You can deploy active strategies either after you have sufficient passive income available to enhance your cash position or in order to generate cash that can be used as your own capital or down payment in any of the passive income strategies. As the name suggests, for those strategies you need to be more active as the returns come only one time for each deal, compared to the perpetual passive income described in the preceding pages. Therefore, we are aiming for higher returns mainly from capital appreciation, but that automatically means taking on a bit more of risk. Active strategies are also more capital intensive and time consuming compared to their passive counterparts.
Buy Below Market Value
You have heard the strategy to buy low and sell high, especially in the stock market. But how do you know when the low or points in the market have been reached, and which way it will go? Here is an easier strategy: Buy low and sell low. Just don’t sell the property as low as you have bought it for. We look for below market value (BMV) properties so we can make money when we BUY, not when we sell. Of course if you can sell it at market value, that’s even better.
You need to be sure of your two exit strategies, so in this case that first you are really able to re-sell it and second, you have another exit strategy available, such as renting it out.
Fix And Flip
Fundamentally, this is a variant of the BMV strategy above. Do you think the condition a property is in when it is being sold plays a big role in what price it can fetch? You bet! In the Fix and Flip strategy, you look for a run-down property (we call that distressed property) – the worse its condition, the better for you.
Then you get your team to renovate and refurbish the place so it looks really great. This might take a few months and capital expenditures, but it’s usually worth it as the selling price will be much higher than what you paid for the acquisition plus renovation. Before deploying this strategy, you need to be sure what price you could sell a newly renovated house or apartment in that area. If your numbers look good, go for it.
Forced appreciation means that we do not wait until the market value of our properties appreciate by themselves over time. Instead, we take things into our own hands and add value to our house or apartment. As such, it is not a strategy in itself, but used in combination with any of the other strategies.
You can probably think of a long list of improvements you can make, and they all drive up the rental potential and market value of your property.
Change Of Use
Valuation methods and income potentials greatly differ between residential and commercial properties. It is a rather complex strategy and should not be tried by inexperienced investors. Changing a residential property into a commercial property or vice versa needs approvals from relevant authorities and involves a lot of planning, capital, and time.
Do You Want To Be A Developer?
When you buy a condominium unit in a new development, guess who generally is the one making the most profit? It’s always the developer.
If done correctly, property development is often the most profitable activity within property investing. Of course it also bears more risk and time commitment.
Building up equity means building wealth for the long-term. Equity is the difference between the market value of your property and how much you owe against it. If you have negative equity (i.e. you owe more than it is worth) you have a problem and potentially your lender will ask you for more money. It’s a situation you should avoid getting yourself into.
Hold Long Term
Equity builds up more or less by itself in the long run, just by holding on to your properties. As such, it is no strategy in its own right, but can be used with any of the strategies that do not involve selling your property after a short period of time. You will need to periodically assess which of your properties you want to continue to hold on to, or not.
You can build up additional equity by reducing your loans that you have against the property and by using forced appreciation techniques.
Commercial And Industrial Properties
I mainly focus on investing in residential properties. The commercial and industrial property market does offer good opportunities for investors too. For units with good cash f low, a passive income is possible. Often, commercial and industrial properties are bought to build equity through capital appreciation though.
It is quite a different ballgame and different rules apply than in the residential market. Even within those segments, whether you buy a retail unit or office makes a big difference. Just to highlight some of those differences, I have put together a few bullet points:
- Valuation methodology is different
- Units are typically let ‘bare’
- Indirect costs like lifts, common areas lighting etc. are to be borne
- Tenancy agreements differ
- Tenants are often more willing to accept rent increase
- For a residential unit in a high-rise, the top units often fetch top prices; for retail, the ground floor units are the most expensive
There are good books out there that focus on the commercial or industrial markets that you can obtain if you are keen on investing in those types of properties.
There is no right or wrong strategy; it will always be different for different people depending on their personal and financial situation as well as their risk appetite. Please select the mix of strategies that at this time is most suitable for you and remember to review it after some time (the numbers must add up to 100% even though some of them might overlap).
The Property Apprentice Master, Jochen Siepmann, wants to share the wealth of his knowledge easily and effortlessly with you for FREE. Start your journey now to greater wealth through passive real estate income and capital appreciation with one, or all, of these FREE offers: