Chapter 11:
Always buy - never sell
TO HAVE AND TO HOLD
In previous books we have strongly
advocated the principle "Always Buy Never Sell". Nothing has changed our view.
How often we see investors enter the
property market and as soon as the going gets a little tough they sell out, often losing
money. Alternatively they may, after modest gains in value, choose to sell believing this
to be the only way to realise a profit.
There are many reasons why investors find
themselves in difficulties and do not have the patience to persevere with the
circumstances that prevail.
WHY DO INVESTORS SELL ?
Property purchased at the peak of the
market or at the height of a boom is typical of the circumstances that can cause investors
to lose their nerve and sell.
Taking on more debt than is safe is another
cause. Not keeping borrowings to a level that is manageable under all circumstances.
Escalating interest rates can be difficult to cope with especially when the borrower has
failed to lock into fixed rates for a fixed term.
As serious as these factors can be, they do
not account for the major reason for impatience amongst property investors.
Failure of the investment to provide growth
over time seems to be the most common reason investors cash in property.
THE PROPERTY TIME CLOCK
If they have purchased at the wrong point
in the time clock it will take longer for the market to run full cycle. This can cover a
seven to ten year time span at worst. If they purchased at the top of a growth period they
have to wait for the top of the next peak to recover and show a satisfactory gain.
Referring to the chapter entitled "A
Simple Philosophy", we advocate buying when the market is down and if selling is
necessary to do so when the market is up. That is not always possible. If one were to
stick strictly to that principal the window to purchase would only open once every seven
to ten years.
The ideal opportunity does occur every
seven years or more and offers an opportunity to maximise growth, and sometimes income at
that time. But the long term trend moves slowly providing ample time spans for solid
growth.
PICKING THE PEAK
Buying before the market commences a major
growth phase must always be the objective. That period can stretch over an extended period
maybe as much as two or three years. Nobody really knows what particular day, month or
year the market turns. Indicators such as rental vacancies, rates of construction,
affordability and underlying demand indicate a trend that can open up an ideal buying time
but not with pin point accuracy.
Two areas of frustration can cause an
investor to sell. Firstly, buying at the wrong time in the cycle just before a market
softens and becoming aware that it will take some years for growth to return, and secondly
buying at the right time and believing that it is taking too long for the market to
provide strong growth.
Time maximises growth
Time itself is the real secret to
successful investing. Let us take property, especially residential property that is
purchased at a time that does not maximise its growth potential. Providing it is well
selected for design, location and type and it is properly and conservatively funded over
the long term, that is at least two property cycles, its growth factor will still exceed
that of other forms of investment with more safety and less hassles.
Poor timing can contribute to a lessor
growth factor but time itself will correct any mistakes. The worst mistake may be not to
buy any residential property at all.
We have seen the growth experienced in
Sydney residential over the last thirty years, a median value of $12,600 in 1966 to a
median in 1996 of $210,000 an aggregate growth rate of 1,567% or 9.83% per annum compound
over the thirty year period.
If an investor had purchased that property
a year earlier in 1965 a year of lesser growth, the aggregate growth to 1996 would be
1,680% or 9.73% per annum compound. Hardly a difference to be concerned about now, even if
it may have appeared to be a mistake to have purchased one year "too early" at
that time.
Property well selected and funded, held
over the long term will continue to provide security for those who embark on a
concentrated program of property investment, especially if they continually add to their
portfolio. It can escalate their assets to provide extreme wealth.
THE STORY OF ONE INVESTOR WHO NEVER SOLD
In the mid 70’s a client of
Fred’s asked him to locate a particular investment opportunity. He was a lawyer who
believed in the virtues of property investment, let us call him David. David was very
successful. He was the senior partner in a large city law firm. Still ambitious he
realised the day would come when he would have to step down from his senior position and
would probably wish to retire in about twenty years to pursue other activities.
The brief was to locate property that would
show exceptional growth over the following twenty years so providing a personal
superannuation fund for David. It need not be income producing as David’s income over
the next twenty years would be more than adequate for his needs. Fred was not too happy
about the non-income producing aspect of the brief. After all it was ingrained in his
philosophy that all property investment should be income producing to take full advantage
of interest deductions and depreciation. But there were to be no borrowings. This was an
exercise in sheer growth accumulation over a long period.
USING GOVERNMENT PLANNING
At that time the New South Wales Government
had released "The Sydney Regional Outline Plan". A document that designated,
regions of Sydney to be rezoned from rural to residential, catering for Sydney’s
future housing needs to the year 2000.
Although specific land titles or areas were
not designated, close scrutiny and research identified areas that seemed reasonably
certain to be included in future rezoning.
The D F Johnson companies at that time had
secured a number of such properties for its clients in syndicated groups.
Fred recommended to David that he acquire
one of these sites in his own right. He did, and paid $65,000 for 8 acres of land in the
far Western outskirts of the city.
Many of the syndicated groups sold their
properties at various stages realising excellent profits. Even though the land had not
been released for rezoning, the elapsed time since acquisition had shortened the time
before future release would probably occur, thus enhancing its value.
