Buy and Hold
August 29, 2014
Investing in property is an increasing trend and it’s great to see. Major new research by Roy Morgan shows almost 1 million Australians (aged over 18) owned an investment property in 2010 compared to 1.31 million today – an increase of 37 per cent. In addition, latest data shows a record 40 per cent of new loans issued in the month of May were for investment purchases. Fantastic stuff.
Here’s the flipside.
If 1.31 million people own an investment property today, that means only 7.5 per cent of the population aged 20-plus are invested in real estate*. In a country that loves property, that is extraordinarily low.
In addition, figures from the Tax Office released in 2013 show almost 73 per cent of property investment owners have only one investment property. A study by the Australian Housing & Urban Research Institute also shows that one in four investors sell within the first year – nowhere near to see real capital growth; and only 41 per cent retain their investment properties for more than five years.
This isn’t the way to look at property investment. While I applaud our 1.31 million investors, the truth is most of them won’t make real money unless they hold for the long term. And if they’re investing for future retirement, they’re more than likely to need more than one asset to maintain their lifestyles.
The good news is that with some simple planning – and your accountant can help you with this, you can safely afford to buy more than one asset and hold these assets for the long term.
Buy and hold
Buy and hold is the easiest form of real estate investment and history shows it’s a great strategy. Buy the asset, never sell it; and draw on the equity it creates over the years to buy another property. The trick is making sure you can cover all the expenses that go along with an investment property.
According to the ATO, two out of three investors are negatively geared and this is probably one of the reasons why so many investors sell too soon and/or only own one property. If you’re struggling with expenses, consider whether you are claiming every tax deduction available to you. Do you have a depreciation schedule? Are you keeping every single receipt for your tax return each year? After tax, you might still have a shortfall so you need to make sure your income will cover it. A buffer in your cash flow planning is an absolute must. Remember to plan for inevitable changes such as a rise in interest rates; as well as potential changes, such as the loss of your job or starting a family – both of which would significantly reduce your cash flow.
Buying more than one
There’s been a lot of discussion lately about the retirement age and the Federal Government’s proposal to increase it to 70 years as of 2035. People are right to be concerned about how they’re going to fund their retirement but instead of worrying about the pension, I think younger Australians and families should be spending more time and energy generating their own wealth to fund their own retirement. Wouldn’t you rather a few unencumbered properties delivering you an income every month instead of a pension cheque that’s only ever going to cover your most basic needs?
Real estate is one of the safest investment avenues available, so buying more than one is a smart step. Two things hold people back – simple fear; and making a mistake with their first purchase. Ideally, the first purchase – either a home or investment, should be a solid asset that over time will deliver the equity you need to borrow and buy again. If you make a mistake and buy a dud, you’ll have to fund the deposit on the next one out of savings and that can be tough in expensive markets.
The key to being able to hold assets long term and being able to buy more than one is purchasing good quality properties in desirable locations. You can equate it to buying a blue chip stock versus a speculative stock. The blue chip might be boring, it might grow in small bursts over a long period, but it’s safe and reliable and you can count on a positive outcome long term.
If you already own an investment property that is negatively geared and you’re concerned about the cash flow shortfall, here’s a solution you might not have thought of.
In any balanced portfolio, you need assets that deliver high growth and assets that deliver high yields. With some simple research, you’ll discover that it is entirely possible to buy a cash flow positive property to balance out that negative cash flow asset. This is particularly so in regional markets where rental yields are often 7-8 per cent versus the 4-6 per cent you might get in a capital city.
Finally, don’t let fear hold you back. Think about the capital growth you are missing out on with every month that goes by. Believe me – inaction is likely to cost you more money than anything else!
*Based on ABS Australian Demographic Statistics Dec Qtr 2013