Many won’t know the difference. You’ll know after you read this article – you’ll understand the distinction between a property trader and property investor. You’ll find out the pros and cons of each so you can make a more informed decision about whether you’d like to be a property trader or property investor.
Are you a property trader or property investor?
Of course it’s possible to be both a trader and an investor. However it’s important to know what activities make you a trader – and what would make you an investor.
Watch the video or keep reading…
Property trading
Do you plan to:
- Buy an existing property to renovate/refurbish, then sell?
- Buy a property off-plan to sell once complete?
- Buy an existing property, subdivide a portion of the land, then sell the subdivision with or without a dwelling?
Then you’re a property trader.
Property investing
Do you plan to:
- Buy an existing property to hold?
- Buy an existing property to renovate/refurbish and hold?
- Buy a new property to hold?
Then you’re a property investor.
What’s the difference between a property trader and property investor?
Property trading and property investing are two different things.
Property trading is when you are changing an asset to add value and selling it in a relatively short period of time, ideally making a profit in the process.
Property investing is purchasing an asset and letting time do its thing with the ideal outcome that it improves in value over that time.
There is no right or wrong with these two options however there are pros and cons for both. There are also different tax implications for capital gains tax (CGT) and goods and services tax (GST) that need to be taken into consideration.
Pros and cons of property trading and property investing
Property trading
Property trading normally requires more time and experience to do well.
In general, there is more risk and potentially more return.
This is certainly not for everyone however that is not what the craze of the home renovation shows will have you believe. Unfortunately, these shows paint a picture that it is a lot easier to make a profit than it really is.
My advice for people wishing to start property trading for the first time is to expect to make a loss or if you are lucky break even, with your first or maybe more, attempts.
There are a lot of moving parts that need to be taken into consideration throughout the process and timing is crucial.
If you are going to do it, don’t stick your toe in: be prepared to make this a career or part-time career so that you can learn the ropes, make good contacts as well as mistakes that you can learn from for next time.
As time goes on you will get better at identifying opportunities, improve your processes and hopefully increase your profit margins.
This is a good outcome however this is not always the case. I have seen good relationships break up over a single project. It can be very stressful and incredibly taxing on resources – time and money.
There are courses you can attend to help you understand how to do all of these things. They are usually not cheap but can offer a lot of valuable information. However, all education and theory aside, the proof is in the pudding when it is out of the classroom and into the marketplace.
Some people that do this will be successful… yet the majority won’t.
What we have found is that most people are very busy doing what they do: work, family life, sport, social time and ideally a holiday once in a while – is that too much to ask?
As much as the thought of property trading is a romantic idea (or at least the successes it may bring) – it is not an option for most people.
Differences between property trading and property investing
The table below is a general comparison between trading and investing. Every person’s situation, knowledge, and experience is different; some of these may or may not apply to you.
| Consideration | Property trading | Property investing |
|---|---|---|
| Experience | High | Low |
| Time (set up) | High | Low |
| Time to hold property | Low | High |
| Risk potential | High | Low – High |
| Return potential | High | Low – High |
| Resources required | High | Low – Medium |
| Approach | Proactive | Passsive |
| Process for success | Many moving parts | Proven formula |
| Tax | GST and / or CGT may applySee the Property section of the ATO website for tax information about:
|
GST and / or CGT may applySee the Property section of the ATO website for tax information about:
|
Property investing
So how can you benefit from the asset class known as real estate?
A more passive way to generate wealth through property is investing.
Do you know anyone who has ever bought a property and it has gone up in value?
You may even know more than one. Not every property goes up… but it should if the basic ingredients are in place – and you avoid rookie mistakes (such as these rookie mistakes when building an investment property).
Property values move at different rates and different times depending on the type of property, location and market conditions.
Successful property investing is a formula.
If you want organic capital growth for your investment, there needs to be population growth in that region which is sustainable. This requires a diversified range of industry and employment, infrastructure and amenities including both government and private investment.
There also needs to be a scarcity of land and a scarcity of properties which causes less supply and more demand. For an example of how to use this formula, check out this article on why baby boomers give valuable clues about the best places to invest in Australia.
So in summary, the success factors for capital growth are:
- Population growth
- Diversity in industries and employment
- Infrastructure
- Amenities
- Scarcity of land and properties
Property investing, if done correctly, can be less risky than property trading but still very rewarding financially.
You still need to have a basic understanding of what’s involved in property investing.
Have a good finance strategy in place.
A great team in your corner.
And let time do its thing.
It is not a get rich quick scheme – so don’t let anyone tell you it is. Beware of property sharks.
There will be cycles of up, down, and across. But if you put buffers in place and mitigate risk, you will weather the storms – and ultimately improve the financial position for you and your family for generations to come.
Summary
- Property trading and property investing are different
- Trading is more short term, high risk and potential reward, many moving parts
- Trading can be stressful and time consuming
- Don’t be fooled by home reno shows showing how ‘easy’ it is to flip a house for profit
- Investing is more long term, lower risk and good reward, with proven formula for success
- Investing is not a get rich quick scheme – you still need a solid plan
So are you a property trader or a property investor?
Happy trading and investing!
Yours in property,
Nick
