What’s The Best Long Term Property Investment Strategy?

Bricks and mortar investments are safe as houses, but what are the options for a long term property strategy?

Property investment is really a long term relationship. You need to choose your investment strategy wisely. According to property consultant and head of MAP Real Estate, Michael Furlong, one of the best long term investing strategies is the one that involves buying property and holding it until the investment properly matures. That is, buying property and holding it for seven to ten years.

'People believe that you can just buy a property and sit on it for two years, make some money and get out. They're totally not understanding what the strategy of property is. The strategy of property is long term – a minimum of seven years,' Michael says.

Let's take a look at your options for long-term property investment.

Buy and hold for capital growth

This is one of the most common strategies and probably the simplest and most secure ones. It consists of buying a property, holding onto it and hopefully reaping the benefits of capital growth. Capital Growth is the term for an increase in the price of an asset over time. The value of the property increases in line with market prices. For example, what you paid $500,000 for 10 years ago is now worth $600,000 today. The property has grown in value by $100,000.

Essentially capital growth can be achieved through buying and holding an asset as property prices have traditionally grown from year to year. Many investors rely on capital growth as a certainty in life; however, the topic of Australian housing prices over the next decade is contentious issue. Furlong says the forecast is for the property market to pick up in 2013 and 2014, so riding out the storm is his recommended strategy. How much your property is expected to appreciate in value is subject to a number of factors including location, property type, time frame and at what stage the property cycle is currently in.

Residential property group, ‘Which Property’ crunched the numbers and gave the following scenarios to demonstrate capital growth and rental returns for residential dwellings throughout Australia.

The last 6 years, rental returns

"Over the last 6 years, rental returns have been stronger than capital growth in all Australian capital cities, according to RP Data. Between 2005-2011, rental growth has increased by 46.8% on average across all Australian capital cities. If a property was rented for $300/per week in 2005, the market rate would now be an additional $140.40/week approximately, which is $7,300.80 a year additional cash flow for investors."

The last 5 years, capital growth

‘Home values across Australia’s capital cities over the last 5 years to August 2012 increased at an average annual rate of only 2.4% per annum. Based on this data, a property purchased for $300,000 in 2005, would now be valued at $360,000. This growth rate has been greatly subdued since the Global Financial Crisis (GFC), which was sitting at 8.4% pre-GFC (August 2002-August 2007). As such, investors have become more reliant on strong rental yields rather than capital growth.

Generally, the balance tips between capital growth and rental yields. Renters turn to purchasing when rents go up and residents turn to renting when capital growth moves upward. This is a standard trend that is typical across the property markets long-term cycles.’

Negative gearing

‘This strategy allows investors to reduce taxable income, while building wealth through potential capital growth’, says Which Property. ‘ In simple terms, if an investor makes a loss on a property investment, they can claim the tax reduction against their income which is known as a tax offset. This allows investors to lower their tax bracket, meaning they can pay less tax.’

Which Property says that, ‘negative gearing is a strategy that can be effective according to an investor’s goals’. ‘This is a strategy that is used mainly by high-income earners who are looking for smart ways to grow their property portfolio whilst the tax departments assists with an investment property’s holding costs. This strategy does require a cash outlay from the investor, however with careful property selection the rental returns will increase over time and the property will shift from negatively geared to neutral and then to positively geared. Over the long-term, gradual rental increases and reduced tax payments, should enable the investor to recover any initial losses from the negative gearing phase.’

‘Furthermore, when the property is sold, the capital growth should more than make up for any losses and this is how wealth is built over the long-term.’

Read our in-depth guide to negative gearing

Property trusts

This strategy is often used by investors who like to mix up different kinds of assets. This approach allows investors to buy an interest in a professionally managed portfolio, just as you would buy a share in a company, which has all sorts of types of property. The money you originally invest stays with the trust until the trust ends and the properties are sold, the proceeds are distributed among the trust’s stakeholders in addition to any gains if the properties were sold for a capital gain.

The past ten years have been shaky for the listed property trust sector. The GFC exposed issues around gearing and diversification, diminishing returns over what is historically a well performing asset class. For instance, according to the Vanguard 2012 Index Chart, Australian Listed Property Trusts were among the best performing asset classes between the period of 2002 - 2012 before factoring in fees and charges. It also demonstrates the impact of the GFC on the A-REIT sector. In 2008 and 2009 A-REITs were the worst performing asset class including Australian and international shares, bonds, cash and international property trusts. Financial year total returns (%) for the sector were -36.3% in 2008 and -42.3% in 2009. In 2010, the sector showed signs of resurgence with a 20.4% average return for investors before fees and charges.

You can learn more in our detailed guide to buying property in a trust.

