When investing in property, there are two strategies, active and passive. In this article we are going to take you through your options and the pros and cons of each.
To recap, an active investor is one that’s involved to make the money grow by investing sweat equity. So essentially, you are working for your money. A passive investor is one that invests money and has the money work for them. For more information about active and passive investors, click here.
Buy and Hold – Passive Strategy
Buy and Hold strategy is a set and forget strategy, essentially what its name makes it out to be. It’s a passive strategy as you invest your money for the long-term and let the investment do all the work for you. You don’t sell the property based on short-term market fluctuations and you gain cashflow through collecting rent payments from tenants.
This strategy has the lowest risk as you are holding the property for a long period, there is an increased chance of achieving capital growth. As rent increases overtime, so does your cash flow and the money in your pocket.
- Ongoing income from tenants
- Increase in property value
- Potential for tax saving
- No pressure to sell the property immediately
- Vacancy costs if there is no demand for your property
- You don’t have immediate access to cash for the property as it’s tied in equity
- Ongoing maintenance costs
Development – Active Strategy
Development strategy is when you purchase a plot of land and subdivide it into a series of properties. You can choose to keep the properties or sell some of them for a profit.
- Potential to make a return in a short period of time
- Add value to a property and create equity
- Build up your capital base quicker
- Time risk – due to the lengthy process of developing properties, which can increase your holding costs.
- Requires a bigger financial input – need to stick to a strict budget to make a profit
- The margin of error is low
Renovation – Active Strategy
Renovation strategy is when you purchase a property that is a little run down and spend money on fixing it up. Renovating adds value to the house and also increases your rental yield. You can renovate to flip the property or renovate to hold it for the long term, using a buy and hold strategy.
- There is potential to add significant value to the property
- You can do a renovation on a smaller budget
- Save costs by doing some of the work yourself
- You may go over budget
- Underestimating how much renovation is needed
- The risk that you won’t add real value to the property
All three strategies require a significant amount of money to begin and maintain these investments. With a buy and hold strategy, you need to be able to cover the costs of the property regardless of what is happening in the market. Similarly, with a development strategy, you need money to fund the development and manage it while looking for tenants and buyers.
Finally, with renovation strategy, there is the potential that you can underestimate how much renovation is needed for a property and go overbudget. All strategies have the potential to make significant profit in the long-term, but in the short-term you are required to have a substantial amount of money to begin and maintain these types of investments.
While you consider your next property investment, think about what type of investor you want to be, active or passive. A coach can help you identify a strategy to help you achieve your goals. For more information and help, contact us Silvertail Property Group and together we can work out the best strategy for you.