EPI157 | Residential Investment Strategies – Buy and Hold for Capital Growth

Everyday Property Investing

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
• 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.

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