APIA Blog

RSS Feed

Do I hold or do I flip?

Wednesday, April 27, 2016

 

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

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.  

Trading

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.

Verdict

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? 

 

 

 

 

 

Recent Posts


Tags


Archive

Introducing Our Partners
Principal Sponsor - Kris Pedersen Mortgages & Insurance logo Gold Sponsor - Barfoot & Thompson logo Gold Sponsor - CoreLogic logo Keith Hay Homes logo Maintain To Profit logo The New Zealand Property Investors' Federation logo
09 360 2376
info@apia.org.nz

The Tenancy Practice Service and TPS Credit Control work closely with the Auckland Property Investors' Association. Our vision of bringing helpful resources, documents and high quality services to Auckland Property Investors and Property Managers is shared by APIA, so its a partnership that works well. 

The Auckland Property Investors' Association is a great organisation for those who want access to advice and information from a range of industry experts and partners. 



Mathieu Holt- Managing Director, The Tenancy Practice Service & TPS Credit Control
Through the Association I found the channels and methods to fund the purchase of property I never dreamed about. Grant Brown

All round it has been one of those things Neil and I felt was really worthwhile belonging to. We have learned so much it has just built our confidence in what we are doing.

Janice Bieleski
I read two articles in the monthly magazine that saved me over $5,000. That is my membership fee for the next 26 years and I am sure I will learn a whole lot more! John Duncan
Fantastic organisation. The networking opportunities are brilliant and provide us with information and opportunities that cannot be obtained anywhere else. We learn something new at every meeting and we've been in this game for nearly 20 years. Pauline and Gyanen Kumar

I find the information obtained from various APIA meetings very useful in guiding my own property investment and rental management.  I also enjoy the networking opportunities with like-minded investors.  I am inspired by other investors’ success and find the more experiences and knowledge that I share with others, the more confident I become.  

Thanks to all APIA event organizers and administrators for your brilliant work. 

Stella Shao

I like talking to people and learning from their experience because it gives me the confidence to invest well. I think it is a knowledge thing. I now know I am doing things the right way.

Stephen Weatherall

My APIA membership has become a total success.

Every time I attend a monthly or regional meeting I come away with so many useful and positive tips that have added value to my property investments and management.

Not only that, the website is a great place for practical advice and useful information. It has now evolved into an important resource for my business.

Talk about value for money! The discounts I have been getting at Bunnings when I present my APIA membership card have more than paid for my annual subscription!

Tim Duffett, Plan A Investments Limited