Buy and Hold property Investment Strategies
A Buy and Hold Strategy is fairly simple. You as the investor purchase a property and hold it for the long-term - you don’t sell it based on short-term indicators or market fluctuations. You collect income from rent, which provides you with the cash-flow needed to hold the asset.
WHY BUY AND HOLD?
For most property investors, a buy and hold strategy is the simplest and has the lowest risk. Unlike more aggressive strategies such as property development or ‘flipping’, buying a property and holding it long-term is a relatively passive strategy, which can be undertaken by almost anyone, regardless of expertise and time commitments. You don’t need to be a builder or carpenter (or need to employ them) to conduct renovations, nor do you need to understand town planning and project management to develop new properties.
Nor is the strategy as sensitive to timing. If you get the market wrong for a new development or ‘flip’, you can be up for big losses, as you can also be if you bought a property for the purposes of short-term speculation. With a buy and hold strategy, as long as you are receiving rental income, and have a sensible financial buffer in place, you can hold the property indefinitely, weathering any short-term price falls.
This point is arguably the most important quality of a buy and hold strategy - it removes the emotions from your decision-making. Emotions, as the legendary investor Jack Bogle says, ‘will defeat you totally’. Holding the right property for the right length of time will reward you if you play the long game, and avoid getting sucked into what the market is doing on a day-to-day basis.
BUY AND HOLD PROPERTY INVESTMENT STRATEGIES
If buying the right property and holding it for the long-term is the key to success, then these are the two areas a successful buy and hold strategy must focus on. Buying a property with great investment fundamentals will give you the confidence you need to hold it for the long-term, knowing that you’ll eventually be rewarded. And buying a property that you can afford to keep for the long-term will allow you to hold it, regardless of what the market does.
The strategies below are about finding that balance - between great long-term investment fundamentals and short-term cash-flow requirements - which is the true art of successful investment. These are the strategies we use for clients at Aquila Property Investment. They are broad strategies based on intrinsic value, building design and age and cash-flow requirements and I haven’t gone into detail on which types of locations and properties to target. However, all of our strategies rest on three pillars:
Buying the Right Property Type
Buying Below Intrinsic Value
BALANCED
As the name suggests, the Balanced strategy aims for a balance between capital growth and cash-flow. Capital growth is underpinned through strong location selection, and ensuring you achieve a minimum level of land value (not buying in a high rise or large townhouse complex is a good start). Rental returns are strongest in this strategy as a result of modern improvements, with a focus on tenant appeal. Getting the extra rental return is critical. If you’re buying a newer build with lower land value and still getting a low rental yield, this negates the whole purpose of this strategy! Depreciation is increased and maintenance is reduced by purchasing a newer build, which will produce better cash-flow from the property and allow for an easier hold.
Property Value
Land Value: 20-40%
Improved Value: 60-80%
Building Age
Up to 20 years
Gross Rental Yield
5-6%
Balanced Property Investment Strategy in Action - Townhouse purchased in southern Brisbane in late 2018 for $293,500
Intrinsic Value: $356,614 - Land Value: $121,192 (34%) - Improved Value: $235,422 (66%)
Age: 16 Years
Gross Rental Yield: 6.55%
GROWTH
The Growth strategy aims for high levels of capital growth through location quality and land value. This is augmented with a building that has an attractive long-term design and configuration, which can be improved through partial renovation/upgrades in the future. There is likely to be a reduction in rental return compared to the balanced strategy, due to the higher percentage of land value and less modern build. The yield can be improved in time by upgrading the property and making it more attractive to tenants - ideally using equity gained in the property during the first 5-10 years of the investment.
Property Value
Land Value: 40-65%
Improved Value: 25-50%
Building Age
15-30 years
Gross Rental Yield
4-5.2%
Growth Property Investment Strategy in action - House purchased on the southern Gold Coast in late 2018 for $600,000,
Intrinsic Value: $639,000 - Land Value: $350,000 (55%) - Improved Value: $289,000 (45%)
Age: 19 Years
Gross Rental Yield: 5.2%
LAND BANK
The Land Bank strategy is designed to achieve the highest possible capital appreciation within your budget, by maximizing the value and quality of the land in your investment property purchase. This does come at the cost of short-medium cash-flow, which means the strategy has a higher level of risk.
The basis of this strategy lies in the superior performance of land over buildings in recent history. For example, in South-East Queensland, land has appreciated on average at over twice the rate of buildings. To maximise the growth in land value, we must select land that can achieve a high value of future construction, as this will be the main driver of accelerated capital appreciation. Depending on the area, this future construction can take the form of houses, townhouses, low-rise apartments or medium-high rise apartments. Depending on the property type you select, you may have the ability to build these future improvements yourself, or you may sell the land to a developer (at a premium) to do so.
The property itself will be older and getting towards the end of its functional life, which will limit rental return and future rental growth. Rental yield (and location quality) can be improved by choosing a townhouse or unit over a house, however, you won’t have the flexibility to develop the land yourself in the future.
Property Value
Land Value: 65%+
Improved Value: <35%
Building Age
25 years +
Gross Rental Yield
3-5%
Land Bank Property Investment Strategy in action - Apartment purchased in early 2018 for $357,000,
Intrinsic Value: $449,510 - Land Value: $308,333 (68%) - Improved Value: $289,000 (32%)
Age: 27 Years
Gross Rental Yield: 5.2%
If you’d like to discuss these strategies in more detail, or see which one applies best to you, then please get in touch for a free consultation.
