Property Investing Strategy – Part 2
Buy and Hold for Capital Growth
- Aim is to hold property that grows in value over time
- Example
- Property purchased in Sep 2019 for clients in Cannon Hill, Brisbane
- Purchase price $730,000
- Rental yield was approx 4.4% (based on 100%LVR) so would have been negatively geared
- No renovations or alterations undertaken
- Current estimated value is $1.1m
- $370,000 increase in value (50%) in 3 years
- Timing here was very fortunate as purchased just a couple of years prior to huge growth cycle
- Expectations around growth – what is realistic, what is good? This example is not indicative of every purchase.
- Aiming for areas that have high capital growth
- Often negatively geared
Why use this strategy?
- Access equity to purchase another investment
- Rent- investors can sell to help them buy an upgraded home they could otherwise afford
- Park money and earn more than you might if you left money in the bank
- The biggest reason is to build wealth to support or supplement retirement.
- 3 ways to do that
- Build equity sell some down
- Pay off some and live off of rental income (?difficult)
- Sell all and put funds into another investment vehicle that supports retirement
- 3 ways to do that
- Financial planners want to see $1.2 million nett in cash for retirement if your aim is to earn circa $60K pa in retirement
How is high growth buy and hold achieved
- Comes down to area selection
- Asset selection
- Meeting the growth fundamentals for the type of property you are purchasing.
- Criteria for a house will be different to a townhouse, apartments etc
How to maximise asset selection for growth
Location
- Infrastructure projects – transport, healthcare, university, community facilities, large shopping chains (e.g. bunnings)
- Transport corridors
- School catchments
- Population growth
- Shopping precincts closeby
- Ripple suburbs – income growth, gentrification, cafe culture
- Historic Growth – discuss
- Water
Property
- Features that suit the demographic
- Land size
- Yard
- Kitchen
- Outdoor entertaining
- Good floorplan
- Light and bright
- Low maintenance – flat block, simple garden
- Well maintained
- Owner occupier and rental appeal
Pros and Cons of this strategy – buy and hold for Capital Growth
- Pros
- Builds wealth
- With a big upswing in growth can make a lot of money
- Losses offset taxable income
- Capital growth has a compounding effect, so the sooner you get into the market the more gains you will enjoy
- Excellent passive strategy (Less moving parts. Less project mgt)
- Accessible to most people (ie – developing might not be for some people, whereas this is)
- Types of properties and areas that are typical for this strategy are usually acceptable by banks with 90-95% LVRS often possible depending on the individuals circumstances
- If held long enough, very forgiving
- Lower risk (when fundamentals followed) than other strategies
- SMSF friendly
- Cons
- Losing money so need to be able to sustain that (ie require spare cash to be able to cover the shortfall between the rent and outgoings)
- Limited capacity to repeat depending on available disposable income
- Interest rate hikes can make holding properties difficult
- Forecast growth is not guaranteed, based on speculation
What’s next
In the upcoming episode we’ll look at positive cashflow property.