If you’re thinking of investing in a rental property be prepared to hold onto the place for the long term to achieve the best results. The latest Pain and Gain Report from research group CoreLogic firmly dispels the myth “you can’t lose money on bricks and mortar” especially if you’re hoping to make a quick profit.
Values may be rising across a number of state capitals but that hasn’t seen all investors make a profit on the sale of their property. CoreLogic found that in the June 2016 quarter, 9.5% of all properties re-sold nationally didn’t achieve their previous purchase price. In other words, the seller made a loss.
This still leaves the vast majority of sold properties turning a profit for their owner. Interestingly though, 12.3% of investors copped a loss compared to 8.2% of home owners.
There can be a whole range of reasons why a property sells for a loss. But a common thread is the length of time the property is held for.
According to CoreLogic, among those properties that failed to recoup their initial purchase price, the vendor had owned the place, on average, for six years. By contrast, properties that resold for a profit were owned for an average of 10.3 years. Property owners who doubled their money had, on average, held onto the place for 17 years.
It goes to show that as with other mainstream investments, taking a long-term position in residential real estate is generally the best policy. The reason is simple. Property prices can go through major swings that can occur with little warning.
If you buy and sell over a short timeframe you are just as likely to catch a downturn as you are a boom, and while you can make a lot of money in real estate in two or three years, you can also lose your shirt just as quickly.
The thing to be aware of is that growth in property prices does not occur smoothly over time. A relatively common pattern is a price surge of a few years’ duration followed by a price fall, in turn followed by a period of price stagnation and/or modest price growth.
The solution is to buy and hold for the long term. That way you increase the likelihood of catching a price surge and consequently generating good average annual returns.
At the very least, you need to hold onto a property for as long as it takes to recoup buying and selling costs like stamp duty and agent’s selling commission, and this will still only see you break even. Under flat market conditions meeting this requirement alone could take years.
Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.
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Renovating and reselling properties can be a good money-making exercise, or a very expensive one if you go in unprepared.