Real Estate is another strategy to use to achieve Financial Freedom, either through capital gains or rental income or a combination of both. As with all investments, just blindly buying any real estate will not maximise your returns, it may in fact, cost you dearly.
Around the world real estate has increased in value from approximately three times average yearly earnings to nine times plus. London, Sydney, Vancouver, and China are at the extreme end of price levels. Investors have used the historically low interest rates to take on debt and add property to their portfolios. This means investors coming to the table now could easily pay too much for an investment if no research is done.
The good news is, pockets of real estate at reasonable prices are still around if you are willing to do the research and hard work to realise the potential. The type of property will depend on what your strategy is.
There are basically four strategies you can undertake
Owner Occupy
This is where you buy a house to live and wait for the value to increase. The best option to create wealth in this situation is to buy the worst house in the best location or street, undertake renovations and improve the property while living in it. Do as much of the work yourself or as much as regulations and your skills let you do. Remember your labour is money and can be recouped when the property is sold.
This process can be replicated time & time again with the profit being used to reduce debt each time or transferred to other income producing assets such as shares or cash. If the borrowing costs can’t be offset against tax then reducing the debt each time maybe a better option.
Your partner will need to be 100% behind this as it can be taxing on the best of relationships living in a permanent state of renovation.
Rental Property
Buying a house to rent can be a great way to get into the property market as the tenant helps to pay the outgoings such as local government charges, insurance and loan repayments. This strategy lets you get into the property market with less of your own money. Depending on where you buy there may also be tax incentives to take advantage of.
As mentioned before you will need to do your research because you want to buy a property at the right price in the right location as well as a property people want to live in. Key points to remember here are location, schools, hospitals, transport, shopping, and importantly the availability of jobs. If there are poor job prospects in
the greater area, your house will be harder to rent and you will possibly have to accept lower rent and an inferior standard of tenant.
Remember financial freedom is your goal. If you buy in an area which is in decline the value of your property is also likely to decline. Conversely, if you buy in an area which is economically growing the value of your property will most likely grow as well.
Renovate to Flip
Buying a property to renovate and sell comes with a higher level of risk and will require you to be very disciplined in your approach and actions. A renovation can be simply and superficial such as a tidy up, replacing a few broken/old items and general paint. A more complex renovation may require a redesign of the property and total refit of the kitchen and bathroom etc.
You may be able to undertake a simple renovation but when it comes to a redesign and refit you will need to management the project from concept to finish. You will need to have plans drawn up, submit approval applications, cost the job, explain the plans and what you want to contractors.
The key thing here is that when buying a property you need to have an idea of what can be done and what the total cost of the renovation will be, including buying and selling costs, and whether after all these a profit can be achieved.
Flip or Flop with Tarek and Christina El Moussa at HGTV is worth checking out to see what can be achieved.
Real Estate Development
This is the ultimate path to financial freedom regarding real estate and where real money can be made but the risk level is raised again. It maybe as simple as buying a property to add an additional house on the site or purchasing vacant land to build multiple properties.
This strategy requires larger amounts of money and debt to fund projects as well as far more planning. It’s probably not for the novice and unless you have had experience you will need to get help from professionals in this field to advise you.
In saying this, it is certainly something anyone can aim to achieve as part of a longer term strategy. It is our opinion that exposure to a couple of successful renovate and flips would be advantageous prior to taking on real estate development.
Tips
The important point to remember is that all these strategies rely on paying the right price for the property, “your profit is made when you purchase”, don’t pay too much.
If money and confidence is an issue go into partnership, preferably with a Plumber, Electrician and Carpenter. When renovating to flip or undertaking real estate development their skills and contacts will be invaluable and they can also undertake some of the work to reduce costs. Having partners also reduces the financial risk of each project which can be a god send when starting out.
