Investing in Real estate’s residential sector means, to most people, simply looking at a house or an apartment as an investment decision. A very popular quote says, “Your home is your greatest investment”, which is true, but it is also true that residential property investment is an all-encompassing phrase.
This refers to an ever-growing list of investment strategies and options targeting capital growth and/or a good source of income. Real Estate has been over the years the most popular and maybe the older type of investment. The reason is very simple. People feel very familiar and comfortable with the idea of investing in property as property has been in one form or another part of our lives since we were born.
Unfortunately, feeling familiar with an investment and making profits are two completely different things. Sometimes been too familiar makes people feel too safe and sure and that leads to mistakes costing a lot of money.
I will try to run you quickly through some of the major strategies and residential investment options out there, as well as some emerging ones that are growing in popularity.
1) Home ownership While owning your own home is the most basic of property investment, it is a strategy that most property owners employ, and go no further with. This is perfectly fine, providing that you are employing other tactics along the way during your life to ensure you are building a nest egg beyond just the home you live in. While your home will no doubt appreciate in value over 30 or 40 years, singularly, the ownership of just this asset will not secure your retirement, you’ll need more than this. Unless, of course, your home happens to be a palatial Miami mansion and you then comfortable to sell up and downsize to a studio apartment during your retirement (a scenario that few would find themselves in, I’m sure!).
2) Buy-and-hold: This is where you grow a portfolio of numerous properties during an acquisition phase, then hold on to them for at least two cycles of the property market (so, at least 15 years, but ideally longer). Capitalize on the monthly income created by renting them, and then later in life you cash out most of the portfolio (sell say 90%). Use the after-tax profits to buy your home to retire in (outright) and also have a tidy nest egg of money put aside to enjoy your retirement years with. This type of residential property investment is very popular in countries like Australia and the US but it can apply in almost all cases. Remember the property market cycle diversifies from country to country and could be very flexible concerning the cycle period especially to emerging economies where the downward part of the cycle could last longer.
3) Buy, renovate and sell -‘flipping’: One of the most popular types of residential property investments especially for experienced medium and big investors. It is not the ideal strategy for the inexperienced or those who do not like/cannot handle fast-paced procedures. Buying un-renovated property, then quickly renovating and selling for a much higher price before quickly moving on to the next one.
The fact that many who set out on their first ‘flip’ property never attempt their second indicates that failure rates are quite high, as more complicated experience and a lot of time investment are the key to success. Some have made lucratively successful careers out of this but they usually are not amateurs.
To succeed long-term with this strategy, you pretty-much have to give up your day job and make this your full-time job. The problem for most people is they envisage a lifestyle where you get to pick out cool fixtures and fittings and personalize a property the way you like it.
The reality is the complete opposite; you instead become a site project manager and make decisions based on the bottom line and not personal taste. Negotiating skills are required to be very high as you need to negotiate from the initial purchase of the property to the last worker that you will hire to do the job for you.
4) Renovate and hold: An integrated version of buy and hold that mixes the above two strategies together. This option works better for those happy to be quite transitional themselves, and not have a fixed residential address for many years at a time.
Basically, you simply continue to grow a portfolio of properties held; but the kinds of properties you acquire are ones that need work. You target for low initial price and reasonable renovation requirements. These could be basic work, or projects that require both structural and cosmetic works. Either way, you either move into it and renovate while living there for six to 12 or more months, or you project manage it until completion of renovation. When the property is ready instead of selling, you hold the property and rent it out for a much higher rental return than it originally offered. Over time you may grow a portfolio of renovated properties that provide excellent rental return.
5) Managed funds and/or property super funds: This kind of investment is the most passive, minimal risk, and minimal personal work required. This approach relies heavily on trusting a financial institution to invest your money in property shares and portfolios, to produce financial growth for you, (Funds – REITs etc.).
Whilst the gains are nowhere near as lucrative as the wealth you could manufacture by running your own strategies; they are also less risky, cumbersome, and use minimal time.
6) Co-investment with friends/relatives: Different to group family buying, in this strategy, a partnership of two, or perhaps three/four, people band together to achieve their investment objectives. In Kenya, there are thousands of investment groups officially formed and have been investing a lot in the property market.
This strategy can be great for those on low incomes, limited resources, and those with limited time to work on a project together and see a gain. The advantages of this plan are that much less start-up capital is required to invest, plus you have a second opinion all the time, which can help protect against making poor investment decisions. Co-investors also have the benefit of being able to share skill-sets, connections/contacts, and experience, to strengthen their plans.
The challenges to this strategy include; people with differences in opinion, personality clashes, and long-term strategy shifting. Additionally, the legal complexities often make contracts/solicitors’ fees skyrocket, as all exit-scenarios need to be considered, and an iron-clad contract detailing the agreed outcome based on every possible scenario must be composed by lawyers.
Additional stress can ensue when family or partners are involved. Depending on the size of the group, things can get really complicated especially, if the market is not going well and hard decisions have to be made. It is very important to make sure that people with skills, experience, knowledge and market understanding are part of the group.
In several cases, groups make wrong decisions because of lack of proper infrastructure and decision procedures. It is easy to follow the rumors when the majority of the people involved in a group do not have the experience to identify and understand the market trends. This strategy can be very good as well as a very bad option as it could negatively affect not only your assets and wealth but your personal relationship with relatives and friends.
7) Full-time property development: This strategy refers to more complicated procedure such as building an entire block of units, from scratch. It probably goes without saying that this strategy is one that only those with high cash stocks are even able to contemplate. More often, mature investors who have been building portfolios over the years may build themselves up to this kind of venture.
Usually by this point, they have picked up skills, contacts, and capital, to make a larger-scale development even feasible. Despite all of this, the complexity of full property development can make fools of even the most experienced and savvy investors. Many developers make use of financing to get the required cash to proceed with the project. In any case, the risk factor is higher in this type of investment strategy.
There is no doubt that there are additional options and strategies out there that property investors are using in their property pursuits. Overall, though, one must always remember that there is no hard and fast rule or strategy to property investment. Remember that property is a medium to long term investment.
Choose one of the above options or form your own strategy that mixes several of them. Be flexible and on top of the market trends. Although real estate is not a short term investment, sometimes, it requires very quick decisions to avoid or minimize possible losses.
Regardless, it is important to consider all options available to you when starting out. Defining your objectives and desired outcomes will determine the best strategy for you. I always have to remind you that any type of investment is like a coin. It always has at least to faces. The one that everybody loves, full of profits and prosperity and the other one that people hate, the losses and disappointments.
Investing your family’s future in any type of investment is a very serious decision as risk will always be there. Be careful and sure to choose the right type of investment for you. If you do not feel 100% ready for it, just skip it.
REValuer by Tegova
Civil Engineer Msc/DBM