Whether it’s the chance to pocket a substantial return, or another investor’s inspiring success story, there are plenty of catalysts that encourage beginner investors to take the plunge. Here, leading experts offer advice on three common investment strategies – and the risks to be aware of
Wherever there's potential to make money from money, there’s also the potential to be left emptyhanded. Seasoned investors already know a thing or two about how the pendulum swings in a market where longterm gains can be intercepted by short-term dips.
And how a strategy bounces off paper – its entry perks, end rewards, and the chance to tap into further gains – can often be very different when theory is put into practice.
According to Brendan Kelly, director of Results Mentoring, the ‘practice’ side of an investment strategy is often “the discovery of the quantity and magnitude of problems that need solving along the way to complete the task or project”.
He asks current property investors: “If you knew then what you know now, would you have undertaken the journey?”
But how can those without the added help of hindsight best understand what they are about to venture into and the roadblocks they are likely to encounter along the way?
Three property experts share their advice on three of the most considered property investment strategies.
1. Buying apartments off the plan
“Probably the most appealing thing about [buying off the plan] is that you don’t have to put a lot of money down, and you don’t have to do much work for it, because, in theory, you get a lot of money in return in one or two or three years’ time,” explains Peter Koulizos, Property Investment Professionals of Australia (PIPA) chairman, and lecturer in property at UniSA Business.
“But the problem with thinking, ‘I’ll sell it for more’, is exactly what is being experienced in Sydney now. Property prices today are lower than they were 18 months ago. So, yes, in the long term property value goes up, but in the short term there are fluctuations.”
Investors who happen to buy an apartment off the plan at the peak of the market and then try to sell their investment when the market is taking a dive will likely experience a loss.
“You’re looking at shortterm movements. If you bought something off the plan in 2015 and tried to sell it in 2017, you would probably have made money. But if you bought it in 2017 and you’re trying to sell it in 2019, it’s likely you’re going to lose money,” Koulizos explains.
He also warns of the possibility of there being an inundated market in which investors look to sell their units all at the same time, as is often the case when the majority of the units in a building are bought by investors.
“It’s not like there is only one apartment for sale, there are lots of people interested and [the investor is] going to get a really good price because demand outstrips supply,” Koulizos says.
“In the situation of apartments bought off a plan, even if you have lots of people looking [to buy], you have lots of people selling. It’s almost like a race to the bottom: the person who is willing to sell it for the lowest, number one, will sell it and, number two, will set the market-value benchmark for all the other units.”
Although the stamp duty and deposit required to buy in might sit on the lower side – one of the strategy’s dominant perks – the investor has to be prepared for the unfortunate circumstance of not being able to sell the unit, which would then result in having to either settle the property themselves (with a larger loan), or lose their initial deposit.
“Property prices today are lower than they were 18 months ago … in the long term, property value goes up, but in the short term there are fluctuations”
Keeping in mind that market fluctuations can be one person’s loss and another person’s win, Koulizos offers a few tips to first-time investors who are interested in buying an apartment off a plan.
“Firstly, they should go and see a qualified property investment advisor so they are getting some advice from somebody who is qualified in property and can clearly outline the risks and returns. If it looks like [buying off a plan] is a good strategy for them, then go to see a property lawyer, because often these contracts are in favour of the builder or the developer,” he says.
In addition, the PIPA chairman advises investors to determine what constitutes a ‘minor’ variation in the sales contract.
As an example, he says, “A minor variation might be the skirting boards: instead of being 15cm high, they are only 12cm high, and that’s minor. But the developer might say, ‘Your apartment was going to be 70 square metres, but now it’s 55 square metres, and we consider that minor’ – when you most certainly wouldn’t have the same view.”
That said, the display suite shouldn’t be taken at face value; it won’t necessarily mirror what the unit is going to look like upon its unveiling, he adds.
Furthermore, considering that banks assess risk, an investor may have to gather a larger deposit to buy an off-the-plan apartment, Koulizos says.
“The banks understand that apartments are riskier than houses, for example. So the more risk involved, the more skin in the game the bank wants from the investor.”
2. Buying, flipping, selling
The ‘romance’ of TV renovation shows can be appealing for at-home viewers, and they often make the renovation process appear “relatively easy” and “stress free”, says Kelly from Results Mentoring, when discussing the buy, flip and sell strategy.
“There are a lot of accolades and a lot of recognition … But for the first-timer not having ever done it before, the risks are far greater than they know.”
As they say, fortune favours the brave, and one can’t deny that there’s a sense of boldness intertwined with executing a flip-and-sell strategy – especially when it’s a DIY job. But to prevail requires more than just bravery.
“Most people don’t think money; they think dream and romance, and success and winning. They don’t see the process of managing money through. So, one of the traps is that they run out of money along the way,” Kelly says.
“Here is a rule: you need 40% of your buy price as cash to see the project through. If you are buying a $500k property, you need $200k in cash. You need to come up with a 20% deposit, so that’s $100k, and the extra $100k is all spent on holding costs, renovation costs, and stamp duty and other expenses.”
Time management plays just as integral a role. Kelly advises investors to double the amount of money they initially think the renovation will cost them, and double the amount of time they think they will need to complete it. If going DIY, then both the budget and time frame should be tripled, he adds.
“Unto itself, blowing your reno budget won’t actually cause the failure, or set you up to fail. What does set you up for a fail, absolutely, is not knowing the property’s realistic sell price,” Kelly says.
“Whatever [price] renovated properties are selling for, you have to buy an unrenovated property for, at most, three quarters of that price.
“The banks understand that apartments are riskier than houses ... So the more risk involved, the more skin in the game the bank wants from the investor”
“You need to understand the prices of houses on the market, in terms of unrenovated versus renovated.”
Doing research on the location of the property, and the property’s target market, also comes into play.
“What do people want in that area?” Kelly encourages investors to consider. “Because once you have found what you need to produce, what you have to then do is find a house that you can turn into that.”
3. Investing in commercial real estate
“The cash flow returns are significantly higher with commercial property versus residential,” says Scott O’Neill, director of Rethink Investing.
“Also, when you invest in commercial property you are less susceptible to market variations, as the value is typically based on the strength of the lease. In addition to rental income producing a passive income, you will also get the benefit of capital growth and rental increases.”
However, O’Neill points to the potential repercussions of an investor only focusing on yield.
“Chasing the highest possible yield without understanding the full scope of potential risks could leave an investor in a poorer position than they had hoped for,” he says.
A long-term outlook is fundamental, says O’Neill, as some beginner commercial investors don’t fully consider the relettability of a property.
“I like to not focus too much on the current tenant. I prefer to focus on how good the actual property is for long-term tenant and business demand,” he says.
O’Neill advises investors who are thinking of putting their money into commercial real estate to seek out long-term leases with the option to renew, predominantly for the security that a long-term rental can provide. However, he says short-term leases may on some occasions allow an investor to tap into more value, as a result of a tenant eventually signing up to a longer lease.
Other tips from O’Neill include ensuring that the location is suitable for the tenant; making sure the tenant operates in a high-demand industry; keeping up to date with future developments in the area to avoid an oversupply of properties; and understanding how long it can take to secure a new tenant.
“Residential investing can be easily done with online research. However, commercial investing is a different beast,” O’Neill says, adding that it’s important to conduct “on-the-ground research”.
“Using an expert to find a commercial property is a fasttrack way of reducing your risk,” he says.