Last week in our ‘Slow and steady’ article, you read about lower risk strategies that are excellent performers for those just starting out or seeking a solid, stable and consistent investment option. These methodologies are excellent vehicles if you wish to add one or two properties to your portfolio, and for beginners to use to establish their property credentials.
These next four strategies are all about lifting the lid on what’s possible at the riskier end of the investment ladder. They come with more caveats, and you need to proceed with caution. Having said that, they offer fantastic opportunities to build your portfolio, as long as they fit your long-term objectives and risk profile.
Renovating
Executed correctly and with the right planning, renovations can provide an uplift in value to a property - without needing to spend a fortune. In addition, much of the work can be outsourced to others.
However, time delays can chew up huge chunks of potential profit, and when working on an older property you never know what problems might arise. Inexperienced renovators often need to learn on the job, and this can mean unnecessary costs and delays. People often run into trouble when they run out of time or money to complete the project. So don’t spend any more money than you must, and never get emotionally attached to the property. Treat it like a business from start to finish!
Flipping property
Flipping property can be a fast way to increase cashflow. Examples include renovating, adding rooms, securing planning approval for further development (and then selling) or changing the approved zoning of land (for example, from rural to residential, or commercial to residential).
Knowing which locations to research and how to narrow down which property to purchase is critical for success. If you time the market accurately, you can ride the wave of price increases - provided you identify your end buyer and add value that someone will be willing to pay for.
Entry and exit costs for this strategy are high, with stamp duty, holding costs and selling costs payable over and above any other costs. In addition, taxes on profits can be huge. Remember to make commercial decisions, and don’t overestimate the profit that might be available.
Property development
Essentially, property development involves buying land, obtaining planning approval, building, selling and orchestrating the entire process from start to finish. The unwritten rule is that you’ll need a 20 per cent margin, which is your profit.
The estimated profit must be balanced with your tolerance for risk, with external factors easily able to impact your project. If you fail, it can send you broke and so you need substantial financial buffers and a good asset base; you also need to be prepared to lose some – or all – of your capital.
Knowing where to go for funding, how to fund your development, how to present your application, what terms to sign up for and how to not get ripped off are all minefields that must be successfully navigated. It’s little surprise many end up having to juggle their finances just to ensure their project stays afloat.
Short-stay accommodation
This can be an amazing strategy to increase yields, and many investors have built a great cashflow portfolio this way. However, if you’re planning on building your portfolio, ensure you can keep borrowing as obtaining additional finance can become difficult.
One of the biggest risks involved is cashflow fluctuation; you need a financial buffer to get you through low booking periods. Aim to double your baseline rent when setting your price. For example, if you can achieve $400 per week on the long-term rental market, you should aim to average $800 per week on the short-stay market. COVID-19 has seen many investors flipping properties over to the long-term rental market in high-density areas as they are no longer able to capitalise on tourists.
Guests can also cause damage to your property, insurance can be expensive, and you need to consider the time involved in managing the property yourself versus engaging a professional company to manage the process for you.
The strategies are all about helping you to determine the best pathway to success without wasting your time on activities that may not produce an ideal result. You can always make more money, but you can’t get your time back, so don’t waste your most precious resource by pursuing the wrong strategy.
Likewise, different strategies come saddled with different levels of risk, but this can be mitigated with the right education, the right team of people around you and an informed and educated plan of attack.
If you’d like to get your property portfolio in shape for financial freedom visit www.propertyfitbook.com.au to purchase Property Fit by Luke Harris, CEO of The Property Mentors. This easy-to-read, practical book takes you through the groundwork you need to cover before you start investing, then explores all the ways to invest in property, including mentor tips and mindset insights, as well as proven strategies that seasoned investors, or those just starting out in property, will find invaluable.
