Property investors should adopt a Warren Buffet-style buy-and-hold approach to maximise their profits, according to one of Australia’s leading property investors, who presides over a $1 billion portfolio.
Damian Collins, who invests on behalf of clients at his Westbridge Funds Management and Momentum Wealth firms, said it can take investors a decade to break even after selling one property to buy another, compared to maintaining the original dwelling.
Ahead of today’s launch of his book — Property Investing Roadmap: How to Build An Income From Property For Life — Mr Collins said he initially sold properties in a bid to realise profits in the early part of his 30-year career.
His soon learnt from the most successful investors that the “true cornerstone strategy of wealth creation” was simply to buy quality properties in good locations that generate superior long term returns — and not to sell.
“In my experience, a proven strategy for success for the overwhelming majority of investors — I would say for as many as 95 per cent — is to buy and hold a property,” he writes in the book.
“It’s that simple. By all means, look at ways to add value through renovations and improvements, but continue holding on to the property.”
Mr Collins said a sale not only put the axe on compounding returns, which get bigger over time, but also incur costs.
His new book shows costs worth about one-fifth of a new home’s value — in an example of a hypothetical investor called Jo — who sells an investment property she bought 10 years earlier for $700,000.
The house is sold for its then-market value of about $1.14 million, after a decade of 5 per cent returns, to buy a new investment property, which is expected to generate a 7 per cent annual return.
In doing so, she faces additional costs, including the real estate agent’s selling commission and marketing costs of about 3 per cent ($34,200), as well as legal and conveyancing fees of about $2000.
The windfall pushes her into the highest marginal tax bracket, with half of her $368,800 windfall subject to capital gains tax, worth $86,668. Her total sale costs are $122,868.
She has $950,000 after factoring in the sale costs and purchase costs for the new property, which includes $47,500 for stamp duty, $1000 for a pre-purchase inspection, $2000 for legal fees and $1000 for borrowing costs, totalling $51,500.
Jo ends up paying $174,368 to switch from the old property to the new one — about 18 per cent of the new home’s value.
“Is it a smart strategy? No — and for two key reasons,” Mr Collins writes.
“First, Jo’s new property needs to recoup the $174,368 she paid in buying/selling costs just so she can break even. That would mean the property’s value climbing to $1,124,368. This could take almost three years. Despite earning a higher annual rate of growth on the new property, it will take 10 years for the new property to achieve the same value ($1.86m) as if she had held the first property.”
His book outlines the rare circumstances when it is wise to sell, such as a declining area.
He said the ideal property portfolio should include half commercial property and half residential, with the mix balancing risk, rental income and long-term capital growth.