There is no doubt in my mind that property investors are a unique breed. Investors in many other types of asset classes (like shares, managed funds, indirect property, deposits, super etc.) play a relatively passive role in the investment decision making process. The majority of these investors allow their advisors (fund managers etc.) to take the driver's seat and make their decisions for them.

However, direct property investors have chosen a real niche in which to conduct their business. The niche is usually too deep for general advice and given the nature of property, they need to be more "active" and treat their investing as a business rather than a passive investment. The investor is fully responsible for their success & failure, not a funds manager or share broker. They are fairly and squarely in the driver's seat.

It is a difficult role to play and an even more difficult role to execute exceedingly well.

I believe there are 3 different types of systems a property investor needs to master in order to be effective in their endeavours;
1. Property Systems
2. Money Systems – your capital, cash flow and finance plan
3. People Systems – your team and self management

In this article I will consider the first of these - Property Systems.

In my opinion there are generally two different types of residential property investment strategies;

• Passive (or defensive) strategies and
• Active (or offensive) strategies.

Passive (defensive) strategies are where the investor puts in a standard amount of effort and therefore the investment has a standard risk profile and standard return. They also typically require a normal deposit (3%-20%) and normal finance (97%-80%), they receive natural capital growth (3%-10%pa) and a natural yield (2.5%-8%). These types of strategies include:

• Cash Flow vs Growth
• Houses vs Apartments
• New vs Old
• High price vs low price
• Off-the-plan
• Special purpose

Active (offensive) strategies involve the investor making a greater effort on a more "creative" type of opportunity, which therefore typically has a higher risk profile and return. These strategies usually involve a creative deposit (<3%) and a creative finance solution (>97%). The rewards for this extra effort are instant capital growth (5%-25%) and higher yield (>8%). These type of strategies include:

• Renovation
• Development
• Unconventional

Cash Flow vs Growth Strategy
Cash Flow properties:
These are properties with a low capital growth profile of 4-6% and high rental yield (return) profile of around 6-10%. Occasionally though, the capital growth can be very high for a short while.

Advantages:

• Positive or neutral cash flow;
• Use surplus cash flow to pay down principal and obtain more equity for future investment; 
• Small entry price – easy to get started;
• Lower stamp duty & land tax;
• Occasional good equity jump due to demand for high yield properties;
• You can't lose with money in your pocket (unless you get in too late);
• Easier to get a full-doc loan.

Disadvantages:

• Pay tax along the way - money in the tax man's pocket is not going to create wealth for you;
• Slower capital growth over longer term;
• Usually regional or outer areas which can be quite sensitive to economic cycles;
• Harder to get low-doc or no-doc loans for some regional properties due to postcode & population;
• Lower leverage to reduce return;
• Potential higher maintenance of property and more tenancy problems due to social economics.

Growth properties:
These are properties with a higher capital growth profile of 7-10% (and occasionally over 12% for a short while) and a lower rental yield (return) profile of 3-5% rent (occasionally below 2.5%).

Advantages:

• Tax benefit: negative gearing and delayed CGT;
• Usually consistent capital growth over longer term;
• Usually inner and high population areas which are not affected as much by economic cycles and interest rate fluctuations;
• Easier to get low-doc or no-doc loans;
• High leverage available;
• Potential lower maintenance of property and less tenancy problems due to better social economics;
• Equity increase can be available to invest further.

Disadvantages:

• Negative cash flow if you take on a normal mortgage at a high leverage level;
• Usually more expensive than cash flow properties – potential entry barrier for beginners;
• Higher stamp duty & land tax;
• No guarantee of capital growth every year – you may bet on the wrong horse;
• Harder to get a full-doc loan to access a cheaper interest rate mortgage as your portfolio grows.

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