What is Your Property Investment Strategy?
Having assessed the property investment risk, you now need to look at your buying or investing strategy.
‘If you fail to plan, you plan to fail’.
It’s important to understand that having a documented strategy is vital when establishing a property portfolio, so that you can measure your progress against it.
Buying a property without a strategy is like trying to build a house without a set of plans. To create property prosperity, you need a documented plan that guides the way and spells out the requirements, costs and timeframes you will need to invest in property successfully.
Clarity around your goals will allow you to calculate how much debt-free property you need to own to achieve your financial independence. You need to know how much it costs to live the lifestyle you want – both now and in the future and consider the timeframes required, so your investment plan will adequately generate an income for you and your family.
2. Asset Selection
While there are many so called investment ‘strategies’ promoted in the marketplace (mostly by project marketers or agents masquerading as property advisors, coaches and experts), there are two fundamental considerations.
A Are you investing for capital (equity) growth or
B Are you investing for income (yield)?
These do not need to be mutually exclusive, however to expect high capital growth and high income returns at the same time isn’t realistic, considering the high entry costs of buying property.
To invest for tax benefits or depreciation is also a mistake, as these are benefits of investing, not the reason to invest – capital growth and income.
So be wary of anyone trying to sell you a property where they heavily focus on tax benefits, as it is likely to obscure the fact that it might be a poor performing property when it comes to the fundamentals.
3. Time Frames
We all seem to be living longer these days, so your assets will need to generate an income for up to 30 – 40 years, especially if you want to retire younger than the current retirement age of 67 years.
Once you have decided your timeframes to financial retirement then entry, hold and exit factors need to be considered.
Entry to the market must factor whether you are investing for capital growth or cash flow as a priority.
If yours is a cash flow strategy, what yield needs to be achieved and does it need to negatively, neutrally or positively geared?
If yours is a capital growth strategy, to what extent can you cash flow a negatively geared property if funds are borrowed?
Is it appropriate to have a mixture of capital growth and cash flow properties to balance your portfolio? Most likely it will be, but which do you buy first?
What type of diversification is required in your portfolio if any? This could be determined based on property type, purpose (capital growth or yield) or location.
From a hold perspective, who is the type of tenant you are looking to lease the property – allowing them to hold it over the longer term? Who are they and what features and amenities do they need? This is crucial to your ability to hold the asset long term to enable it to grow in value over time and to also generate income to allow you to service interest repayments or reduce your debt. Knowing who they are (or aren’t) when you search for a property to purchase is imperative.
How long is the property to be held? One can argue that timing into a market is where you make money. While this can be correct and may be a primary driver when working to short-term timeframes or strategies, you need to do a lot of analysis and research to pick the right part of the cycle (even the experts who work in property research full time don’t always get it right).
Sometimes it’s more about just getting into and spending time IN the market rather than timing the market, however if the herd is being carried along and prices are escalating madly, it may be a good time to sit back and watch while investigating other opportunities that aren’t so hot.
What’s your exit strategy? Will you retire on the rents, refinance into retirement or sell the property to pay down debt?
Most people venture into the property market only to have average property sold to them by agents who often are only interested in your ability to enter the market and who don’t have any interest in your ability to hold or sell the property in the future.
This could leave you holding what may be a poor performing asset, but it may take you years to find out. As always, buyer beware and remember you can seek unbiased help from a Licensed Buyers Agent or Buyers Advocate if you need it.
All of these factors go towards establishing an investment strategy from which to use as a foundation to invest and of course can make a substantial difference to the outcome you can achieve if done properly.
Some of the article content is extracted from the book Property Prosperity – 7 Steps to Buying Like an Expert by Miriam Sandkuhler © 2013, with the author’s permission