Achieving financial freedom through real estate has always attracted people to invest in property. There are countless rags to riches stories of ordinary Australians who have managed to secure a comfortable retirement through property. Unfortunately, there are also an equal number of people who have brought on a whim, without any clear strategy or goals and have lost their fortune in the quest to get rich. If you’re thinking of entering the property market for the first time, the “buy and hold” strategy is one of the easiest and most popular strategy to use.
One of the best ways to get started is to make sure that you have an investment goal in place, and an accompanying buy and hold strategy that helps you to achieve your goals.
The buy and hold strategy is essentially a strategy where you buy the property, either as an investment or as your own principal place of residence, sit on it and wait for values to double or triple.
Before you start to invest in property, you need to make sure that the properties you buy align with your end goal. Here are some questions to get you thinking about your goals:
- What do I hope to achieve at the end of my investing journey?
- How much passive income do I want to create when I retire?
- What strategies can I use to accomplish my goals.
- Am I investing to generate cash flow or capital growth?
The best strategies are not always set in stone. If your goals change, your strategies should also change to align with your new reality. If something doesn't work, it's best to refine or throw it out for something that works better.
Know your Niche
Before we jump from goals to strategy, you should also clearly define your niche market – that is, who are the types of people that you want renting your property? Knowing your niche helps you to identify and buy the type of houses that the people you want to target desire to live in, how much they’re willing to pay in rent, and what property best meets their needs and lifestyle.
Once you know your niche market, you can focus on buying, renting and repeating the same process.
The strategy that you can use straight away to achieve your goals:
Broadly speaking, when it comes to buy and hold, there are only two popular strategies that most people adopt – either to buy property for cash flow or for capital gains.
Cash Flow Strategy
Positive cash flow is a strategy which uses the incoming rent to cover the expenses and interest repayments for that property. In some cases, these properties may give you additional money in your pocket.
A property is considered a positive cash flow property if it has a rental yield of 7 per cent. They are typically located in lower social economic areas, and are therefore generally more affordable to 80 per cent of the population.
Capital Gains Strategy
The capital gains strategy requires you to buy property closer to the CBD, in good locations and that will increase in value more quickly than cash flow properties.
Applying your Strategy
Both cash flow and capital gains strategies require that you adopt a buy and hold approach in order to get the most out of your investment. This is different to buying and selling for immediate cash gain (often referred to as flipping) or renovating with the view to selling for a profit.
Many professional investors who adopt a buy and hold approach never sell their property, they prefer to live off passive income generated from renting out the property.
It's also important to discuss your strategy with your accountant, your solicitor, your broker and your property manager. Try to involve as many people as possible, it's important that they clearly understand what you are trying to achieve, and that they do everything possible to help you to achieve your goals.
For example, when it comes to mortgage brokers, there are great brokers who have real world experience and they can help you to go further along on your investment journey, and then there are terrible brokers. One of the biggest mistakes that most people make is thinking that all brokers are the same, and they use the services of a broker to essentially find the cheapest interest rates possible. The best mortgage brokers try to understand your goals, they can advise you of the best way to structure your loans and they can help you to secure the right loan with the right lender.
Executing your Strategy
The last thing to remember about strategy is that there is no perfect strategy. Your strategy isn't the end all and be all, it should support you to reach your end goal. It can change as your lending environment, property market and life stage changes.
If you need advice from someone who can help you to get started on your investing journey, why not speak call and speak to our mortgage brokers. We can help you to structure your loan and talk you through the products and services we have available.