Here at APIA we are all about critical thinking and pushing our members to take a big picture approach to property. There are many ways to build
wealth with property and no right or wrong strategy in general. However, there is a best strategy out there to suit you. Jolene
and Jacek’s story highlights the difference between being a paper millionaire and an actual millionaire which compels us to really take stock and think
about whether our strategy is serving our purpose. So seeing that we are celebrating the two Js’ successes this week, lets take a closer
look at their preferred trading strategy vs the more traditional buy-and-hold we often speak of at APIA.
Related article: 5 minutes with Jolene Bagby and Jacek Baranowski
Buy-and-hold means simply as it says – that an investor buys a property and holds on to it for the long term, if not forever. It is a time honoured
strategy that creates wealth both through capital growth and long term cash flow.
A buy-and-hold portfolio typically suits a high income and time poor investor. It improves in value over time and is less susceptible to short term
market fluctuations. Because time is an essential component, a buy-and-hold strategy puts less pressure on the investor to turn an instant profit.
Rather wealth is generated through a steady stream of passive income (i.e. rent). You are not trying to turn an instant profit so there
is no compromise on your cash flow to invest in major renovation or improvement works. This more vanilla and conservative approach to property
investing also means that you have access to competitive financing rates especially as your portfolio grows. Also holding on to your properties
gives you a very good opportunity to build on the generation wealth of your family.
However, these advantages are not without their catches. Holders depend on their tenants to provide the passive income as well as look after the
property. Many novice investors either underestimate the importance of or lack skills in selecting and managing the right tenants. This
fundamental mistake can be detrimental to the profitability of the property. Those who are financially overstretched and console themselves by
focusing only on the long term outlook can fall victim to market downturns. Make sure that you do not leverage yourself to the halt with second
or even third mortgages just because you can access those funds during the good times.
More commonly referred to as flipping, trading is when an investor purchases a property with untapped potential, explores them and resells at a
profit. More often than not traders sniff out below market deals, carrying out big scale property improvements to bring the property up to market standard
and sell it at a profit.
The competitive edge trading has over buy-and-hold is how quickly this strategy can turn a profit for the investor. Your cash is not trapped in a
property for the long and is extracted out (along with the profit) as soon as the property sells. For this reason trading is often considered
by lower income investors who have a DIY can-do attitude. Since you are not in the market to buy properties but rather potentials, your initial
cash outlay is likely to be less than that of a buy-and-holder investor. By not having to be a landlord, you are also saving yourself from the
hassles of dealing with (bad) tenants. Psychologically it is also more rewarding to see instantaneous profits being made from your property activities
which can boost your confidence and keep you motivated.
But there are a few drawbacks with trading. The biggest one has to be tax. Trading comes with its own set of tax rules that are a lot more
onerous than a buy-and-hold strategy. You would be wise to set up appropriate structures and implement disciplined tax protocols with the advice
of your accountant to ensure that your trading activities are not interrupted by IRD audits and penalties. Finding a good property to trade is
not as easy as it seems. Novice traders should seek guidance from those who are experienced with hunting down the deals and seeing the potentials
that no one else can. Home improvement TV shows these days delude may of us into thinking that adding value to a property is easy. That
is not often the case. To improve a property in a cost and time efficient way takes experience and good industry connection. Also trading
can be incredibly expensive if you do not have the cash reserve for the improvement because short term loans often come at a higher interest rate.
So, you can see that both strategies have their advantages and draw-backs. Buy-and-hold is suitable for higher income investors who have the luxury
of time to see the investment through many years to come. Trading can bring phenomenal profit especially in this market if done right. Whatever
strategy you choose always be mindful of your overall purpose for investing as well as the time and resources you have to wait out for your final reward.
So what is your preferred strategy?