biggest challenges with this approach. Additionally, the legal complexities often make contracts/solicitors’ fees skyrocket; as all exit-scenarios need to be considered, and an iron-clad contract detailing the agreed outcome based on every possible scenario must be composed by lawyers. Additional stress can ensue when family or partners are involved. Should things go sour, the relationship can suffer. This can occur with friend-based co-investors also; but if you can find your rhythm early on, this can be an effective strategy.
8) Full-time property development. And by this I mean, for example, building an entire block of units, from scratch. It probably goes without saying that this strategy is one that only those with high cash stocks are even able to contemplate. Often times, more mature investors who have been building portfolios over many years may build themselves up to this kind of venture. Usually by this point, they have picked up skills, contacts, and capital along the years, to make a larger-scale development even feasible. Even despite all of this, the complexity of full property development can make fools of even the most experienced and savvy investors. Not for the faint of heart.
I’ve no doubt there are additional strategies out there that Australians are using in their property pursuits (and I’m keen to hear from you, more on them!). Overall, though, one must always remember that there is no hard and fast rule or strategy to property investment. Some people choose just one of the above strategies and roll with it; whilst others form a strategy that mixes several of the above as tactics along the way. Regardless, it is important to consider all of the options available to you when starting out, and to know that you can only do this; once your objectives and ambitions are laid out.
And that right there, folks, is the first and best step in your strategy: to define in great detail your objectives and desired outcomes. Without this (and to quote hard rock singer Chris Cornell) it is like building a house of cards on a hill of sand.
Cameron McEvoy is a property investor and maintains a blog, Property Spectator.