Strategies are ways you can achieve your goals. In many situations, there are multiple ways to achieve a goal available and the same is true in property investing. I will be introducing you to some of the common strategies. It is your task then to identify those that work best for your individual situation. It is important for you to review and adjust your strategies from time to time as the property market and the economy changes and your own personal situation might change.
The Property Strategy Pyramid
There are three principal ways how we can make money in property:
- Passive Income: Regular cash flows from rental
- Active: Buying and selling properties within a reasonably short time frame
- Equity: Building long-term wealth through appreciating property prices (and potentially paying down mortgages)
I call these three ways ‘elements’ and these elements should build on top of each other like a pyramid.
At the bottom of that pyramid should be your passive income that serves as the foundation and from a timing perspective should be built up first. The strategies that give you passive income are focused mainly on regular positive cash flow; your income from those properties is higher than your expenses.
In the middle of the pyramid we have active strategies that focus mainly on obtaining cash from buying and selling properties as one-time deals. The cash that you have generated from those strategies might be re-invested into either another active deal or to generate additional passive income.
Finally at the top of the pyramid is equity, which pertains to any of the strategies that involve holding your properties over extended periods of time, sometimes decades. As the value of your portfolio increases, you are automatically building wealth without actively doing anything. Doesn’t that sound good?
Passive Income Strategies
Passive Income strategies are the stepping-stones to your financial freedom and as such, are very crucial. You have achieved financial freedom once your passive income exceeds your expenses. The strategies that give you passive income are typically low risk and long term and focus on monthly income and less on capital appreciation. One beautiful advantage is that they only require work in the beginning, but after that, the money keeps coming perpetually! Most important is that from each property you acquire, under any of the passive income strategies, a positive cash flow is resulting.
Buy To Let
Buy To Let is one of the easiest and most straightforward strategies available to you. It simply involves you buying a property and renting it out. Some of the challenges lie in finding the right property in a good location, getting it financed, and renting it out.
Remember that we aim to make money on the day we BUY the property, not when we sell, so you would want to find a suitable house or apartment that is being sold below market value in an area where there is a high rental demand. Depending on its condition, you can either rent it out straight away, or renovate, refurbish, or re-decorate it in order to increase your rental value.
Fundamentally, this is also a Buy To Let strategy, but with a twist. Many countries help financially challenged residents obtain a place to live by paying the rent for them. For you as a landlord it would mean that after having acquired the property, you would rent it out to the local council, city, or government.
The key advantage of that strategy is that since the authorities are your tenant, you are virtually guaranteed to be paid on time and have no void periods. If you are worried about what condition they might leave the property at the end of the contract, put a clause into the tenancy agreement that at the end of the tenure the tenant has to hand back the property in exactly the same condition it was in when the agreement started.
Houses Of Multiple Occupation
There might be different terms being used across various countries such as Houses of Multiple Occupation (HMO), Multi-Lets or Flat-sharing, but the concept is the same: You rent out the rooms in your property to separate individuals. If you have an apartment with four bedrooms, you could rent one fully-furnished room each to four different people who will then share common facilities like the kitchen and living room.
Advantages of this strategy are: First, your income is higher compared to renting out the same apartment to only one single tenant and second, a lower risk of voids.
Lease Options as well as long-term Buy Options are relatively little known, yet powerful strategies. Options are legal contracts that allow the seller (i.e. the current owner) to retain legal ownership of the property and the buyer to treat the property as if it belonged to him or her during the duration of the contract, which is typically a number of years. That includes the right to change, renovate and rent it out, and keep all the income. The difference between these two contract types is that in the case of a Lease Option being agreed, the property falls back to the seller at the end of the contract period, whereas in the case of a Buy Option, the buyer has the right, but not the obligation, to purchase the property from the seller at a pre-agreed price.
Why would the current owner do such a thing? One reason would be if the owner moves abroad for a period of time for an overseas assignment, or more commonly, if he cannot pay his mortgage payments anymore and wants to avoid foreclosure. In the commercial market options are more common, as often the owner prefers not to sell, but to lease out his property.
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: