How the super-rich are currently making massive profits in property - and what can we learn from it?
There are a number of ways to profit from residential property, including renovation, building or developing, buying 'off the plan', buying for income/yield, sub-dividing or just plain old buy and hold.
On top of that, there are a number of criteria or rules you can employ in deciding the location. Some advocate buying in cheap, affordable out of town suburbs as they argue there will always be demand for affordable property from both buyers and renters, and if you have bought cheap how far wrong can you go?
On the other hand, there are many compelling arguments to buy as close to a major CBD as possible, as again there should always be a high demand from a large number of buyers and renters who want to live close to where they work, shopping, nightlife and so forth.
It's a confusing world out there
It's no wonder that many investors end up confused or with no strategy at all. I reckon there are at least 225 variations you could consider (5 types of property x 9 types of locations x 5 stages of property).
But it's even harder than that! As an investor, or potential investor, you not only have to consider which strategy to employ, you also need to decide if you are going to stick to that one strategy or change it over time.
More seasoned investors tend to fall in to two camps. There are the ones who argue it is better to develop an area of expertise, and stick to it. You can then really get to know a location and type of investment ("I am expert in renovating student accommodation in inner North Melbourne suburbs", for example).
In the other camp are those who remain more flexible and adapt to varying market conditions, changing their strategy accordingly to take advantage of the market cycles (renovating close to home in a flat market, buying off the plan in major CBDs in a growth market).
What kind of property investor are you?
So, you may ask, what does all this have to so with the super-rich? Well many of the really successful investors fall in to the second camp, where they are able to change their strategy to take advantage of the current or future market conditions. If you are wondering which 'camp' is better for you, the answer lies within! What suits your personality? Are you the steadier, consistent, focussed type or the more adaptable, flexible and perhaps restless person?
Wealthy cashed up investors, who are flexible in their strategy, are in a position to take advantage of the current unique state of the Australian property market. These investors are currently finding quality land or large completed developments and securing them at below market value, which is often well below their value of say two years ago.
By buying at a significant discount, they are insured against any possible fluctuations in the market, their rental yield is higher and they can hold them until they can sell on at full market value. And all without the hassle of finding land, building on it and having to wait until the development is completed to take profit.
It's a good time to buy
So why is this a unique time? At the moment the market is looking very promising for buyers (more on that in my next article) with good growth predicted for the next few years, but times are generally tough for developers. Fallout from the global financial crisis has led to developers often finding it difficult to get sufficient bank funding, or even worse have had previously approved funding withdrawn (certain banks are incentivising lending managers to reduce their total borrowing!).
I am regularly talking to distressed developers who are being forced to sell developments that they thought they were going to make millions on (I know you feel for them!).
So what can we learn from these very successful investors?
First is the advantage they have in being able to adapt their strategy to take advantage of the market, even if you just bend it a little rather than completely change it.
The second lesson is more exciting. You can actually copy what they're doing, just on a smaller scale. If you hunt around, you can find quality investment property at a price which is generally 10% to 20% below the bank valuation. You can achieve a good rental return from it and either sell for a profit, or ideally hold and the growth adds to the profit already locked in by buying at a discount.
Two further offers of advice.
First, do not jump in and buy something just because it is discounted, or cheap. As always, do your research and use this unique set of circumstances to 'trade up'; by which I mean consider buying something better for the same money.
The second is, consider using the resources of a specialist investment company. I do believe that anyone can learn how to successfully invest without using these companies, but in this case I know that they have exclusive access to some of the best discounted opportunities, because they have the advantage of employing people to talk to developers all day, every day and they can sell a large number in a short period of time.
Making billions may not be your ambition, but if you want to increase your wealth and give it an instant lift, then at the moment you can copy the super-rich and buy distressed and discounted property.
