Investors need to take a lot of time and consideration when dealing with the real estate market. You must always seek new opportunities, diversify your portfolio, and secure profitable assets in order to capitalize on favourable market conditions. The capability to do any of the mentioned actions relies on how you manage your investment expenses. You need to balance out the management and maintenance of your ongoing property investments on top of your newly acquired property.
Flexible strategies that can efficiently adapt to changing market conditions and economic dynamics are easier to adjust and more likely to achieve long-term success. The goal is to minimize unnecessary expenses and maximize returns which directly affect the overall profitability of the property investment. Allocating your resources efficiently, such as capital, labour, and time, among various properties and investment opportunities produces a well-balanced and diverse portfolio. Those that use effective practices can act decisively and benefit from opportunities faster, giving them a competitive advantage over competitors who may be restricted by slow decision-making or inefficient processes.
How to develop sustainable property investment strategies?
Every investor must always remember that there are either positive or negative outcomes for each decision made for the development of their investment. Financial stress is a common occurrence for investors, but it can be easily controlled with effective finance management especially during periods of economic downturns. You need to be careful of your emotions when noticing the changes to any market behaviour, do not let excitement or anxiety be your driving factor when chasing certain investments, you may be quite unsure of. Investors can protect their investments and reduce their exposure to unforeseen obstacles by proactively recognizing and resolving potential risks. Adapting the concept of sustainability to your investment strategies can help lower the risk profile of your investment properties.
What do you need to establish sustainable investment strategies?
Any kind of strategy needs a backbone or at least a list to refer to. So what do you possibly need to remember when you’re trying to make a personalized sustainable investment strategy?
1. Purpose in Property Investing
Purpose is the force behind your decision to invest on a property. This also triggers you to be more responsible when dealing with potential investment and you’d need a little bit of sophistication as you make financial decisions. The purpose of investing on property can be customized even if it’s for selfish reasons or just for the sake of accomplishing an achievement. There aren’t right or wrong answers because this purpose is set to be a reminder for you whenever you feel lost or confused as you handle your property investment.
Simply answer these questions:
- “What is there for you or what are you trying to achieve when you invest on a new property/adding a new property investment to your property portfolio?”
- “Why do you want to continue to invest on this type of property?”
- “How will you be able to continue investing on this property, what must you do in order to maintain this property investment?”
- “How do you see yourself in the future? Will you be able to achieve what you want to achieve on the long run when you invest on that property?”
2. Investment Timeline
Alongside the purpose, what is the timeline you set for your investment and what do you expect to happen in that certain timeline. Would you rather renovate an easy and manageable property then hold on to it for a long period of time or would you rather take the time to rehabilitate a problematic property then sell it right after. At this point, you can list down your expectations for your investment property for a period.
You can determine what investment approach you’re taking when you answer these questions (either you’re a passive, semi-active or active investor)
- “How much time am I willing to take to improve the property investment?”
- “How long will I hold this investment property after I’ve done my improvements?”
- “Once you listed down your expectations at certain periods of time – what should you do if those expectations were not met?”
3. Property Type Investment
Investment on a certain property type is directly related to what type of investor you would be. There are a lot of properties in the market like townhouses and units whether in the urban city or the rural districts. The properties have different attributes with distinct characteristics that impact their performance and profitability. Understanding the unique features of each property type allows investors to customize their strategies accordingly.
- “How much can you tolerate in terms of upkeep of your investment property?”
- “Will you follow the trends of the market – especially interior design trends? Or will you choose to go with a timeless design?”
4. Property Portfolio Diversification
Diversification helps spread risk across different assets and markets. You can tap into various real estate markets in some areas with distinct growth potentials and take on different property types. This reduces the impact of an underperforming property, offsets any loss and maintain a relatively good portfolio performance.
You may analyse what you already have by answering these questions:
- “What is the list of properties you have by type and how many are they compared to the other property types?”
- “How many properties do you have by area or region and how many are they compared to different areas/regions?”
- “What do you notice differently in the properties already in your portfolio from the rest of the real estate market and its health?”
- “What are the factors that make certain investments successful and how can you reflect that to your other property investments and any future investment?”
5. Property Investment Capital
The investment capital refers to the financial resources or the funds of an investor which is used to purchase and hold different properties within their property portfolio. The investment capital needs to be divided accordingly to your multiple properties to increase resiliency of your portfolio. This not only reduces risks associated with individual property types or markets but can also enhance possible income streams and growth opportunities.
There are other ways to use your capital and it can depend on what approaches you are taking. These approaches depend on the questions:
- “What type of investment capital are you using? Is it an investment capital that acquires equity of an existing asset or is it capital as a form of accumulated cash savings?”
