When someone buys a property cash cow with future development potential they are literally putting over $1m into their future. But there’s a catch. The money comes in over time, not in one lump sum and only if they hold it for long enough!
That doesn’t excite some people. They think a million-to-one shot of winning it all immediately via an actual lotto ticket is sexier than a guaranteed return over time. Smart investors see that a guaranteed return over time is the one to get excited about.
Timing the market is just as important as time in the market. You need to buy and hold property to see a substantial return. Unfortunately, some people forget about the hold part.
The Melbourne and Sydney property markets have been delivering fantastic returns for a number of years. Given the strong growth, many people have felt compelled to buy an investment property, but they’ve leapt into the market with the intent of only holding on to the property for a couple of years and making a huge return. They’re convinced they can earn big bucks fast, then cut and run. However their plans haven’t always turned out as they expected. The fact is that investors who do best in the market hold onto their properties long-term.
Maybe it’s those renovation shows on television that lead people to believe that property is a short-term play. On those TV shows, a cute young couple buy a dump, fix it up and sell it for a mint in a matter of months. But in real life, investors who’ve tried this are often hit by unexpected costs, difficult renovations and poor resale returns. Sadly, in some cases these misadventure have even led to the break-down of marriages.
RP Data is a leading property information service in Australia. When figures from its ‘Pain and Gain Report’, show that a percentage of properties resold recorded a gross loss on the previous purchase price, that’s hard to believe when you consider how quickly property prices are rising in many capital cities. Naturally you’d assume that the majority of these losses would be in regional Australia, where property prices haven’t seen the same growth as the cities. But RP Data can sometimes tell us that losses were recorded across capital cities.
What did these property owners do wrong? Again, we can go to RP Data for an answer. Its report informs us that properties sold at a loss were owned for an average of only 6.2 years, while properties sold at a profit were held for an average of 10.2 years. Properties that doubled or more in value were owned on average for 17.5 years.
When it comes to making money in real estate patience is a virtue. Ideally, you should aim to buy an investment property, make a great cash flow return and hold for the long-haul. Property prices usually move in cycles – they go up, then they go down, then they stabilise until the next rise. Everyone wants to buy when the market is down and sell when the market is up, but most investors do the opposite! They buy at the peak and have to wait years before the next boom. A clever investor will look for high returns with low risk. They won’t over burden themselves with debt. They will build their cash flow because cash is king and oxygen for your portfolio. Interest rates have been low for a long time, but if the American economy continues to strengthen, interest rates will soon be on the rise. Anyone stepping into the market should be prepared for interest rate rises. Long-term investors now need to be looking for well-priced properties that will reach their capital gain goals over time.
But short-term investors, desperate for fast money, tend to buy with unrealistic expectations. That can be dangerous. New figures released in April show that Sydney house prices are set to fall this quarter for the first time in 18 months. If you become burdened by interest rate rises, what will you do? Will you be forced to sell your investment property at a loss?
Long-term positive cash flow investors aren’t bothered by market fluctuations, they can withstand interest rates rises and want to hold because their cash flow is snowballing. Savvy long-term investors are in a position to wait for the right time to sell their investment property and they’ll net a handsome reward when they sell at the top of the cycle.
So the longer you own a property, the bigger your pay day will be. The property market moves in cycles. If you buy at the peak of the cycle and then re-sell during a trough, you may see an average return or worse, lose money but if you own the property for 10 to 20 years, you can weather the property cycles and build real wealth.
An ongoing rent-flow is crucial to holding on to a property long term. Vacancy rates and the condition and location of the property are key. As an investor you should be looking to buy in an area that is not reliant on one industry or company for employment. Also look for an investment property close to public transport and search for properties with features like a garage, an extra bathroom or a view. Its called “convenience factor”. This will help attract tenants and provide greater capital growth returns.
The beauty of owning property is that you can see and touch it – it’s tangible. The other benefit is that its passive, you don’t need to monitor it every day or even every month. A manager will do that for you and you can focus on other things while your cash flow and equity grows in your sleep. Long-term cash flow investors that buy big blocks at the right time experience less stress and risk than short-term buyers and see greater returns. Take a hands-off approach. Get a real estate agent to manage the property – then just sit back and wait for your investment to mature.