Learn more about property investment strategies in Australia

Compare the latest investor mortgage rates

Rates last updated November 19th, 2018
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Name Product Interest Rate (p.a.) Comp Rate^ (p.a.) Application Fee Ongoing Fees Max LVR Monthly Payment Short Description
3.89%
4.24%
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$0 p.a.
80%
Fix your rate and minimise repayments for 2 years with this interest-only investor mortgage.
3.99%
3.99%
$0
$0 p.a.
80%
Get a discounted, low-fee investor loan from a convenient online lender. 20% deposit required.
3.99%
4.13%
$0
$10 monthly ($120 p.a.)
80%
A competitive variable rate home loan with no application fee.
3.84%
3.91%
$0
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80%
Get instant online approval and flexible repayment options with this fixed rate mortgage for investing.
3.79%
3.82%
$0
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80%
An essentials variable investor mortgage with a high borrowing amount so you can fund a large purchase.
4.08%
4.13%
$600
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90%
Fund your investment purchase and offset up to $15,000. Available with a 10% deposit.
3.99%
3.99%
$0
$0 p.a.
70%
Investors with a 30% deposit can get this low rate loan to fund their property portfolio. Take advantage of split and redraw facilities.
3.74%
3.79%
$499
$0 p.a.
80%
Competitive variable investor mortgage to fund your property portfolio. You can add a 100% offset account for just $10 a month.
3.93%
3.94%
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80%
This investment loan keeps fees low, has a sharp interest rate and comes with a 100% offset account.
3.99%
5.35%
$600
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90%
Competitive rates for fixed for 3 years with redraw facility.
4.03%
3.92%
$499
$0 p.a.
80%
A competitive 3 year investor rate with principal and interest repayments. Optional offset account with a $10 monthly fee.
4.05%
4.22%
$0
$10 monthly ($120 p.a.)
90%
Lock in your interest rate on your investment property for 2 years. For a limited time you can earn double Velocity Frequent Flyer Points.
3.91%
3.92%
$0
$0 p.a.
80%
Investors can go from application to approval in as little as 20 minutes with this innovative online lender.
4.43%
4.28%
$600
$0 p.a.
90%
An interest only investor mortgage that lets you offset up to $15,000. Available with a 10% deposit.
3.98%
3.98%
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70%
Investors can get a 100% offset account and a low rate if they have a big deposit. 100% online application process.
4.09%
4.87%
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$395 p.a.
90%
Buy your investment property and set your repayments for the first year. Available in QLD, NSW and ACT only.
4.24%
4.00%
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80%
Buy an investment property and enjoy the certainty of a 3-year fixed rate with interest-only payments.
4.09%
4.40%
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Forget about rate rises for two years and minimise your investment repayments with this interest only mortgage. Requires a 30% deposit.
4.54%
4.59%
$600
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80%
An investment loan for new Heritage Bank customers. Low fees and interest-only repayments.
3.97%
3.99%
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80%
Package your owner occupied loan with investment loan and receive a discounted investment rate. 100% offset account included.
4.29%
5.33%
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$395 p.a.
90%
Lock in a competitive investment rate and combine your loan with a credit card and transaction account for extra savings. Package fee applies.
3.99%
4.62%
$395
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80%
Investors can enjoy flexible repayments and an easy application process with this pioneering online lender.
4.29%
4.31%
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Investors will pay no application or ongoing fees for this interest-only loan.
4.18%
4.18%
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80%
Investors get a 100% offset account and pay no application or ongoing fees on this loan from an innovative online lender.
4.14%
3.96%
$0
$0 p.a.
80%
Investors can go from application to full approval in as little as 20 minutes with this innovative online lender.
4.13%
4.14%
$0
$0 p.a.
90%
Access a fee-free offset account and a special interest rate for investors.
4.29%
4.31%
$0
$0 p.a.
80%
A simple, variable rate investor loan from an online lender that keeps fees to a minimum.
3.99%
4.62%
$395
$0 p.a.
80%
Investors can enjoy flexible repayments and an easy application process with this pioneering online lender.
4.90%
4.31%
$0
$0 p.a.
80%
Lock in a fixed rate for 5 years and make interest-only payments with this investment loan.
4.24%
4.68%
$0
$0 p.a.
90%
Fix your investment repayments for 1 year. You can get this loan with a 10% deposit. Available in QLD, NSW and ACT only.
4.18%
4.19%
$0
$0 p.a.
80%
Investors can easily access their equity using BPAY, a debit Master Card or cheque book with this interest-only line of credit.
4.31%
3.95%
$0
$0 p.a.
80%
A variable interest-only loan for investors. Fast application, low fees, optional offset account. 100% online lender.
4.64%
5.39%
$0
$395 p.a.
90%
Pay off your investment knowing your exact repayments for the first 4 years. Get this loan with a 10% deposit.
4.29%
4.27%
$0
$198 p.a.
70%
Fund your property portfolio with this fixed rate mortgage which includes a 100% offset account. 30% deposit required.
3.94%
3.92%
$0
$0 p.a.
80%
Lock in your interest rate for 2 years and enjoy flexibility, an optional offset account and a fast online application process.

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Marc Terrano

Marc Terrano is a Lead Publisher at finder. He's been writing and publishing personal finance content for over five years and loves to help Australians get a better deal.

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