Why 'buy and hold' strategy works
The 'buy and hold' strategy of real estate investing is seen by many as the safest and most consistent method for inexperienced real estate investors to proceed. While typical investing involves a degree of risk when entering and exiting, the property market (due to its long-term nature) is a very effective vehicle at averaging out the peaks and troughs of market fluctuations, making for a smoother market cycle. This is even more relevant as younger investors are choosing to enter a property market brimming with potential.
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Investing in property as a method of generating recurring income or as an appreciating asset is an excellent decision. There will always be a demand for well-priced homes in good locations. The key is to successful property investing is being properly informed about all aspects of the process prior to making decisions. Having a trusted agent by your side will help you every step of the way.
Diversifying your portfolio
The ‘buy and hold’ strategy is a good way to diversify a real estate portfolio and can benefit investors by delivering short-term yields through rental income as well as long-term gains on the value of the property. Choosing the correct rental area will result in being able to charge a viable rental amount for the property in question and deliver predictable returns on your investment. Letting your property to students is a very popular choice within an area suited to the student demographic and it comes with the added advantage of letting the property on Airbnb during the campus holidays.
Another positive of this investment method is the ability to build equity in your property with every passing month. The rental amount paid to you every month can contribute significantly toward the monthly bond repayments on that property. This in turn means that with every month your ‘debt-to-asset ratio’ shifts or, simply put, that the amount owing on the bond decreases and your equity share in the property rises. With the option of you making additional payments toward the bond, you will be able to pay off the loan sooner and save on interest incurred. It is strongly recommended that you make use of a bond originator that will be able to secure your purchase as well as get the best rates for your loan. Be mindful that you undertake thorough credit checks and a vetting process to ensure prompt monthly payments and that your property is well taken care of.
If you choose to take a bond in order to invest in your ‘buy and hold’ property, you will be able to eventually leverage further credit based on your paid-up equity in that property. This means that you will be able to invest in another property, based on the positive bond repayment of the current property. (This would of course also depend on your affordability and ability to come up with a relatively good deposit amount.) Through careful management of your available lines of credit, you will be able to increase your equity stake in multiple properties in as little as five to ten years. This method of wealth creation is generally more stable when compared to the option of ‘buying to sell’ which does not create any type of passive income.
Look out for a good deal
A good tactic when entering the world of real estate investing is to look out for a good deal. Buying a property that requires no work and is in prime location would be the perfect turnkey investment. There is, however, some merit in buying a property that needs a little work. This allows you the opportunity to do a minor facelift and give the property a bit more of a contemporary appeal. A fresh coat of paint, and some up-to-date fixtures and fittings will allow you to charge more rent than you would have initially. Having a good relationship with your agent will give you first-hand insight into the market and will allow you to take advantage of good opportunities.
An important point to note for all potential ‘buy and hold’ investors would be that not everything is sunshine and roses. The maintenance of the property is your responsibility and it is vital that you have an emergency reserve of funds available should you need to undertake repairs. On average, it is recommended that you allocate between 10-20% of the annual rental income toward property maintenance. It is equally imperative that you have comprehensive insurance cover for life’s unforeseen circumstances. A burst geyser could dampen your mood and budget if you do not have adequate contingency measures in place.
The ‘buy and hold’ strategy is a tried and trusted method for investors that are new to the market and can be very rewarding if you have done your due diligence and have a sound financial management policy in place.
About Tim Greeff
Tim Greeff, regional director of Greeff Christie's International Real Estate
