Property Investing Strategy – Part 2
Buy and Hold for Capital Growth
Aim is to hold property that grows in value over timeExampleProperty purchased in Sep 2019 for clients in Cannon Hill, BrisbanePurchase price $730,000Rental yield was approx 4.4% (based on 100%LVR) so would have been negatively geared No renovations or alterations undertakenCurrent estimated value is $1.1m$370,000 increase in value (50%) in 3 yearsTiming here was very fortunate as purchased just a couple of years prior to huge growth cycleExpectations around growth – what is realistic, what is good? This example is not indicative of every purchase.Aiming for areas that have high capital growthOften negatively geared
Why use this strategy?
Access equity to purchase another investmentRent- 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 thatBuild equity sell some downPay off some and live off of rental income (?difficult)Sell all and put funds into another investment vehicle that supports retirement 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
Infrastructure projects – transport, healthcare, university, community facilities, large shopping chains (e.g. bunnings)Transport corridorsSchool catchmentsPopulation growthShopping precincts closebyRipple suburbs – income growth, gentrification, cafe cultureHistoric Growth – discussWaterFeatures that suit the demographicLand sizeYardKitchenOutdoor entertainingGood floorplanLight and brightLow maintenance – flat block, simple gardenWell maintainedOwner occupier and rental appeal
Pros and Cons of this strategy – buy and hold for Capital Growth
ProsBuilds wealth With a big upswing in growth can make a lot of moneyLosses offset taxable incomeCapital 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 forgivingLower risk (when fundamentals followed) than other strategies SMSF friendly ConsLosing 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 incomeInterest rate hikes can make holding properties difficultForecast growth is not guaranteed, based on speculationIn the upcoming episode we’ll look at positive cashflow property.
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