#1 – Buy-and-hold strategy
Let’s start with the hands-off, buy-and-hold strategy.
In this strategy, you buy a property, rent it out, and hold onto it for 15+ years while you wait for it to go up in value.
You can also make money through rental income and renovations, but most of your returns come from the property going up in value.
How much money can you make?
Let's say you buy a $1 million property, and it goes up in value by 5% a year (on average). In the first year, you might make $50,000. This increases over time.
But remember, that’s $50k on paper. You don’t get that money until you sell the property, but it’s still wealth you’ve made.
Bear in mind, too, that capital growth rates change. It won’t be 5% every year. It will change over time. Similarly, some properties go up in value faster than others.
For instance, Auckland properties tend to go up in value faster than properties in the rest of the country.
What are the pros and cons of the buy-and-hold strategy?
A buy-and-hold strategy is the easiest way to make money in property investment.
But it’s also the least glamorous; you just wait for your house to go up in value.
And while it’s a hands-off strategy, there’s still some work to do. You have to work with your property manager, talk to your accountant and pay the bills.
You’ll also need to crunch the numbers and do the research to buy the right property.
There are also costs involved in owning a property and holding on to it for the long term.
For instance, it’s likely the rent won’t cover the cost of your mortgage at today’s interest rates. This means properties are negatively-geared and require a top-up.
But the good news is that this strategy is lower risk than some of the other strategies discussed in this article.
#2 – Golden Goose strategy
The Golden Goose strategy is all about cashflow. It’s where you buy a property without a mortgage and live off the rental returns.
For example, you might buy a $1 million property all in cash. This property might make $800 a week for you to live off (before tax).
How much money can you make?
Under this strategy, you can make a pre-tax income of $40k for every $1 million you invest. In other words, you can often get a 4% pre-tax net return.
If you buy a $1 million property, it might get $60,000 a year in rent. That’s a 6% gross yield.
But then there are costs of owning that property (e.g. rates, insurance, management). That might come to 2% of your property’s value.
So the property makes $60k a year in rent, but then you have $20k in costs. So you get to live on $40k before tax.
After you pay tax, you might walk away with $26,800 to live on (33% tax rate).
On top of that your property may still go up in value. But since you’re investing in yield properties, it likely won’t go up in value as fast. You might get 3% capital growth a year.
So you might make an extra $30k in equity too. So all up, you might make $56,800 on a $1 million property. This is through a mix of cashflow and capital gains.
What are the pros and cons of the Golden Goose?
The benefit of this strategy is that some of the returns are in cash. Unlike the buy-and-hold strategy, where any gains you make are locked in the property.
The downside is you’ve got to have a lot of money spare to buy a property mortgage-free. Not many people have that option.
So this strategy usually works for investors who have already been in the market for a few decades.
#3 – Flipping
Flipping is an active strategy. It can easily become your full-time job.
Flipping is where you buy a property, renovate it, sell it and take the profit. It’s also generally the most romanticised investment strategy.
How much money can you make?
You can usually make $50,000 – $100,000 from a flip (before tax).
Let’s say you buy a $600k property, renovate it for $50k, and sell it for $750k. It might look like you made $100k in profit.
But then, once you take away all the set-up costs and fees, you’re likely left with just $50k (more on this below).
But sometimes, you might not make as much money as you thought you would.
You might break even or lose out. It depends a lot on the market you’re in.
It’s realistic to think that you could do one flip every few months, so the average investor will do a few a year, if you still have a job.
You also need to factor in your tax. If you do a few flips a year you can end up in a high tax bracket. For example, if you make $50,000 before tax, the walkaway could be as low as $33,500 per flip.
What are the pros and cons of flipping?
There are more costs involved in a flipping strategy. So, while you can make a lot ... you need more money to make it work.
For starters, you need the cost of renovations, as well as the price of the house (e.g. $600k property + $50k renovation).
But then you’ve also got two sets of legal fees because you pay the lawyer when you buy the house and then when you sell it.
You also need to factor in the real estate agent’s commission, marketing and home staging costs.
You’ll also pay higher interest rates because most flippers use non-bank lenders. Main banks don’t tend to lend money for flips.
But the good thing about this strategy is you get to keep the profits of your flip.
It’s cash in hand rather than equity locked in a house.
But on the flip side, you don’t get the long-term benefit of the house going up in value or the rental return.
#4 – Development
Development is the most complicated and expensive strategy.
It’s where you become the developer and build properties to sell or rent out.
How much money can you make?
About $50k per unit might be a reasonable target for a developer who is starting out.
But some developers like Mike Greer might aim for a bit higher. That’s because they’re building the units themselves as opposed to hiring builders to do the grunt work.
Let’s say you want to develop 4 units. Your land costs $500k. Then it costs you another $1.5 million to build the units. That’s $2 million in total.
Then you sell the 4 units at $600k each.
So your revenue is $2.4 million.
Take off your costs and you have $400,000. But you had to hire a real estate agent to sell the units, you had legal fees and interest costs. All of this eats away at your profit.
That’s why your pre-tax profit might be close to $200k.
After GST and income tax, that $200k is now looking like $100k – $150k.
What are the pros and cons of developing?
You can make a lot of money, but it’s very easy to go broke – especially if you are inexperienced.
That’s why this is the highest-risk strategy on this list. It can also take a lot of time to sell the properties, even if you’re working with a real estate agent to sell them.
You also have the risk that building costs blow out. This can happen because costs rise after you set your budgets or you have construction delays.
Time is often the killer for these projects because if your project is delayed you still have to pay interest on your loans. So, the bank’s interest costs can eat into your profits.
