Building a successful property investment portfolio isn’t as easy as buying any property you see and renting it out to the first tenant you find.
In order to build a portfolio that will continue to provide strong, consistent returns for many years to come, investors need to make the right decisions in the beginning. This starts with choosing the right strategy. There are a number of ever-growing strategies to choose from, all having the common goal of providing long-term wealth and financial security.
Home ownership: This strategy is one of the more basic strategy options, but it is still popular amongst many home owners. It simply involves purchasing a property to live in with the purpose of using the property’s value to secure your retirement. Although it is more than likely that the value will increase in value by the time you retire, it is best to implement other strategies so you are not relying solely on your property to build your nest egg.
Purchase Positively Geared Property: Purchasing a property that will provide a positive return from day one is one of the most popular strategies for investors as it provides them with regular rental income instead of having to wait until they sell the property to see a return.
When selecting a property, investors need to think about what target market they want to appeal as this will influence the type of property and location they should choose. Some investors make the mistake of choosing a property or location that would suit their lifestyle, not what potential renters are looking for.
Purchase for Capital Gain: This strategy is different to the one previous as you are relying on capital gains rather than capital growth to provide an income. Investors will purchase a number of properties and hold on to them for a number of years until it is the right time to sell. They then use the profits from the sales to set themselves up for retirement.
The location that an investor would buy in may differ greatly depending on whether they choose capital growth or rental yield. Areas that have a strong rental yield may not necessarily have long term capital growth.
By/Sell Quickly: House flipping is not for the faint-hearted. It is a fast-paced strategy that is not suitable for the inexperienced. House flipping is when an investor purchases a ‘renovator’s delight’ property, then quickly renovates it and sells it for a profit before moving onto their next property.
This may sound like a fun and creative strategy to use, however, there are a number of risks involved. Many house flippers lose money on properties as they overcapitalise and end up selling the property for less than what they originally bought it for. Another risk is that they do not keep potential buyers in mind when doing the renovations. They may renovate a property beautifully, but if it does not fit with the target market, then selling it may become a problem.
Invest with family and friends: Co-investing is a great option for those who are on lower incomes or have limited time and can combine together to manage an investment property.
Some of the benefits of co-investing include less start up capital and you have second opinions which can help avoid poor decision making. However, there are several risks of investing with other people such as personality clashes and parties changing their minds about the long term strategy. In order to protect yourself and your co-investors, make sure you have all of the legal paperwork prepared by a legal representative.
Each of these strategies have the capability of providing investors with long term wealth, however, it is important to conduct thorough research before making any decisions to ensure the strategy is right for you.