When you’re investing in real estate, it is very important not to go into it blindly. By this I mean, you’ve got to have some kind of strategy. A plan which you follow in order to achieve what you want.
In real estate, there are plenty of strategies which you can follow, but today I’m going to tell you a bit more about the best real estate investment strategy for someone who would like to make this kind of investing their full-time career.
I’m talking about the two-pronged approach.
What is the two-pronged approach?
Basically, the two-pronged approach consists of both capital deals and income deals. This means that you don’t only make use of either capital deals or income deals, but rather both, at the same time.
For those of you that are not familiar with the terminology, capital deals are where you buy property with the mindset of selling it as soon as possible for as big as possible capital profit. Income deals, on the other hand, is where you buy property with the mindset of keeping it for a medium-to-long-term and receiving both capital growth as well as income from this property.
Why is this strategy so unique?
When buying property using a bond, you have to go through a whole approval process from the bank. This means they look at your current income situation and try to see if you will be able to manage this mortgage on your own. If you are a first-time buyer, the chances are good that you will be able to get bond approval because you are not a big risk to the banks…yet.
The problem comes when you’re trying to get approval for your second and third bond before you have even made a dent in first. You will now be sitting in a situation where you owe the banks a lot of money and you don’t have any equity available in your bond for any deposits. I know if you’re leasing your property, your tenant will be covering most of the bond repayment (all of it if you’ve gotten a good deal), but the problem still lies in the fact that you don’t have any capital available for the next deposit.
If you’re in this situation and you keep on doing income deals, you will find that the banks will not be that generous anymore and will probably only cover about 80% or less of the total amount. If you don’t have any capital lying around, it will be difficult for you to cover the extra 20% of the total value.
This is where the capital deals come in. After you have your “long term” property, you do a capital deal and use that profit to inject into the existing bond. This capital will be seen as equity. Now you have the money available to put down as a deposit for the next deal.
Once you’ve done your capital deal, repeat the process.
For me, this truly is the best real estate investment strategy, seeing that you get the best of both worlds. The capital deals will help you so that you’re not tide down with debt at the banks and have more capital readily available to use as deposits.
I would like to hear what you think or if you have any strategies that work for you.