You’ve invested in your dream property. Now what? How long should the asset sit in your portfolio?
Ask the average Australian real estate investor how long you should hold your property investment and they’ll likely tell you eight to 10 years. Because that’s the average time Australian property owners tend to hold their investments and it makes sense why.
Time in the market can often trump the returns from timing the market, especially for punters who don’t have the time, patience, or nous to forecast when property markets are likely to rise and fall.
But there’s no rule or best-practice inscribed into the tablets of successful property investing philosophy about holding periods. When should you divest? How long should you hold a property investment? It depends. But at least having an idea of how long you want to hold the asset – whether a commercial or residential property – is a good idea.
Here are a few simple things to keep in mind when contemplating your length of property ownership.
Allow time for an increase in value
Enjoying the illiquidity of real estate means enjoying the gradual increase in value you’re likely to see over time.
The rollercoaster volatility of the share market is owed to investors’ ability to jump in and out of the market, the stock exchange constantly reevaluating companies as a result. Whereas real estate investors see gradual changes in their investment values due to the time it takes to transact (you’d need to value every property every day to see the same volatility as the stock market).
And from our experience, this illiquidity a good thing. As long as you allow enough time for an increase in value.
You might have enjoyed a little while of stable income from a robust tenant. Yield is of course a brilliant reason to invest in property, particularly commercial real estate which offers significant income return. But after all the effort of finding that perfect location and all the costs to purchase that beautiful asset, you’ll want to walk away without some capital appreciation.
If you bought property in Perth in 2009 and held it for ten years, you barely would’ve seen a blip of growth in the value of your asset. Yes, the time-in-the-market rule is a popular one for many property investors but it’s not foolproof. Property is an investment, after all, so there is an element of risk involved in that the value of your investment mightn’t go up – at least for a while.
The solution is patience.
History shows, time and time and time again, that real estate heads north over time. Just ask those WA investors who sold in late-2019 or 2020. In 2021, Property values in the west skyrocketed for the first time in over a decade, rising by 13.1 per cent in the 2021 calendar year, as a result of the scarcity of investments and the rock-bottom interest rates on offer.
Consider the market
We’re once again veering away from the time-in-the-market philosophy, and for good reason.
Once you’ve invested in property, it’s hard not to study the real estate market. You’re a player in a game with so many influencing factors calling for your attention – supply, demand, interest rates, employment rates, wages growth. And there are many market and economic indicators you can use as your guiding light when contemplating how long to invest in a real estate asset. You can even study property cycles. You might even work on the 18-year property cycle, made famous by economist Homer Hoyt, who discovered a consistent trend in property markets: 14 years of growth followed by four years of decline.
Your decision of how long to hold your investment property might be determined by how well you can analyse these factors and indicators.
Real estate is not a get rich quick investment and anyone telling you that it is should perhaps be kept at arm’s length. It’s not a game for overnight millionaires. It’s for long-term planners, passive income earners, and patient investors.
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Properties & Pathways is a dynamic Australian property investment company. Our completed syndicates have provided investors an average annualised return of 21.97%. For more information on how you can invest alongside us, get in touch today.