Residential property has been the darling of investors over recent years. However a new study by research group RP Data highlights the need for investors to adopt a long term focus rather than rushing in to buy the first rental property they can afford.
On the face of it, residential property is a very straightforward investment, and choosing a property to rent out, and hopefully, sell at a profit one day is an easy concept to grasp. The catch is that no investment is ever a sure thing, and no matter how robust the market may be, there is no guarantee of making a quick buck on bricks and mortar.
RP Data’s latest ‘Pain and Gain’ report is testimony to this. It looks at the profits – and losses, made on residential properties resold between April and June this year. It may surprise some investors to learn that almost one in ten (9.0%) homes resold during the quarter dished up a loss on their original purchase price. In fact, the average loss on these properties was $63,097. Ouch.
On the plus side, 91% of all property re-sales during the April-June quarter recorded a profit. This begs the question, what did the owners of these properties do that the loss-makers didn’t. In many cases, the answer quite simply, is that they took a long term approach.
Buying property in an area that is experiencing population growth, that offers plenty of local amenities and has good transport links will underpin the potential for future capital gains. Nonetheless, one of RP Data’s key findings is that the length of time a property is held for is directly related to the likelihood of making a profit on sale.
Tellingly, among those properties sold for a loss, the average holding period was just 5.6 years. Properties that recorded a profit on sale were held, on average, for 9.8 years. Homes that doubled in value were held for an average of 16.5 years.
One of the reasons it pays to take a long term outlook is the sheer scale of upfront purchase costs. Taken together, expenses like stamp duty, legal fees and pre-purchase inspections can add up to tens of thousands of dollars. It often takes time for a property’s value to rise to a point where these costs are not only recouped but a profit is made on sale.
Committing to an investment property for the long term – at least ten years, may sound perfectly achievable in today’s environment of very low interest rates. The thing is, there is no telling where rates will be five or even 10 years from now – though my guess is, they’ll be higher, they can’t stay at these record low levels forever. This makes it essential to be sure you can afford to hold onto the property even if (and when) rates rise at some point in the future or if the place experiences extended vacancy periods.
It’s worth thinking too about your personal plans for the future. You don’t want to find yourself in a position where you are forced to sell the property in a flat or falling market because it no longer suits your goals, budget or lifestyle.
Don’t get me wrong. I’m a great supporter of sensible, long term property investment, it can really pay off and build your wealth. Just make sure you do your homework before buying, choose a popular location with genuine growth potential, pay a well-researched realistic price, and be able to afford extra repayments in the event of interest rate rises.