Updated: Jan 7, 2021
Buy and Hold strategies are not overly complicated. They involve investors making decisions around the long-term gains and cash flow of the property and not the short-term market fluctuations or indications. The strategy is very popular amongst Australians and is often the approach when purchasing their family home. While simply letting time and compounding work to improve the equity position they hold on their property.
Like with homebuyers, risk adverse investors often utilise this approach as it is considered a passive approach to property investment and is associated with a low level of risk in comparison to ‘flipping’ renovations or undergoing development strategies. This passive style of investment can essentially be done by anyone with the financial capability to buy, as buyers should always be well informed, this strategy requires little to no expertise, experience or time investment. Being educated and prepared however will result in a big difference in long term results in the choice of property you decide to buy and hold.
The holding period of this strategy means there is less of a sensitivity to timing when entering the market. Entering the market at the wrong time could spell disaster for a ‘flip’ or development, while a dip in the market is never great for your property, the key to success with this strategy is to buy the right property and hold it for the long haul. Receiving the rental income from your property will help finance the purchase and will allow investors to see the growth achieved through each property cycle and avoid the high buying and selling costs associated with each property transaction in Australia.
So, what to look for in a property?
Finding the right property and time in the market is the key to this strategy it’s essential you find the right property at the start. Sure, buying a below average investment property might still see some nice returns over a long period, but compared to the market they may have underperformed. Not being confident in your research and not buying quality properties will see you suffer huge opportunity costs when settling for sup-par properties.
No matter what approach within this strategy you take, the key fundamentals of property selection remain. You need to:
Buy in the right market
Buy in the right location
Buy the right property type
Buy at the right price
Knowledge is power and doing this correctly is essential to success. The more confident you can be in your research and knowing you are ticking these boxes will help drive the performance of your investment. So do your due diligence!
What approaches are there?
There are several approaches to the buy and hold strategy, mentioned below and your choice will generally be based on your personal financial situation and trying to find a balance between trying to find strong long-term growth, while also meeting your short-term cash-flow requirements.
The first approach is a balanced strategy which as suggested finds a balance between the cash-flow and capital growth. The capital growth component of this approach will be supported through strong location selection and the right property which has a sound land component to value. This generally means buying houses or townhouses in small developments. Rental returns are underpinned mainly through the modern improvements associated with the building that add to tenant appeal. Having an appealing property which gains good rent and quality tenants will help secure your cash-flow into the future. Having a newer property or property with recent improvements will also add elements of depreciation which will help with cash-flow. This should be discussed with your accountant or financial planner to understand better.
As suggested, this approach seeks higher levels of capital growth while sacrificing some of the cash-flow component. Growth approach is driven by quality location selection and through purchasing properties with a high proportion of land value than building value. This usually results in a lower rental demand and, therefore, yield compared to the other approaches as the building is generally less modern. This type of property does give to the possibility of renovations to increase yield in the future.
Land Banking Approach
The aim of this approach is to achieve maximum capital growth at the expense of cash-flow. This naturally brings a higher level of risk as you must have an ability to repay the debt and emphasises the importance of buying the right property. As properties with these characteristics are normally towards the end of their functional life, they will result in the personal redevelopment of the property or the resale to a developer at a premium price. Buying the wrong property in an underperforming location without the cashflow can become extremely costly for an investor and ensuring you have chosen the right property with the right characteristics is crucial to success.
So... Whatever approach or strategy you and your financial planners have decided is best for your personal situation, all good property acquisitions are underpinned by selecting the right property. Making sure you know and choose the right market, location, property and price are essential to achieving your goals.
For more information or help in finding the right property for you, contact our team now!
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