Best Property Investing Strategies
Today what we’re gonna be talking about is property investment strategies. Bit of a detailed one for you here, but I hope there’s some value out of it.
First topic we’ve got here is buy and hold. If you have look, we’ve done, also, a detailed video on this already. However, buying and holding is a strategy of buying a property and then sitting on it. And, we wanna hold it and take the capital growth into account with that property. Very, very valid strategy, and very important that we do that. Because, not always can we do the speculative trading, like shares for example, and property, where we buy and sell over a quick period of time to make quick bucks. Unless we really know what we’re doing, and we really know the market of that location, it’s a risky game. And, I know stories of people that have tried to do stuff like that, and they’ve actually come out $80,000, $100,000 out of pocket. Whereas, if we use the capital growth, to our advantage, we will make money over the long term, unless there’s a real disaster.
So, buying and holding is a very effective strategy for us. And, what I try to explain to people when they’re looking at property investment as a strategy, let’s have a systematic plan in place. So, let’s look at potentially buying and holding first before we go to more speculative investments, whether they’re subdividing, or investing for property development with somebody else doing it. Let’s just get the bread and butter done. Let’s go for a nice blue-chip investment strategy, reduce our tax … Even if it’s slow growth, doesn’t matter. And then, we can start looking at the high risk developments, and everything else, as we go forward.
The other thing that people come up with all the time is negating gearing. And, over the recent period of time, there’s also been discussion in the media that the government may even reduce or removed negative gearing. And, that might … how that will impact the invested. So, the concept of negative gearing is actually claiming the loss on a property in your tax return. With the advantage being on new properties, that we’re able to claim non-cash expenses, such as depreciation, in our tax return, which increases our loss. So, what’s been spoken about is removing the rights to negative gearing. So, recently what’s happened is they’re actually saying depreciation’s only gonna be claimable to brand new properties. That’s one change.
However, what happens when the tax office, or the government, whoever you wanna blame it on, so to speak, makes a change to tax, it can’t be retrospective. So, if we have a property and we already own it, they can’t change the tax laws for us to be affected for something that we’re already claiming. It can only be the stuff coming in the future. Well, me personally, I haven’t seen any retrospective tax laws. But, it doesn’t mean that they won’t do it. But, it’s very unlikely because it’s inequitable. So, when it comes to negative gearing, that’s what we’re talking about there. We’re talking about claiming losses off our investments to offset income that we have earned via wage and salaries in our tax return.
So, I guess one of the morals of the story here is to really make sure we get in so we can take advantage of these things before they do change any laws and policies.
Then we’ve got this thing here called positive gearing. So, positive gearing, what we’re talking about, which is very similar to positive cash flow, is we’re actually getting that asset to claim enough that it’s actually making a positive income in our financial pocket, okay? So, what that means is it’s actually earning us money, which is highly, highly beneficial. So, we’re actually looking at negative gearing and positive gearing. The difference being that we’re claiming enough that instead of making a loss on paper, and in our pocket, we’re actually making a profit in pocket.
And then, what we’ve got is positive cash flow, is where the property we’re buying straight away, the rent is so much higher than the expenses on the property that we’re actually make money in cash flow instantly, right? So, usually that means the rent has to be maybe 6, 7% in return to the value of the property.
Then we have renovations or flipping, which is quite popular. People like the idea. This can be a risky game. We really need to understand the market. So, what we’re doing there is we’re looking for an undervalued house. So, a house that’s probably in quite a considerable state of disrepair. And, we’re looking at, “Okay, we can invest this much in to improve the quality of the house, and then resell it.” So, when we’re looking at this sort of activity, a) we wanna be very skillful at knowing the market that we’re looking at buying in, we need to be very skillful in can we do some of this ourselves, or do we need to hire contractors to do it for us, which means we need to be very strong in our budgets, right? We need to be almost fixed in our budgets. Because, if we have variable budgets in doing an activity like this, well that could impact our margin and our … If it impacts our margin, well, then it might not be worth doing.
So, I’ve always explained to people when they’re looking at doing something like this, if it’s gonna take you a year and you’re gonna make $10,000, for all the stress and the activities that you need to do in that one year period, is $10,000 worth it? So, you need to ascertain for yourself the effort that you have to put into an activity like this. What is the amount of money you need to make that you are satisfied to do it? I’m not saying don’t do it. But, work out what your time value is before you do something like this. We see all the TV shows and we think, “Oh, that looks easy,” and, “We can do it.” And, maybe it is easy, right? But, if we don’t have the skills, maybe we’d get better off, as I said earlier, going back to the buy and hold first, getting the bread and butter done, and then looking at this high risk flipping. There’s a lot to it.
And, then we have passive property development and active property development. With passive property development, what we’re talking about there is a developer wants some money to do a development, and we’ve got money. And, we give it to them. And, they guarantee us a rate of return. There is a risk. The risk is that they could go bankrupt. So, you may wanna talk to them about their experience in doing property developments. An experienced property developer, obviously there’s gonna be a lot less risks than someone that says, “Hey. I’ve never done it before. First time. But, I know what I’m doing. I’m good for it.” Okay?
And, what you can do, and I know people what they’ve done, is they’ve got money in super. And, they’ve converted their super into a self-managed super fund. And, then they’re lending their super money out as a private lender. And, I know people that can help facilitate those transactions. They’re private lending specialists. So, you can do it with money that you have in your name, cash in the bank, and also in self-managed super funds. So, it could be a way of potentially getting a higher rate of return from your super money.
But, almost similar to what I was saying about what your time cost is, what is your risk cost to lending someone money? If the cash at the bank interest rate is 4%, for example, and you’re gonna lend someone, a private investor, to do a development, money, you do not wanna lend it out at 4%. Because, the risk is a lot higher than cash in the bank. So, you might wanna be looking at 10, 11, or 20%, depending on the risk of the person that’s doing the development. So, that’s something you need to think about when you’re doing these sort of considerations. What is the value risk for me to give this person money? Okay? ’cause, the last thing I want is for you to see that you’ve lost your money.
And then, lastly, you’ve got active property development, where you actually go out and do property development yourself. Now, I know a lot of property developers. And, the general rule of thumb is, unless they’re getting one block into five blocks, they won’t touch a block. Because, there’s not enough margin in it otherwise. So, they’ve worked out what their value cost in time is to do a development. And, therefore, they know what they need to get the return that they’re happy with. Okay? It is a bit of a tricky game ’cause every council, or every jurisdiction, has different policies in relation to sub-development and development. So, you really need to be careful that you have the expertise and the time to research it.
I, myself, I don’t do too many developments, ’cause I just don’t have the time. I’m too busy running my business and managing my team. Okay? So, you need to make sure that you have the time to invest. And, the worst thing I’ve seen, unfortunately for some people, is they’ve jumped in, they haven’t done the research on the location, they haven’t done the research on the council, and they’ve made an emotional buy. And, they’ve gone, “Well, I live in this suburb. I know it. I like it. I’m gonna buy this property, and I’m gonna sub-divide it.”