There are more ways to make money in property than most people realise.
Many property investors, like myself, concentrate on one or two property investment strategies. Most portfolios are negatively geared, positively geared (or positive cash-flow) or a mixture of the two. If you’re an enthusiastic investor, and you have a little time, you might be interested to find out a little more about some alternative (and a little more advanced) investment strategies.
You’ve probably already heard of some of these strategies, such as renovation and development. The average investor feels as though these are strategies that “other people” do. It’s always worth keeping these strategies in mind, and here’s why.
A good renovation to the right property can increase its value by thousands. It can turn a dud property into a shining star. It can turn an otherwise ordinary yielding property into a positive cash-flow gem.
Renovating can be far more than splashing a coat of paint on a wall or covering a chair in some nice fabric. Knocking down walls, adding rooms, building up, building out… There’s a big difference between what you might be comfortable doing, and what you can get an expert to do.
Whether you choose to do a light (D.I.Y) renovation, or get the experts in, renovation for investment is strictly a numbers game. It’s critical that you plan well and assess the feasibility of the project before you even buy the house. You need to manage your budget carefully and know your costs. There are great packages that can guide you through the process and it can be worth investing in one, especially if you plan on renovating more than once. Check out Kaz’s review of The Complete Renovation System – the system she used for her recent renovation!
As I said, a good renovation to the right property can do wonders. But a bad renovation, or even a good renovation to the wrong property can be a sure way to throw your money away. Do your homework first!
2. Property development
Property development is almost the next step for an experienced renovator. If you’re considering property development as a strategy, you can leave your options open by focusing on buying investment properties on large (especially corner) blocks. This leaves you two options:
a. Keep the existing dwelling, earn some rental income along the way and build a second property on the block
b. Knock down the existing property and build a number of dwellings on the block
A great way to learn about property development is to find a mentor who has developed property before. Ask a lot of questions! Remember, also, that property development takes time so you will need to be able to cover shortfalls in your cash-flow for two or three years.
Development is a strategy which can give great rewards. Coupled with these rewards are higher risks and a more hands-on approach. This is definitely a strategy where you need to plan well, educate yourself, consult with experts and budget well.
Make sure your checkout our podcast episodes 25, 26 and 27 which feature interviews with Troy Harris, property developer from Rookie Developer.
3. Vendor financing
Vendor financing often comes into play when the purchaser cannot obtain finance through conventional means. The vendor essentially becomes the lending institution. The vendor and the purchaser come to a financial arrangement that is mutually beneficial and enables the buyer to buy the property and the vendor to provide a financial arrangement that yields a profit for them also.
This is clearly a strategy where all the legalities need to be sorted out. If you’re considering entering into such an arrangement, you’ll need a sound team including an accountant, lawyer and possibly a broker. Make sure they all have experience in vendor financing, and make sure you cover yourself in every possible eventuality.
When it works, vendor financing provides a win-win for both the purchaser and the vendor. When it doesn’t it’s a mess.
Flipping is the rapid sale of a property, prior to the settlement period expiring. The big advantage of flipping is that the purchaser may make a lot of money in very little time, with very little outlay. Only the deposit for the property needs to be provided as it is never actually owned by the purchaser, and at the right sale price the vendor can potentially make a significant amount of money.
Flipping is one of the less conventional and probably more risky strategies. Expert flippers make good money without putting a lot of money down. If the flipper, however, is unable to sell at a profit then one of two things will happen:
a. They may find themselves being forced to take out full ownership of the property. This can severely limit their cash-flow, or put them under a lot of financial stress
b. They are forced to sell at a loss
Again, when it works, there’s a lot of money to be made. But when it doesn’t, it can put the flipper in a very difficult situation.
Every property investor needs to be aware of the options that they can take. Of course, not every strategy is right for you and it’s important to be comfortable with the decisions you make. If a new option interests you, do your research and get educated.
And good luck with your property investing.