Investing in property and homes is one of the oldest ways to build wealth, and it can be one of the most reliable. However, success is far from guaranteed if you dive in without a proper strategy. Every year, large fortunes are lost by people snapping up homes or properties on a whim, believing that they are investors when really they are speculators dependent on luck for success. Real investors ensure their home or property purchases align with their overarching plan.
There’s no single best property or home investment strategy for investors. Renting units or homes out, fixing properties or homes up, and buying early in areas where demand is expected to grow are all different but legitimate approaches that can be very successful. So, rather than looking for the best strategy, it makes more sense to look at the mistakes that all good strategies avoid. Then, you can make sure whichever home or property strategy you choose avoids them, too.
Lack of Research
Despite the fact that homes and properties are among the most expensive things you can buy, and that most buyers will be taking on some form of debt in order to finance their purchase, many neglect doing in-depth research. A proper home investment strategy doesn’t involve buying things just because they look good or because of rumours that the value will increase. It should approach research in a much more comprehensive and systematic way.
Your strategy should clearly set out the qualities that define a good home or property based on your needs and goals, as well as how you plan to assess them. Then, you can research every opportunity in the same efficient, disciplined way, and take guesswork out of the equation. This can help you avoid costly mistakes like buying in areas with little growth potential, where home and property values are declining, or where there’s a high turnover of tenants.
Too Much Debt
Excessive borrowing is something that can derail home investment strategies that would otherwise be very successful. It’s very tempting to take on a lot of debt because borrowing money to invest more will increase your profits if your strategy works. This causes most home investors to forget that it also makes their losses much larger if they run into trouble. And in the property and home market, a lot of the possible trouble is out of your control.
Events like a tenant unexpectedly vacating a home or property or a surprise interest rate hike can cause sudden drops in income, and they aren’t things an investor can really do anything to prevent. It’s prudent, then, to keep debt payments small and manageable so that surprises like these can be absorbed. If you have too much debt, you may be forced to sell up at a potentially unfavourable price just to avoid bankruptcy.
Ignoring Cash Flow
Every home and property investment strategy for investors needs to factor in cash-flow management, even if the ultimate goal is capital gains from selling the home or property at a higher value. Home and property prices can take years to appreciate, and in some cases, they never will. If you’re spending on maintenance, repairs, refurbishments, or taxes in the meantime, it’s important to make sure you don’t run out of money before the home or property value has risen enough to sell.
Good investment strategies are self-sustaining, meaning you shouldn’t have to sacrifice your personal income or savings at any point, beyond what you’ve set aside to invest. This doesn’t necessarily mean the home or property needs to generate income. For example, if your strategy is renovating homes or properties to increase the value, ensure you buy them cheaply enough that you have capital left over for all the repairs and ongoing costs until the home or property is sold.
Underestimating Maintenance Costs
One factor that can have a big impact on both your cash flow needs and your profits is home and property maintenance. What makes it even trickier is that you cannot really predict when repairs will be needed or how much they will cost. That’s why savvy investors factor a maintenance reserve into their strategy. For landlords earning rental income from homes, setting aside 5-10% each month is usually enough to build up a sufficient reserve.
Investors using other strategies will need to allocate a portion of their home or property budget to maintenance. However, because we’re prone to underestimating these costs, it’s hard to say exactly what percentage should be set aside. The figure may be more or less, depending on things like the age of the home or property and common home issues in the area. Seeking professional home and property investment advice may help new investors to estimate these costs more accurately.
Poor Location Choice
There is wisdom in the saying “location, location, location.” While it is not the only important factor in a successful home and property investment strategy, many experts would argue that it’s the single most important factor in all of them. Homes or properties with prices that are low relative to the area they’re in make the most attractive investments, no matter what kind of strategy you’re following, but a cheap home or property in a bad area isn’t always a bargain.
Very low prices should actually make you suspicious, not make you want to jump at the opportunity. In many cases, the prices are low for a valid underlying reason, like a high crime rate, or a lack of employment or education opportunities in the area. Your home investment strategy should prioritise areas with qualities like a strong job market, great transport links, and plans for future development that will make the area more pleasant and convenient.
Conclusion
A home and property investment strategy for investors can take many forms, from buying residential homes or properties for rental income to letting out beach-view homes or apartments on Airbnb. But one thing you can be sure of is that every successful strategy helps investors avoid the mistakes described above. The purpose of a strategy is to leave as little to chance as possible, so it should include in-depth research, encourage restrained borrowing, and factor in cash flow management.
Of course, any good strategy in business, life, or investment in homes or property should account for times when things don’t go according to plan, too. Buffers and reserves protect you against the unexpected and are crucial components of any effective plan. Lastly, no strategy should ignore the foundational principles of the home and property field in which it’s being applied.
