Property investment strategy – which one is the best?
Have you ever wondered which property investment strategy you should employ to start building your property portfolio? Which one would give you the best result and produce the biggest return on investment?
The truth is, there are multiple ways to become successful with property investment and below I will describe one of them. Overall, it comes down to your personal and financial circumstances. Finding the strategy that works for you may take time but it is time well spent. Once you found your best fit stick to it and keep improving it every time you have a chance to exercise it. This is important as we all like to experiment from time to time, yet the success comes from mastering one thing and becoming great at it. Before I share the property investment strategy that I have adopted, here are some of the common ones you may have come across:
1. Buy and hold
2. Buy, renovate and sell (also known as flipping)
4. Passive property development
5. Active property development
6. Holiday home
7. Defence housing
Out of the above lot, the only two that I would ever consider for myself are ‘buy and hold’ and property development. Crowdfunding could be interesting, but I just don’t know enough about it to have an opinion and I like to fully own the asset. There are definitely people out there who took on other strategies successfully, yet I find them to carry an unnecessary risk that I prefer to avoid.
I am a big advocate of the ‘buy and hold’ property investment strategy since I truly believe it to be the best way to build long-term wealth for most of us. I would even call it ‘buy and never sell’, yet things happen and it may not always be possible, but having this intent is important. To make this strategy work wonders your investment property must adhere to one simple rule – it must appreciate in value. This is the basis of ‘buy and hold’ approach, hence whenever I consider adding a property to my portfolio the very first thing I ask is – will it grow ? In fact it is a little bit more than that, I want the property to not only grow, but grow at a pace that would outperform the market average and put me ahead of the game. So how can you find that rare gem?
Below are some of the factors I like to consider to get an overall feel for the performance potential of the investment property. The list does not contain everything that contributes to the property growth but should give you a good idea of the overall picture.
Location, location, location (must)
This probably is the most important thing to get right as part of your property investment strategy. This one decision itself will underpin most of your capital grown for years to come. My rule here is pretty simple, ideally I would like to see all of the below items ticked:
- I prefer middle ring suburbs located from 5 km to 15 km from the CBD. In my view this is where most of us would like to live, hence I expect those suburbs to continue to be in strong demand.
- Sydney, Melbourne and Brisbane are the only places for me to invest. I am actually slowly shifting my preference towards Sydney and Melbourne only because according to the The Australia Institute report Sydney and Melbourne are expected to experience the greatest population growth over the next 40 years. Since property investment is a long-term game for me, I am happy to wait in order to reap the bigger benefits later.
- Although past is not future, I like using historical performance data to back up my research. Suburbs with historically strong demand usually carry their performance into the future. You can check the Resource section of my blog for the tools that would help you to get access to the suburb’s historical data.
- Ease of access to amenities is very important. Amenities to consider are public transport, shops, restaurants, attractions, schools, parks and other public facilities. I like using Walkscore application as it rates the property on how ‘walkable’ it is and gives it a score. Feel free to check it out here.
- Avoid suburbs with above average crime rates and below average income growth.
Established stock (must)
There is an old debate in the property investment world on whether you should invest in new or established dwellings. My personal preference is buying an established stock for many reasons, such as renovation potential, buying on true market value and most importantly – what I see is what I get. I did however try investing in the new stock, but fortunately enough I have managed to get out of it without too much damage. I personally know people who have experienced a much bigger pain with their off-the-plan purchase.
Looking back now, my off-the-plan deal was actually not that bad. I have researched the agent, the builder, I have done my due diligence and I was happy with my findings. The problem was that whilst we were waiting for the construction to complete my wife got pregnant and went on the maternity leave which has reduced our income and hence the borrowing capacity. On top of that the banks have changed their lending policies which made getting the loan even harder. All of a sudden we were running a chance of not getting the loan and loosing our deposit.
I am not saying that buying new property is a bad idea, I just figured out that it has more risk than I want to bear. There are many people who have made fortunes with it, yet for me the approach of ‘slow but steady wins the race‘ is more favourable.
Fit for the demographic (must)
Should you first decide which type of property (e.g. unit, town house, house) to buy or where to buy? This may come counter intuitive but the trick is to figure out the suburb that would get you the best appreciation (based on your budget) and then buy the type of property that fits the suburb demographics. For example – if you have decided to buy an investment property in Randwick, NSW then according to the Census data 67% of dwellings are units. In terms of the bedroom breakdown it looks like this:
|Number of bedrooms||Count||Percent|
|None (includes bedsitters)||Number of bedrooms not stated||0.4|
|4 or more bedroom||1,267||11.5|
|Number of bedrooms not stated||206||1.9|
So based on the above data it makes sense to consider a 2 bedroom unit as that represents the most typical dwelling type for the suburb.
Strong rental demand (must)
When picking a suburb, you want to ensure that the law of supply and demand works in your favour. There are two great metrics to consider for that purpose – vacancy and rental listing rates. Vacancy rates of 3% and lower are considered to indicate a high demand and low supply in the area. As for the rental listing rates you want to have at least 30% of local residents renting (versus owner occupiers) as that is a great indication of a healthy stream of renters in the suburb.
Timing the market (optional)
I am a great believer that there is never a bad time to buy an investment grade property. The way I look at it is that there are good times and there are great times. Great times are the ones when you buy the property just before it starts to experience a rapid growth. Good times are all the other times. There are ways to ‘predict’ the suburb growth since it is usually caused by one of the following reasons:
– Suburb is due for growth as it reached a respective stage in the property cycle
– Suburb is going through a gentrification stage
– Ripple effect caused by the neighbour suburbs’ growth
Something special (optional)
Buyers and renters are always happy to pay a little bit more if the property has something unique about it. This could be a well though out floor plan, great view, bigger balcony, lock up garage, extra off street parking, study room, good school catchment and many other things.
Potential to add value (optional)
Buying a property with renovation potential is a great way to quickly increase the intrinsic value of the property and rental return. What ultimately happens, given that the renovation is done right and you do not overcapitalise, is that for every dollar spent you should get $2 or $3 back. This creates equity in your property that you can then access through refinance.
I have added value to my very first investment property using renovation where I have managed to get 4 times return on investment. This can be very powerful and boost your property investment portfolio building dramatically.
Infrastructure development (optional)
Another way to position yourself for the above average capital growth is to pick a suburb that has infrastructure development plans. This could be anything from a train station, shopping centre to a hospital or a school. Anything that would make the suburb more livable and ‘walkable’ would eventually have a knock-on effect on the property value. If you ever wondered what developments are planned for your suburb, you can always approach your local council for information.
Would you like to download the checklist that I use myself to assess any property for investment potential? This checklist will help you to cut through the noise and identify the properties that are worth considering. Click here to get the checklist
To conclude, – this article covers only some of the main aspects of the ‘buy and hold’ property investment strategy. All of the above is my personal opinion which is purely based on my personal experience. It by no means covers everything, but rather intends to give you a good starting point for further research and exploration.
I wish you successful and happy investing!
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