Understanding property investment strategies for beginnersMay 15, 2022
When I started in property I didn’t care about a strategy… I thought there were only flipping and renting and even if I knew anything different, I wouldn’t have cared. My sole aim was to make money. Lots of it. As fast as I could. What I didn’t realise at the time was exactly how much time I was wasting and the potential risk I was taking by NOT caring. It took me 3 months before I made my first offer. And I got it wrong. Dead wrong. So wrong that a 6 month project turned into 3 years and counting.
The first three months had me going from property to property looking for something. I looked at flips, rentals, multifamily renting, student accommodation, developments and so on. My coach at the time told me that my energy is admirable but my focus needed attention. I didn’t listen and ended up buying a property that required a fairly big development to be done. I was going to sell the units and take that profit and do it again. So by thinking I was flipping I bought the property in a structure that should work better for flipping but then I ended up keeping the units and turning it into rentals. Thus getting the wrong structure for my eventual strategy…. Confusing you yet? I was also very confused and frustrated. So don't be me! Do it right the first time. Below some basics on getting started with a strategy that will work for YOU.
What do you want from property? Start with the end in mind.
First of all, it is imperative that you decide what you want from property as this will determine the best strategy for you.
- Do you want a lump sum to pay off some bad debt? Like that credit card that somehow just ran away from you… or a car that needs to be fixed or a luxury holiday with a special person. There is more than just flipping that can get you this. Have you heard of the BRRR strategy? (Buy, Renovate, Rent, Refinance)
- Can you qualify for a bond? I f you can’t there are strategies that work for people that do not qualify. You should have heard about back-to-back deals by now. One of our favourites that we do all the time is a “Delayed Sale/Purchase”
- Do you need extra cash every month for school fees (yes that was my first aim when I started) and just how much cash do you need every month? This is important as some strategies are more difficult than others but can give you much more in your pocket every month.
- How much time can you spend on investing in property? Do you know the difference between a passive investor and an active investor earning passive income?
- No cash? No Problem! There are 3 strategies that we use all the time and we teach that are unemployed or students still at university.
Now that you have identified what you want to achieve, you can identify a strategy that fit your goals. Below are some of the strategies and their variations – it is by no means a comprehensive list!
Standard Single Occupancy Buy To Let
This buy & hold strategy is the least innovative but most proven way to make small but less risky long term cashflow and equity by buying normal flats or houses at a below market value price and renting it out to families.
You can get lending on them easily (if you don’t qualify for a bond then this won’t work for you) and they are the easiest to manage as you can pay a normal estate agent to do this for you.
Buy Renovate, Refinance: This allows you to increase the value of the property through renovation, and getting all of your cash out upon refinancing.
Office space: Buying large commercial buildings & renting out office space to business professionals
New construction, build to rent (residential): The process of buying land, building houses and renting it out long term (you can also benefit from section13SEX!!)
Commercial rental: rent out to retail or other commercial customers. On commercial you can get tenants to pay for extra costs such as maintenance, rates and taxes etc.
Instead of letting the property to one family tenant, you let out individual rooms to increase the income. The more rooms/units you can carve out of the property, the higher the income.
High end services accommodation: The most profitable room by room model is the high end “mini Hotel” It is also the model that requires the largest initial cash. This strategy works well for professionals near the town centre or more affluent parts of a town or city.
This model commands the highest room rent, attracts the best tenants, and needs to be furnished accordingly.
Post grad/professional: one step down in ‘quality’, but with a slightly larger market. Look for a place close to big technology companies, bank corporate offices etc.
Government employees: A larger market than professional/post grad, and not as necessary to be right in the town centre. These can be located close to government institutions and don’t forget about public hospitals for nurses and doctors,
Less input cost. Tenants are less fussy about the quality of the accommodation and perhaps an extra room can be squeezed in per house. Some people will even be happy to share a room.
Student: Especially effective in University cities, and usually within one kilometer of campus. Voids are higher because of holidays, maintenance and management are also higher, but tenant expectations lower and students are used to sharing rooms. Some of my larger rooms are shared between 4 students. Accordingly, rent can be higher.
Workers: The ‘lowest’ end of the market, needing the lowest amount of initial cash input, but commanding the lowest rent per room, and requiring the highest management in time and costs. You will need to have specialists in eviction, tenant maintenance and rent collection. Space can be maximised to great effect, and the market in South Africa is huge for this type of accommodation.
Rent to rent: Also known as sub-letting. You rent an ‘multi-tenant’ property from a Landlord on a single let basis, and then get approval to sublet to students or airBnB or rooms. You create all the cash flow of an HMO, yet you don’t buy it. No deposit needed. No big upfront costs, just small maintenance costs.
AirBnb: This is where you can rent out rooms on a nightly basis. AirBnb is very flexible and you can do private accommodation, or private rooms with shared common facilities.
Backrooms: It is very popular in township areas to build backrooms and rent it out to tenants on a monthly basis. It is still easy to stand out in this market as traditionally these types of accommodation was done as Wendy Houses, so offering something formal can get you good long term tenants due to huge demand and very little supply of good accommodation.
Buy to Sell
Buying, refurbing and selling residential property is known as flipping and those who use this strategy are referred to as ‘traders’ rather than ‘investors’.
If you are looking for bigger ‘lumps’ of cash in the short term, larger scale projects or you want the maximum return on time invested (when exchanging time for money) then flipping can fit your strategy & vision. It is highly dependent on market conditions (easier to flip in growing market), but professionals can flip property through the entire cycle even in a recession!
Re-modelling property: Find a flat with a large living room and move the kitchen into the living room to create open plan living. You can then turn the kitchen into an extra bedroom and sell as a 2 bedroom flat
Assisted Sale: The strategy, as the name suggests involves you (the investor) ‘assisting’ a seller (or representative of a distressed seller) to sell their property. You are effectively doing a joint–venture agreement with the seller and getting paid for helping them sell their property.
Convert and sell: Convert commercial units to flats to sell on to first time buyers, owner occupiers or investors.
Sectionalizing: Buying a block of flats when it is still registered at the deeds office as one property, subdividing the units and creating a sectional title register and sell the units individually to end purchasers. You can normally get more money from individual units than from a whole block.
Delayed sales/purchases/Installment contracts
You agree with the seller that you will pay him typically a deposit immediately and the balance of the purchase price over the next 13 months to 5 years. Giving you enough time to renovate, place tenants, get a rental roll in place and then bonding it with the bank when you have financial statements on the property. We love this strategy and have executed it many times before.
Commercial To Residential Conversions
With many offices moving out of city centers office blocks are standing empty and council is open to allow for conversions to residential units. Profits are in the ‘change of use,’ either holding the flats for rental income of selling/flipping them on for a more immediate profit.
A packaged deal is a deal you sell for a fee, for someone else to buy. This is also known as sourcing or wholesaleing in other countries. The more of the work you do the more you can charge for handing / selling the deal to another investor.
Turn-key investing: This is where you buy, renovate and sell properties to overseas investors seeking a great place to park their money. You will handle the management making the investment truly passive for the purchasing investor. Upside: you can charge higher fees.
I ended up being a specialist in passive income strategies and not looking back... so if you want to learn the top 5 strategies for passive income please book for the Free Webinar on this link