- “How would you use your investment capital? It’s also important to figure out where your capital comes from whether it’s from saved cash or borrowed money.”
6. Property Cash Flow vs Capital Growth
Cash flow is the net revenue the property investment creates after deducting all expenses from the rental income received. There are certain patterns to cash flow which can differ depending on the type of property and the health of the market. Diversifying the cash flow sources allows investors to manage expenses efficiently. The positive cash flow from prosperous properties can cover the costs of the poor performing properties. Negative cash flow properties, in which expenses exceed income, may give capital appreciation or other strategic benefits, but may necessitate further funding. Positive cash flow can influence your short-term lifestyle needs whereas negative cash flow can influence long-term wealth-building.
In what aspect do you want your properties’ cash flow to work for the rest of your portfolio?
- “What are you aiming for when it comes to the cash flow of your properties? Would you seek consistent revenue or would you like increase value appreciation?”
- “What’s the local market conditions of each property investment? Is there a rising demand for rentals to generate positive cash flow or is there a possibility of property value appreciation counterbalancing negative cash flow?”
- “If you have negative cash flow properties, do you have the financial capacity to support its expenses and probably vacancies?”
7. Debt Structuring
Debt structuring is the arrangement of debt types and financing instruments. This involves careful analysis of debt sources which you can create a framework that can align to your strategies. You can determine between debts if they’re a good debt or a bad debt. Good debt is related to the purpose of a loan, an example is when you use the loan to acquire an income producing property asset. This type of loan is a tax-deductible debt whereby the interest can be set against your taxable income – therefore lowering your total taxable income.
There are other schemes to utilize for debt structuring like using an offset account and making contingency funds. An offset account can be used to reduce the interest cost of loans which means that your money is working harder for you. This scheme involves linking the transaction account to the mortgage/loan account so the balance in the transaction account will be offset against the outstanding balance of the loan. Whereas the contingency fund is a money reserved to address any unexpected expenses due to unforeseen events. It acts as a financial cushion, ensuring that the borrower can meet its obligations and deal with unforeseen circumstances without falling behind on its loan payments.
Here are some important questions to ask yourself when it comes to your debt framework:
- “How can you make debt fit into your investment strategy?”
- “How is your debt affecting your investment property’s cash flow? How can you align debt payments with rental income?”
- “What are the potential tax benefits of debt structuring in relation to your investment property?”
8. Market Drivers
Market drivers are constituents which have an influence in the growth cycle of the property market. One such market driver is the local economy in the area or region. Local economies also heavily rely on the main industry or industries that make that individual town and city special amongst the rest. Another market driver is the behaviour of the existing population that resides in that town or city. There are a lot of other market drivers which can also be researched upon when you are interested on investing a property in the area.
It is best to do your research on the market drivers, but what else must you consider about them?
- “What are the trends in the area? Figure out the rent performance and historical price of the properties in the area.”
- “Are there regulatory changes, tax policies or zoning updates that could affect return of investments or property value?”
- “Other than the influences within the local economy, what potential external influences and other market drivers do you need to consider? These could possibly be global economic trends or geopolitical events that inadvertently impact the local economy.”
9. Risk Appetite and Mitigation
Risk appetite is based on an individual’s willingness to tolerate various degrees of risk when making decisions in pursuit of achieving their investment goals. All sorts of investment strategies and allocation of assets heavily relies on your defined risk appetite. Risk mitigation are strategies and actions taken to control potential risks that could adversely impact investment outcomes. Risk mitigation encompasses a range of approaches, including hedging, due diligence, and diversification.
Remember that those whose risk appetite is conservative, you may prefer to prioritize capital preservation and financial stability. Those who have a moderate risk appetite would want a balanced approach between capital growth and diversification. While those who have an aggressive risk appetite would take on high levels of risk for substantial returns and high-reward opportunities.
It’s important to ask yourself to determine how comfortable you are to a certain risk level (the higher you can take the risk, the more aggressive is your appetite)
- “How much potential loss can you tolerate without feeling overly stressed or anxious? How will you be able to react in order to recover from your losses?”
- “How do your life circumstance impact your ability to take risk? Consider your age, personality, natural tendencies and how responsible you can be in terms of finances and investments.”
- “What do you need to plan for managing risks within your investment portfolio? Setting a risk mitigation plan can help bolster your confidence in your risk appetite.”
10. Consult with Professionals
It goes without saying that in order to maximize the full potential of your investments, you would need to consult with professionals who have the experience and are experts in their fields. Although it’s easier to get all the information you need online, everything won’t just click into place easily. Seeking help from someone who have the knowledge and knowhow can be beneficial to you because they can also guide you with strategies that can provide you with the best outcomes.