A good example of why you should hold long term

Posted by Luke Graham

Since our inception, Blue Wealth Property have been advocating for long-term holds. Even at times when ‘property flipping’ was a fad (which is usually in upward markets). We’ve spoken about the reasons before, usually at least a couple of times each year in the research blog. On some occasions we are able to share examples of property investors who successfully deployed a long-term strategy to their benefit. On other occasions, it is a less comfortable conversation about a property investor who didn’t do so, and it cost them big time.

All factors considered, holding property over a longer time horizon enables an investor to ride out the property cycle. This means going through buyer’s markets and seller’s markets several times over. A property investor who followed this strategy would experience periods of price growth, price decline, stagnation, rental vacancy and high demand, as well as demographic transformations. Enough time in the market also enables a property investor to more readily ‘spread out’ the high transaction costs in real estate such as stamp duty, agent’s commissions, etc.

But some property investors fail to hold their properties for long enough. In fact, some dispose of them as soon as they perceive temporary market indicators working against them. This could be a reduction in their weekly rent, a period of high construction activity, or even a decrease in median house price—all of which will take place at some point during the property cycle. As we have discussed before, this is usually the worst time to sell.

Recent sales data from an apartment block in a major Australian city is tangible evidence of this common mistake. Having settled on a high-yielding dwelling in this project during a mid-2017 buyer’s market, a property investor sold after just two years. CoreLogic sales data indicates this investor lost five figures from the discount to their sale price. On top of that would be stamp duty, legal fees and agent’s commission. In the 15 months since that property sale, comparable sales indicate the new buyer has enjoyed approximately 10 percent capital growth, as well as some of the country’s strongest rental performance. If the first buyer had held on for just a year longer, they would’ve ridden out the buyer’s market with a positive cash flow investment in the black.

Posted by Luke Graham, on 23rd Feb 2021