The “buy and hold” strategy is considered by many to be the safest and most consistent method for inexperienced investors.
Younger investors are increasingly choosing to enter the property market and Tim Greeff, regional director of Greeff Christie’s International Real Estate, says 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 to successful property investing is being properly informed about all aspects of the process prior to making decisions.”
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 and 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 and deliver predictable returns on your investment, Greeff says.
“Letting your property to students is a popular choice, within an area suited to the student demographic, and comes with the added advantage of letting the property on Airbnb during campus holidays.”
Another positive of this investment method is the ability for investors to build equity in their properties every month. The rental amount they receive can contribute significantly toward the monthly bond repayments. This means every month, their “debt to asset ratio” shifts. Simply put, the amount owing on the bond decreases and their equity share in the property rises.
“With the option of making additional payments towards the bond, you will be able to pay off the loan sooner and save on interest incurred.”
Greeff recommends investors use a bond originator able to secure their purchases and get them the best rates for their 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 one chooses to take a bond to invest in a buy and hold property, they will be able to eventually leverage further credit based on their paid-up equity in that property.
“This means you will be able to invest in another property, based on the positive bond repayment of the current property. This would 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 10 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.”
Greeff advises that “a good tactic” is to “look out for a good deal”.
“Buying a property that requires no work and is in a prime location is the perfect turnkey investment. There is, however,
some merit in buying a property that needs a little work. This allows you to do a minor facelift and charge more rent than you would have initially.”
An important point to note for all potential buy and hold investors is that maintenance of the property is their responsibility and it is vital to have an emergency fund reserves available for this. On average, it is recommended investors allocate 10% to 20% of the annual rental income to maintenance. It is “equally imperative” to have comprehensive insurance cover for unforeseen circumstances, such as a burst geyser.
“Buy and hold can be rewarding if you have done due diligence and have a sound financial management policy,” Greeff says.