How to make money from property - Buy and hold strategy (Part 2)
By Adam Grocke
This has been used by the majority of property investors as it is the most simplest and traditional approach to property investment and reduces your risk compared to other strategies. You simply purchase a property and retain it until you have seen enough growth in the price to suit your needs/objectives or you continue to hold the property to generate a positive income to assist with retirement.
The risks are reduced because of your time in the market. No-one wants to overpay, but if this does occur you should be covered by growth in property value over the long term, say 20 years. EG: if you paid $30,000 too much for the property initially, in 20 years’ time, that $30,000 won’t matter much with inflation and property price growth. Your time in the market also helps to average out the property cycles. As with any investment (shares, bonds, currency etc.) property goes through cycles that are very hard to predict. The typical cycle consists of the following:
- Bottom of market/start of recovery
- Rising market
- Boom Market
- Slowing market
- Stagnant market or falling market
There are so many variable factors that affect the property market and in particularly how long it will stay in each part of the cycle. Therefore, the longer you’re in the market, the more cycles you will go through and the greater the chance you’ll see a rising and boom market. Obviously the perfect outcome is to purchase at the bottom of the market and sell just before the end of the boom but this is almost impossible to pick.
The key to this strategy is to purchase for the right price, have a clear time frame and correct ownership structure to tackle CGT issues in the future. Also remember that the value is generally always in the land as land appreciates in value, the house will depreciate in value as it gets older. Therefore, focus on desirable locations that have or will have limited new developments of land available.
It’s also important to know the difference between commercial and residential properties. Read more about this in my future blog - How to make money from property – Buy and hold (Commercial vs residential property)