David did not sell. No doubt he was tempted
on many occasions with some lucrative offers coming his way over the years. His successful
career continued, but in 1992 David decided to retire. Around that time his land was
promulgated for release a little earlier than previously anticipated. David entered into
serious negotiations with statutory authorities to determine town planning considerations
as well as the supply of utilities to the site and to resolve environmental matters. These
negotiations continued for some years until one day in 1995, Fred, now also retired,
received a phone call from David to say he was calling around. They were now
neighbours.
Under his arm he was carrying a dozen bottles of Moet and Chandon champagne to celebrate
the approval of subdivision of the land into 100 housing lots, giving the land a retail
value of about $13 million.
Foresight, perseverance and stickability
had paid off for David who had been carrying holding costs and out of pocket expenses for
over twenty years.
He could have sold many times over but he
hung in and reaped the rewards.
Fred has helped many thousands of investors
to Real Estate Riches, some to large fortunes. Many have written to him to show their
appreciation. David was the only one to show with champagne.
This is an extraordinary story. But it
emphasises the principal. Always buy and never sell. It also begs the next question. What
should David do now? Sell, hold or develop? We’ll let you know the result in our next
book.
ANOTHER HAPPY HISTORY
Fred’s book "How To Get Real
Estate Rich" first published in 1969 was a best seller. It probably was the first
book ever published in Australia by an Australian author that dealt specifically with
investment in Real Estate in Australia. Many North American books had been written on the
subject but they were not entirely applicable to Australian conditions, property or tax
laws.
In that book he related the story of Hugh
and Ann Bennett who used equity in their home, purchased years previously, of $13,600 to
acquire land and develop twenty four rental apartments for long term income and growth.
They used only their equity in their home
plus $6000 cash. The construction costs of the development, plus the land cost, totalled
$178,400.
Is it almost unbelievable, twenty four
apartments for only $178,400, but that was in 1969. The original feasibility indicated a
return of 10.6% per annum on full capital outlay ignoring return on cash equity. On
completion of building the construction loan was converted to an interest only loan for
ten years at a fixed interest rate.
During the period of construction, rents in
the area increased substantially and demand intensified increasing the return on full
capital to 19% per annum. This translated into higher capital value of $264,800 or 48%
gain in one year.
HOW $6000 GREW INTO $3,840,000 OR GROWTH
OF 64,000%
Overall the Bennett's had $6,000 cash
invested in the project, the borrowings coming from their home and the newly constructed
property.
As the book shows, on their capital outlay
of $6,000, in one year they achieved growth of 1,440% and a net income return after
interest on net equity of 229% a total 1,669%. Twelve months later, with increases in
rent, the return had improved to 1,980% on net cash outlay.
Fred points out in that example that Hugh
and Ann were fictitious persons, but the facts were true. He now reveals that the property
was acquired and developed by the Directors of his own family company.
Although time has seen the property pass to
other family members and estate beneficiaries it is still today substantially held by its
original owners including Fred.
The performance of this property can be
easily traced from its construction in 1969 to today.
The apartments which were leased in 1969
for $16.00 per week are now leased for $160 per week and the value of the twenty four
apartments is now $3,840,000. On the original outlay of $6,000 dollars that is an
aggregate growth of 64,000% or 25.96% per annum compound.
Over that twenty eight years the property
has been managed by our property management company and maintained by its owners in good
condition.
How can you ever realise a profit if you
don’t sell?
The answer is you can’t. The
accumulation of wealth through property ownership creates a capacity to borrow and a nest
egg for future cash flow when income from personal exertion ceases.
HOW TO ENHANCE LIFESTYLE
With a large equity in property one can use
further borrowings to enhance lifestyle e.g. holiday homes, ski lodges, travel and
entertainment.
Whether income is derived from a business
or as an employee, additional cash flow may be required from time to time. With assets,
one can always borrow for lifestyle even though it may not be tax deductible. It is only
borrowing against increased growth that would not have occurred if the property had been
sold previously.
When income stops, perhaps through
retirement, and no other superannuation is available, a portion of the property can be
sold to reduce borrowings and increase income for living expenses. If further capital is
required more property can be sold to achieve this, particularly residential real estate
that provides separate titles. Is this breaking the rules to sell? Yes perhaps it is, but
after years of holding property that has dramatically increased in value, maintaining a
high standard of living is a reasonable conclusion to a lifetime of property accumulation.
In the example we have just outlined, the
original borrowings were only around $130,000 with a present value of $3,840,000 leaving
huge equity for more borrowings over the years for improved lifestyle or further property
acquisitions.
If you are young and energetic
shouldn’t you start now? If you are middle aged it is not too late, being wealthy ten
or twenty years from now will still be worthwhile. If you are older you could still
enhance your senior years by improving your retirement and topping up your superannuation
pay out by using present assets for further growth. At least you could encourage your
children to start now, not later.
We could give you many more examples of
asset growth through long term property ownership. Apart from our own success we have a
huge file of letters from others who have achieved wealth and security. It is not hard but
you have to start.
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