Want to Build Your Property Portfolio?
In theory, it is easy to build your property portfolio. After one successful property investment, you proceed to select another potential investment opportunity. Specifying your next investment can be a new challenge that could encourage you to diversify your investment portfolio. With each new investment, it is good to reconstruct your investment goals to break possible monotony and trigger positive portfolio progression. You can also consider changing your investor tactics or investment strategies. But keep in mind that you have to make sure the properties you’re looking for – should match your disposition as an investor and your capabilities to manage your investments.
How do you, as an investor, affect your property investments?
An investor’s profile directly affects their property portfolio. Investor-related factors that influence their property investments are typically the investor’s disposition, risk profile, and goals for investment. Understanding these terms may help you develop as an investor to identify your strengths and weaknesses and increase the chances of success with each investment venture.
How much time and effort can you, as an investor, deliver for your property investments? What kind of results do you want to see based on your risk appetite during what specific time period? How willing are you to learn new skills and attain knowledge that could help your current and future investments? You have to consider these questions as the answers could determine what kind of property investor you are.
What are the types of property investors?
Passive Investor – buys a low-maintenance property, then holds the property for an indefinite amount of time, expecting slow growth especially capital growth and cash flow. Passive investors do not involve themselves or engage with other people to update or improve their property. To maximize the anticipated results, passive investors must be willing to hold the property through long-term market cycles of 10-20 years.
Semi-Active Investor – buys a low-cost property and initiates renovation or addition or expansion, which adds property value. This scheme also allows the investor to build up equity, increase the positive cash flow, and anticipate capital growth. Like the passive investor, the semi-active investor would hold onto the property for a long-time frame.
Active Investor – buys a low-value property to develop or possibly flip, giving the entire place a completely new look to sell the property at a high price. Being an active investor requires a certain skill set and enough experience in order to uplift old and cheap properties to deliver an upscaled property that complies with modern building standards. Active investors dedicate themselves for their investments and at some point, it becomes a passion for them to flip properties as well.
It’s easy to start off as an investor that stays within their comfort zone. However, the more you deviate from your comfort zone and explore risky investment territory, there are chances that your endeavours will pay off with exceptional rewards. Active investors most often still blunder while very experienced in flipping properties. Some riskier properties would need more than just a simple upgrade of living conditions, they may also hide major issues that can only unravel once you diligently observe your surroundings. While eager to spend money and make money at a short time span, there are times it would be better to consider holding property investments to increase value and potential for further growth.
What type of property is the best option to purchase for your next investment?
There are a lot of available properties and various types of properties that are on the market. Although investing in a property similar to one you’ve already invested in is often safer, it is better to expand your portfolio for other property types. There is no right or wrong answer to ‘what is the best property to invest in’ since choosing the next investment property is subjective to the investor.
Certain factors can be used to determine what properties are suitable for what kind of investor. Investment property factors that can help are – level of maintenance, affordability, scarcity factor, growth potential, value-add potential, rental yield, and money velocity. You can also use these factors to examine property types you have a strong or least preference with.
A. level of maintenance – Pertains to the upkeep of a property, or building, and may be a commercial operation through a property maintenance entity, an employee of the corporate body that owns the property, or a volunteer effort.
B. affordability – The cost or price of the property in relation to its attainability, and whether it is feasible to purchase with the investor’s current funds.
C. scarcity factor – An economic factor which exhibits the relative availability of resource development or a decline in the supply of a resource or product relative to demand over time.
D. growth potential – The capacity of an investment to appreciate in value over time, as measured by the difference between its present value (market value), and its purchase price, or the value of the investment at the time it was obtained.
E. value-add potential – The capacity of an investment property to provide investors with the possibility to boost an asset’s cash flow through renovations, rebranding, or operating savings.
F. rental yield – The difference between the income received from renting out the property and the total investment costs.
G. money velocity – It is the number of times money transfers from one entity to another or the amount of money spent in a certain period. Money velocity influences how long it will take for a property investment to recover from losses and make a profit.
What are the different types of properties to invest in?
This section is dedicated to inform you the types of properties and what they can offer to you as well as what they lack in. Scale rating based on the above mentioned factors usually varies depending on investor views and how one looks at a particular type of property.
Best for: Passive Investor
Units and apartments have growth potential, but this is dictated by the degree of development in the suburb. Units and apartments have a limit to value adding because of the market. The price and value of the unit and apartment is at the mercy of other properties being rented or sold in the current market. The scarcity factor is generally low for units and apartments especially in areas where there is oversupply. There are times that the value lessens especially when renovation is needed to the property, however this actually gives the buyer or probable tenant a chance to get a discount depending on its issues. They may also have a good rental yield depending on the conditions and the location of the unit/apartment. Units and apartments may be a little budget friendly in terms of maintenance and insurance. Ensure to factor in the fees for the upkeeping of common areas of the complex, building insurances and amenities available to all tenants of the building. The money velocity for investments on units and apartments would entirely depend on the investment strategy. If you’re a passive or semi-active investor, the money velocity would be steady and slowly yet constantly increasing. For an active investor, the money velocity would depend if the final sale was able to accommodate the money expended for the investment.
