Less assumed knowledge, less risk and less deposit makes the buy and hold strategy a great entry-level investment. Here’s our expert advice for getting the best bang for your buck.
The ‘buy and hold’ property investment strategy is by far the most popular amongst Australian investors. This is because it’s simpler than other property strategies (such as property development or ‘flip and renovate’), requires a smaller amount of capital to get started, and comes with fairly low risk.
What is buy and hold real estate?
In basic terms, this strategy involves purchasing a property and retaining it until you’ve seen enough growth in the price to suit your financial goals, or you continue to hold the property to generate a positive income to assist with retirement. Generally speaking, you should hold the property for at least 10 years to give yourself the best chance to see price growth.
Is ‘buy and hold’ a good strategy?
If it’s your first property investment or if you have had 30 years to build up your property portfolio, you should absolutely consider this strategy. If executed correctly, ‘buy and hold’ is a foolproof strategy that has a high chance of making you money over time.
Very little. 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 can (and should!) hire a property manager who will take care of everything for you.
What’s the risk?
This strategy is lower risk compared to the other property investment strategies because you hold the property for a longer period. This means you increase the likelihood of achieving capital growth and are less reliant on picking the bottom or top of the property market. Plus, the longer you hold the property, the less likely you’ll notice mistakes that might cost you money, as your time in the market will help to average out the property cycles.
Of course, 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 the market/start of the recovery
- Rising market
- Boom market
- Slowing market
- Stagnant market or falling market
There are so many variable factors that affect the property market, especially how long each cycle will last for. The longer you’re in the market, the more cycles you’ll go through and the greater the chance of experiencing a rise 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.
Expert tips to success
- If you want capital growth, focus on location. Property close to the CBD, transport, beaches, schools and major shopping centres generally outperforms other areas.
- Research the property and the area. Know what other houses have sold for, what the future plans are for the area, and what houses in the surrounding suburbs are worth. You can also generally make good money from buying in a suburb that’s next to or in between higher priced suburbs.
- Purchase for the right price. Time and time again this is where we see people make the most money.
- 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?
- Have a savings buffer. You can lose a lot of money if you need to sell the property unexpectedly. We recommend at least six months’ worth of loan repayments saved as a buffer if you lose your job or have maintenance bills.
- Ensure you have the correct ownership structure. This will help you tackle CGT issues in the future.
- Remember the value is always in the land. This is because while land appreciates in value, the house itself will depreciate in value as it gets older. We recommend focusing on desirable locations that have or will have limited new developments of land in the future. This ensures the economics of supply and demand gives you the best chance of capital growth.