When investing in companies, investors have at their disposal many strategies to minimize risk and maximize profits. Can such strategies be utilized when purchasing properties?
John Hallandale, 33, recently purchased a house for $15,000. He paid cash for a double block of land with a dilapidated, inhabitable two-bedroom house in Queenstown, a mining town in central Tasmania. Due to its current condition, the property cannot yet be rented, so effectively, John is losing money. Unconcerned, John views this property as the 'wild card' in a property portfolio mix akin to that of a competent share investor.
A STRATEGY
A common strategy employed by many when investing in shares - the majority of your portfolio consists of a number of companies consistently showing a profit, with a very small proportion being made up of speculative stocks.
The majority of the portfolio is concentrated in consistently performing industries, such as banking or manufacturing, or companies that are, time and again, able to show a profit. With such a share portfolio composition, in addition to possible capital growth, the investor can expect a steady income received through dividends. In light of the strong performing economy throughout the 2003-2004 period, S&P/ASX 200 companies allocated approximately two-thirds of their profits for dividend payments. Many companies exceeded dividend payment expectations, special dividends were paid and share buyback plans were offered. Australian share investors have grown to expect income received through dividends.
Delving deeper into John's portfolio, we do see that he has another 5, well-situated properties. Instead of paying dividends, John's well-located property composition provides steady rental income. He uses this income to support his mortgage debts. Not only are these properties providing steady income, but also they are also showing great prospects for capital growth.
RISK AND RETURN
On the other hand, the speculative proportion of a share portfolio, consisting in today's terms of possible mining, high technology or bio-technology companies, provides minimal or no income through dividends, but with the possibility of 'exceptional' capital growth.
John's Tasmanian purchase could be viewed as the speculative proportion of his property portfolio.
Speculative shares inherently carry greater risk. They have no proven track record. Some companies have yet to make a profit, or they may take many years to release their product to the market (such is the case with many medical or biotechnology stocks). Solely owning speculative stocks carries great risk. The risk that you may lose your capital if the company 'goes under' or the share price moves in an adverse direction. Share traders acknowledge that it is imperative to consider the risk to reward ratio. A mining company, after years of negative growth or immense losses may happen upon a deep-water oil reserve, sending the share price rocketing through the roof. A biotechnology company may discover a vaccine to a once thought incurable disease.
A LITTLE FUN
Such share selection also offers the investor the opportunity to have a little fun. They may remove themselves from the S&P/ASX 200, banking or manufacturing industries, when, for once, it is deemed acceptable to invest with emotions or to gamble. They may choose to invest in industries or companies that are close to their heart. They may choose to buy or sell based on an event that may (or may not) take place. They take this opportunity to 'gamble'.
PROPERTY PORTFOLIO
John has employed this commonly used share trading strategy with his portfolio of properties. The majority of his portfolio consists of well-selected properties, providing steady income and unrealized capital gains. Locations as diverse as Redcliffe, Dubbo, Bathurst and the Gold Coast. The Tasmanian purchase offered John the opportunity to speculate or gamble, to develop a speculative proportion in his property portfolio.
It is imperative to consider that John does not solely own his Tasmanian property. A large proportion of his property portfolio consists of properties that do return a steady income through rent, and offer potential capital gains through meticulous location selection. But he has thrown in a 'bird amongst the pigeons', an investment that has the potential to falter, or to make immense capital gains. In addition, he has mitigated his risk so that if the speculator does not perform as predicted, he can be confident he will not have to return the family house to the bank. This is due to the steady income stream being received with the other properties in the portfolio.
"When I initially purchased this property in the 'middle of no where' in Tasmania, my friends told me that I was absolutely crazy", remembers John. "They told me that now I had really overstepped the mark. Then, everyone started to talk about Tasmania as the next big thing. I even recall reading an English article about the burgeoning Tasmanian property market".
John jokes about his Tasmanian 'bachelor pad', though is in no rush to neither renovate nor sell the property. "For sure, after the council taxes are paid each year, I am losing money on this property. I don't mind. My property portfolio is well enough balanced to allow for this 'wild card'". He speculates, "Yeah, I may lose money from this if Tasmanian prices nosedive. I may lose my $15,000. I've allowed for this. But what happens if the market booms. Is it possible that I could sell for $30, $50 or even $75,000? Wow, that we be a great return!"
EXIT STRATEGIES
Lessons learned from share trading strategies should also be acknowledged in pursuing such a mix in a property portfolio. John is uncompromising. "If one is to pursue speculative properties, make sure that you can afford to lose your money spent in the speculative property".
Share investors have commonly employed 'stop-loss' or 'take-profit' exit strategies, to aid in determining when to sell. These are designed to limit the investor's loss or to lock-in profits. John is of no exception. "If the price moves above what I would like, or what I see as a profitable return on my initial outlay, and if there is a demand, I will sell it". He habitually reviews statistics on properties sales throughout the region, and has his own 'exit strategy' on this property.
John is positive in the outlook for this speculator. He has recently put it on the market for $55,000, having already received interest from various investors. If he is able to sell, he could pocket a fairly lucrative sum, when compared to his initial outlay.
John offers one last, piece of advise for speculators. "Oh, and don't be too greedy".
JOHN HALLANDALE uses to buy and sell properties.
