A lesson worth learning is that if something is working well, don’t try to change it. When you reach a point where your portfolio is growing well and generating good cashflow, it can be tempting to want to branch out and try something else.
Stay clear of commercial and time-consuming deals
I have personally seen too many investors who are struggling to build a portfolio give in to the temptations of developing, subdividing, or buying commercial property. I should say right now that it’s definitely possible to make money out of it; but it’s just a completely different kettle of fish in terms of the rules and higher stakes so be warned.
Many of the individuals that I tutor find it hard to purchase deals where they can add value to get a 10% return, therefore some of them have decided to follow the strategy of building a minor dwelling unit (MDU) on a property in order to get the yield up.This is all well and good, but it can be very time-consuming. In a hot market it can take three months to get approval from council. Then there’s the problem of getting a builder to do the work within your time frame and the whole thing can take 12 months or more. If you want to recycle equity (definitely the way to keep going and build a portfolio), at this rate it would only be possible to do one or two of these deals a year.
With a good portfolio under your belt, a commercial deal or three can be very tempting. One of my students made $1 million in 12 months – but he had to work on the deal full-time and was unable to do anything else. Commercial property is far more risky than residential (as I can tell you from bitter experience) so I would rather do several residential property deals than put all my eggs in one basket with one big commercial one. The strategy that works for me every time is cashflow, cashflow, cashflow with a focus on dual income properties, cosmetic renovations and then buying the occasional capital growth property. I’ve resisted the temptation to branch out into something different and I’ve stuck with what works. The same strategy continues to work for me to this day.
|For further reading on Property Investment NZ, click on the articles below:
Setting Goals for Financial Independence – click here
Tips for Becoming a Property Expert – click here
Buying Rules for Property Investment – click here
5 Tips to Add Value through Renovation – click here