Why we love the traditional Buy & Hold Property Investment Strategy - and you should too!
By Adam Grocke (7min read |Beginners/ Intermediate)
The Buy & Hold property investment strategy is the best choice for you, if it’s your first property investment or if you have 30 years to build up your property portfolio. The good news, if executed correctly: It’s a lazy, foolproof strategy, that has a high chance of making you money over time.
As I said, you basically don’t have to do anything. Even if you pay too much from the beginning and invest in the wrong area, you should still make money over a period of time. The other good news is that you will not have any worries because you can hire a property manager who will take care of everything for you. How good is that?
Buy & Hold is the most commonly used strategy amongst Australian investors and a great entry level investment, because
A) It’s simple, less knowledge is required
B) A smaller amount of capital is required
C) It comes with reduced risk compared to other strategies
This strategy is lower risk compared to the other 4 property investment strategies because you hold the property for a longer period. Meaning, you increase the likelihood of achieving capital growth and are less reliant on picking the bottom or top of the property market.
Also, the longer you hold the property, the less likely it is that you will notice mistakes you have made along the way. For example: if you paid 5% too much for the property initially, in 20 years that 5% will have been overtaken by inflation and property price growth, making it far less noticeable.
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:
There are so many variables that affect the property market and determine how long the market will remain in each phase 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 enjoy the long-term effects of a rising and boom market. Obviously, the perfect shorter-term 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 keys to this strategy are:
1. Get advice if you are not comfortable that you have the time or expertise to follow the steps below
2. If you want capital growth, focus on Location Location Location! Properties close to the CBD, transport, beaches, schools and major shopping centres generally outperform other areas
3. Research the property and the area. Know what other houses have sold for, what the future plans are for the area, what houses in the surrounding suburbs are worth. You can make good money from buying in a suburb that is next to or in between higher priced suburbs
4. Purchase for the right price. Time and time again this is where I see people making the most money
5. Have a clear time frame that isn’t too short
6. Have a plan and stick to it. Will you sell the house in 10 years to make money or pay off the loan to have an asset that generates your income? Both strategies are good but vastly different
7. Have a savings “buffer” or “plan of attack”, so that you don’t need to sell the property if something unforeseen happens. Otherwise, you can lose a lot of money unexpectedly. I recommend at least 6 month’s worth of loan repayments saved as a buffer to cover you if you lose your job or have unexpected maintenance bills
8. Ensure you have the correct ownership structure to tackle CGT issues in the future
Also, remember that the value is always in the land because land appreciates in value. The house itself will depreciate in value as it gets older. Therefore, focus on desirable locations that have or will have limited new developments of land in the future. This ensures the economics of supply and demand give you the best chance of capital growth.
If you’re an astute property investor or you want to generate better yields from a buy and hold strategy, you should consider a commercial property. However, it does carry more risks, and it’s important to know the key differences between investing commercial or residential properties.
Let’s have a chat today and plan your next steps, call us on 08 8303 0300.