Best for: Passive Investor
Potentially can be good for: Semi-Active Investor
Townhouses can have a higher rental return with the inclusions of utilities and spaces that aren’t seen in units and complexes. As for the growth potential, it is higher than units and apartments since townhouses can be more flexible with their policies and regulations. Townhouses also have more space and personal outdoor areas like a small lawn and backyard which is great for pet owners and owner-occupiers with growing children. Townhouses are relatively low maintenance like units and apartments, but those extra areas like the yards would need maintenance every few months just to keep it neat. Townhouses have low potential in adding value just like units and apartments because of the fact that there are rows of other townhouses that have the same exterior. The value adding aspect would have to rely on renovations to the townhouse’s interior. The level of scarcity is moderately low for townhouses especially with modern architectural style. However, the scarcity level increases when the townhouse was built in the early 1900’s with a distinct architectural style that differentiates itself from the other townhouses. Townhouses are finance friendly especially with finance banks and investment property sinking funds. Money velocity for townhouses is somewhat similar to units and townhouses, but it’s higher because of the other substantial factors mentioned earlier.
Best for: Semi-Active Investor and Active Investor
Potentially can be good for: Passive Investor
Houses have high value-add potential, especially when vacant lots are adjacent to these properties and those vacant lots are purchasable. It’s easier to add value to houses through renovations, alterations, and additions. However, it depends on the range of the improvements, whether for aesthetic purposes or accessibility and utility. There is also growth potential for standalone houses, but it depends on the area’s development. City/town and suburb growth factors help the investor to analyse if buying a house in that area would be good. Some growth factors that can help determine people’s inclination to rent property in that location are – renter proportion, vacancy rates, and employment opportunities. Houses may have a lower rental yield than townhouses, but they can potentially give a high rental yield depending on the location. Properties close to the Central Business District (CBD) can have a higher rental rate however there may be a lower rental yield because of high property price. Whereas properties farther from the CBD or cities can have a higher rental yield but a lower rental rate. Take note that if there is buildable land close to the area of the property you’re going to invest in, there is a possibility that the land will be developed and a new supply of houses will emerge which can lower the rental demand of your property. The level of scarcity for houses is similar to townhouses, it depends on the type of house (bungalow or 2-storey) and possibly the house’s architectural style (exterior and interior). The scarcity factor for houses is a little higher compared to units and townhouses because of land-to-building ratio. The depreciation of unit complexes, apartment buildings and townhouses would lower the percentage value of land-to-building ratio. Houses may have lower depreciation rates, but this also means that these houses need more maintenance compared to units or apartments. Overall, houses can be low maintenance and finance friendly except for instances of flipping or reconstructing the house itself. Money velocity on houses is higher than townhouses because building equity and value is easier with cosmetic and structural renovations and it’s quicker to add property value.
4. House and Land Package
Best for: Passive Investor
Potentially can be good for: Semi-Active Investor and Active Investor
House and land packages are somewhat finance friendly. When investing in house and land packages, rental guarantees are sometimes available for investors. This insurance pays the rent for a period of time when the lessee or tenants don’t pay their rent. Rental guarantees also set rental income over a period of time when the property remain unoccupied after purchase. House and land packages initially have no potential or there is barely any potential for value adding because there are a lot of design restrictions placed on master-planned areas by their developers. Property investors looking to flip the house can only choose from the designers and builders that are associated with the developers. While small changes to essential home designs may be acceptable especially to its interiors, anything that is significantly different with the estate’s overall design and feel may not be approved. There may be value-add potential later on when the property has aged. House and land packages can be low maintenance, other than the maintenance on utilities like air-conditioning or repairs on structural components like windows, investors can completely set aside the investment property and come back to it when needed. There is a chance for growth in this type of property investment especially when holding the property through several market cycles and the property can remain a positive cashflow investment. Money velocity for house and land packages are high only when holding the property for as long as 15 to 20 years. The longer the property is held, the higher the profit the investor gets after selling the investment property. House and land packages tend to have a lot more supply than demand at the start of the new development venture, thus the rental yield may be lower than what the investor wanted. Having more supply of house and land packages also damages the scarcity factor since there are a lot of other properties to choose from and other packages still up for sale. There’s also risks in house and land packages because land may not rise in value in the area of your investment. Buildings eventually depreciate through time and the house and land package is barely getting any positive value before a new supply of properties are up in the market.
Take note that there are situations of banks not lending an investor money when buying a property in an area that has a high volume of investors. Especially when a portion of that high volume of investors are people the bank have lent money to. Although, there are other banks and lending institutions that would happily encourage more investments for a certain area.