Why Buy and Hold Can Be a Lucrative Strategy

Why Buy and Hold Can Be a Lucrative Strategy

Why Buy and Hold Can Be a Lucrative Strategy: A Deep Dive into Property Ownership Costs in Australia

The idea of buying and holding property is a well-regarded strategy, especially when considering the costs associated with frequent buying and selling. Whether for owner-occupiers or investors, the advantages of holding onto property for the long term are compelling, not only from a capital growth perspective but also from a cost-saving standpoint. In Australia, transaction costs such as stamp duty, legal fees, agent commissions, and, in the case of investment properties, capital gains tax (CGT), can quickly add up, making frequent buying and selling less attractive.

According to CoreLogic, approximately 20% of Australian homeowners purchased their property in the past five years, with 2021 being a particularly popular year for property purchases. While many homeowners are understandably driven by life changes that necessitate moving, there are significant financial benefits to holding onto a property for the long term. In this article, we’ll explore why a buy-and-hold approach can be lucrative and examine the true cost of buying and selling property in Australia.

Avoiding Transaction Costs

One of the key benefits of holding a property is avoiding the often-overlooked transaction costs associated with buying and selling. When purchasing a property in Australia, buyers are hit with a range of fees that can take a substantial bite out of their finances.

  • Stamp Duty: This is one of the largest upfront costs when purchasing a property. Stamp duty varies by state and is based on the purchase price of the property. For example, in New South Wales, stamp duty on a $1 million home would be around $40,000. This is a significant sum and can make frequent buying and selling very costly.
  • Legal Fees: Conveyancing or legal fees, which cover the transfer of ownership and other related legal processes, can range between $1,000 and $3,000 depending on the complexity of the transaction.
  • Building and Pest Inspections: To ensure the property is in good condition, buyers often commission building and pest inspections, which can cost anywhere from $400 to $1,000.
  • Mortgage Fees: For buyers who need a loan, lenders typically charge establishment fees, which can add an extra $600 to $1,000 to the cost of purchasing the property.

On the selling side, the costs also accumulate:

  • Real Estate Agent Fees: Selling a property involves paying an agent commission, which is typically 1.5% to 3% of the sale price. For a $1 million property, this could range from $15,000 to $30,000.
  • Marketing Costs: To attract potential buyers, sellers often need to pay for marketing campaigns, including online listings, photography, and auction fees, which can cost an additional $2,000 to $10,000 depending on the strategy.

Long-Term Capital Growth

Another compelling reason to buy and hold is the potential for significant capital growth over time. CoreLogic data reveals that the median property price in Australia has increased by 70.2% over the past 10 years, 157.9% over the past 20 years, and a staggering 425.9% over the past 30 years. This long-term growth trend indicates that property values, while subject to short-term fluctuations, generally appreciate over time. By holding onto a property, owners can potentially reap the rewards of substantial capital gains without incurring the costs of multiple transactions.

For investors, the benefits of holding onto a property are even more pronounced, as capital gains tax (CGT) becomes a significant factor. In Australia, CGT applies to any profit made on the sale of an investment property. However, if the property is held for more than 12 months, investors can benefit from a 50% discount on the CGT, which incentivises long-term ownership. By holding the property for a longer period, investors not only benefit from capital growth but also reduce their tax burden when they eventually decide to sell.

The Power of Equity

Another advantage of holding onto a property is the opportunity to build equity, which can be a powerful tool for future financial decisions. As the property value increases and the mortgage is paid down, owners accumulate equity. This equity can be leveraged to finance renovations, purchase an investment property, or even fund other major life expenses. For those who may need a larger or newer home, renovating instead of moving can be an attractive option, especially if it can be financed through a home equity loan.

Consider Turning Your Home into an Investment Property

For homeowners who need to move due to lifestyle changes but can afford to keep their existing property, converting it into an investment property is another strategy worth considering. By holding onto the property and renting it out, homeowners can generate rental income, which may help cover the cost of owning two properties. While this strategy comes with its own set of responsibilities, such as managing tenants and maintaining the property, it can also provide a steady stream of passive income while the property continues to appreciate in value.

Conclusion

In summary, while the idea of upgrading, downsizing, or relocating can be tempting, the buy-and-hold strategy presents compelling financial benefits. The costs of buying and selling property in Australia — from stamp duty and legal fees to agent commissions and capital gains tax — are substantial, making frequent transactions expensive. By holding onto a property, owners can not only avoid these transaction costs but also benefit from long-term capital growth, build equity, and, in the case of investment properties, potentially generate rental income. Whether you’re an owner-occupier or an investor, the buy-and-hold approach remains a lucrative strategy for those looking to maximise their wealth over the long term.

Next Steps

To find out more about how a financial adviser can help, speak to us to get you moving in the right direction.

 

Important information and disclaimer

The information provided in this document is general information only and does not constitute personal advice. It has been prepared without taking into account any of your individual objectives, financial solutions or needs. Before acting on this information you should consider its appropriateness, having regard to your own objectives, financial situation and needs. You should read the relevant Product Disclosure Statements and seek personal advice from a qualified financial adviser. From time to time we may send you informative updates and details of the range of services we can provide.

FinPeak Advisers ABN 20 412 206 738 is a Corporate Authorised Representative No. 1249766 of Spark Advisers Australia Pty Ltd ABN 34 122 486 935 AFSL No. 458254 (a subsidiary of Spark FG ABN 15 621 553 786)

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