In a previous article, I wrote about the importance of knowing what type of investor you are, and being that type of investor only.
I believe there are two types of investors.
– passive or buy and hold investors who create their wealth by building a property portfolio over the long-term, and
– active investors who would rather create equity or growth in their property in the short-term using such strategies as buy, renovate and sell.
Here’s a story to help explain why it is so important to work out what type of investor you are, before you actually begin investing.
I was running an information session for a Property Investment Program I facilitated a few years ago. A lady asked a question about an investment property she had recently purchased and renovated. The property was now on the market for sale. She was undecided on whether to sell it or not, and wanted my opinion.
I was unable to answer the question directly, as there were too many variables that needed to be taken into consideration. I answered her question by asking her a series of questions. Only she knew whether she should sell or not, depending on what her investment strategy was with the property.
However her question had a huge impact on me. By asking the question, it told me that she had not taken a planned approach on her property-investing journey.
This is where many people fall over. People jump into investing without having any sort of plan… and just hope they will make money.
A passive, or buy and hold investor does not buy a property with the intention of selling it. A passive investor would have completed extensive research before making the purchase. They would have only purchased property in an area with potential for high capital growth over the long-term. She is not a passive investor.
Her actions of buying, renovating and selling shows she is an active investor, or an investor creating equity in the property in the short-term through renovating, and then selling it for a profit.
She was asking the questions at the end of the project. Her intent was to buy the unit, renovate it and sell it for a profit. Before she bought the property, she should have completed extensive research, to determine if she would make a profit when she would eventually sell the property. Below is just a sample of the many questions that should be asked before a purchase is made.
o How much are comparable properties selling for in the market?
o How long are comparable properties taking to sell?
o Have renovators already entered the market? If yes, what sort of renovations are they completing?
o What is the right type of renovation in that market?
o What is the budget for the renovation?
o What return will the renovation generate?
o How does this return compare with other investment strategies?
When the research has been completed and the questions answered, you can then assess a property and know if it is an ideal property to suit your investment strategy and give you the return you are seeking. It is about getting the right property, in the right location, for the right price, for the right type of investment strategy. A property that may be ideal for a long-term buy and hold strategy, may not be ideal for a short-term buy, renovate and sell strategy.
Another option could be for her to renovate the property and keep it. This strategy is a combination between a passive and active investor. However, this strategy depends on her financial situation. Does she have the cash-flow to hold the property and build wealth in the property over the long term, or does she need to sell it for a profit in the short-term? Is it the right property in the right location for that specific investment strategy?
Let your Primary Aim tell you what sort of investor you need to be. Your property investment strategy plus your strategy for your life need to be well aligned.