In property investment, there is no shortcut to success. For most investors, being successful in the venture entails patience, dedication and hard work— after all, wealth-creation comes down to ‘time in the market’ and not ‘timing the market’.
CoreLogic reported in 2015 that properties sold for a profit were often held for almost a decade, while properties sold at a loss were owned for only an average of five years. While you reap the benefits of capital growth as you jump from property to property and especially towards the end of your journey, the duration of time that you’re holding onto your asset will see you profit from cash flow through rental returns and tax depreciation.
In some cases, the depreciation value can be equivalent to 60 per cent of the total purchase price of the property.
Smart property investors often aim to strike a balance between capital growth and cash flow in their portfolio to be able to hold as many assets as they could for as long as possible and ultimately maximise their earning potentials.
By taking the long-term approach, they also get to recover from mistakes as they get to see full market cycles through the years and learn to navigate their way through the landscape as they experience its different ebbs and flows. Find out how you can incorporate a long-term strategy into your property investment journey:
1. Find the right location
The location of your property can very well dictate the growth that you can expect from your investment over a period of time.
Contrary to popular belief, ‘property hotspots’ aren’t always the best choice for long-term investments.
According to experts, seek suburbs that are primed for growth through thorough market research instead of looking at locations that are already well-known for being investment areas.
Areas that are primed for growth usually display a good local economy—having growth drivers such as great infrastructure, growing population, multiple industries and job and wage growth.
As long as the area shows signs of the growth drivers stated above, you are most likely on the right path, whether your research leads you to a capital city or a regional market.
In fact, RP Data reported in 2013 that resources-driven markets outshined ‘lifestyle markets’ in terms of reselling prices.
Queensland’s Gold Coast saw 35.3 per cent of resales for less than the original price, while Perth, Queensland’s Central West and Victoria’s Barwon and the Central Highlands only saw six per cent of resellers suffering a gross loss.
By seeking growth areas, you avoid inflated prices because of the lack of competition in the market and you consequently get greater benefits from the long-term investment.
2. Pick the right property
Once you have found the area that ticks all your boxes, look into properties that will fit into your long-term investment strategy.
While there will be personal preferences taken into consideration, experts advise investors to factor in cash flow in order to sustain their investment for a long period of time.
Cash flow-positive investments can help you maintain great serviceability so you can keep growing your portfolio. If you decide against selling, your asset can also provide passive income once you reach retirement.
3. Determine a good rental term
One of the ways to ensure good cash flow is to find properties that are in demand—meaning, dwellings where tenants will want to stay for long.
Long-term tenancy allows for consistent income and establishes trust between landlords and tenants, thus providing the comfort that the property is taken care of.
In contrast, while it provides increased profitability, ‘holiday homes’ or ‘short-term letting’ may give rise to issues that insurance businesses may not cover, including unexpected major damages.
It has also become a common source of tension as neighbours frequently complain about the noise made by short-term tenants.
In fact, the NSW Land and Environment Court ruled in 2013 that the short-term letting of a home in the Central Coast town of Terrigal is illegal after a neighbour complained that the noise from drunken parties happening in the holiday home caused psychological damage to his family.
It was argued that the short-term letting is in breach of the Environmental Planning Assessment Act since the definition of a “dwelling house” entails a degree of permanent occupancy. The owner should, therefore, seek approval from the local council if they want to continue the business.
The owner of the property admitted to being unaware of the way his property was being used and has since asked renters to sign an agreement to prevent the same occurrence in the future.
Making holiday homes a part of your investment portfolio entails hard work—from hands-on management of the property to a thorough negotiation with insurance companies to cover unique incidents.
Investors looking to engage in short-term letting are strongly advised to be mindful of the legislations relating to that type of business as well as the guidelines that work to protect both parties involved.
4. Choose the right repayment scheme
Once you have established your property’s place in the market, it’s a matter of successfully holding it until you realise its full earning potential.
The structure of your loan can determine the sustainability of your portfolio as well as your ability to grow it further.
For investors looking to implement a long-term strategy, experts advise using a principal and interest (P&I) loan, where the lender calculates repayments based on interest charged, loan fees and a portion of the principal balance.
By using this loan structure, you can pay for the amount borrowed and the interest owed for up to 30 years and benefit from the lower interest rates over time.
P&I loans can also help build equity as you let your tenant pay off the loan for you through rental returns. It also often allows for extra repayments, meaning, you can pay down your debt faster and immediate take ownership of the house.
In contrast, interest-only (IO) loans let you pay only the interest on the amount you have borrowed for a set period, which usually ranges from three to five years.
Interest rates could be higher and you may have to deal with increasing repayments due to the shorter repayment term, thus hindering your ability to build equity quickly.
At the end of the day, the right repayment scheme is the one that offers low interest rates as well as the ability to make larger and more regular repayments on your loan so you can pay down your debt faster.
Selecting the right structure will help you reduce financial stress should you go through major life changes throughout your investment journey, including changing jobs and having your own family.