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Should You Hold Or Trade Your Investment Properties? · The Follio Property Podcast

• 0:05
  Welcome to I Call Bullshit, a property podcast where we separate real estate fact from fiction. I'm Rhys Bettle and in every episode we uncover the truth behind the property market's biggest claims and trends. Joining me is our resident expert, Lachlan Delahunty. He's seen it all and isn't afraid to call out the bullshit when he sees it. Welcome, Lachlan.
• 0:23
  Rhys, always a pleasure. Different side of the desk today, I noticed too. Oh yeah, I'm sick of getting a double chin cut out in the reels that get put on Instagram, so let's try this side. Alright, let's jump into the first topic. It's better to buy and hold. Time in the market is more important than timing the market.
• 0:41
  So let's, when we look at this, let's have a look at a couple of articles. So one we've recently seen, why trying to time the market doesn't work from the Australian property investor. It's quite topical, I think, especially getting close to the property investment industry. There's always people that have got a philosophy on one way or the other. So I thought this was a great topic for us to unpack today. But I think, look, first, let's explain it. What is buy and hold and what is time is more important than timing the market. Maybe explain that for the viewers and listeners.
• 1:10
  Yeah, I guess, you know, my thoughts, I think the buy and hold strategy is a very traditional model where you just buy real estate, you put it to bed and you let time and we're not talking months or weeks, we're talking years and sometimes decades to do the heavy lifting. And it's a very old school and traditional mindset and it has worked. So don't get me wrong. But I think in the modern age with the data that we have, it's a lazy way to invest. Okay, what indicators do investors use when they're looking to time the market?
• 1:38
  So we look at historical cycles and that's when it goes back to what traditional methods of investing look like. They essentially will invest in their own backyard and that's how our parents did it. That's exactly how anyone that's brought up with family surrounding property, they've all sort of fallen into property investment either by mistake whereby they've upgraded their home but didn't want to sell their investment and therefore that become the investment property.
• 2:07
  or because their friends were doing it or because it went through the market, went through a property boom, so it became the flavour of the month or the year as we're seeing at the moment. There's sort of all different reasons people fall into investment. So that buy and hold mentality is brought about in various ways. But like I said before the show, it's a lazy way to invest. So when looking at how to time the market, you've got to look at key indicators and data sets as we do on a daily basis.
• 2:32
  I think it's interesting. You often see first-time investors, we'd call this in the UK an accidental landlord, where they're looking to upgrade to the bigger property, want to get in the market. That's the easiest way. They've already got the asset type there. And I think that tends to be, for a lot of investors, that's where they stop.
• 2:52
  and they just sit on that asset and through different cycles will have some peaks and drops. Over 70% of investors are accidentally investors. Interesting. In terms of a buy and hold strategy, what really, from your perspective, matters for longevity?
• 3:10
  If you've still got that traditional mindset, or you might already have quite a substantial portfolio. So we see clients regularly, some client that I met with last week had 55 assets in her portfolio and these weren't just you're running your middle investment properties, these were A grade blue chip, think Subiaco locally, Western Australian assets, but the portfolio was largely in Victoria and Australia.
• 3:36
  New South Wales in Sydney. So Paddington, Hawthorne, East, these sorts of suburbs, which is really difficult. You know, it's going to take us a month to work through the highest and best use strategy for that portfolio. But for the majority of people, it's... I forgot your question, what was it? What really matters... Should we go back? Yeah, I was just interested in that story. What really matters for longevity?
• 4:00
  On a buy and hold. Yeah, on a buy and hold, it's all about quality. Quality is the most important thing, and that's location. When we talk through the pillars of a property investment, firstly, it's location. Second, it's land, land content, land value ratio, not necessarily the biggest amount of land. And then third, it's the improvements and improvement quality. So what does that look like?
• 4:23
  typically we're going to get the best location we can and the largest land in that location and then a house that's going to service the mortgage through rental income over the next 20, 30, 40 years. So then you do have to look at things that, you know, holding properties beyond this cycle. So you don't necessarily want to get a money pit and that's what a lot of people go into and we're big fans of buying the worst house on the best street. But if the plan is to hold that and never sell that, that's going to be an absolute headache to manage longer term. So those things do come into play. But certainly...
• 4:53
  So quality selection and having A grade assets in the portfolio is fundamentally the most important thing. And the cost of that is it's gonna be a lower yielding asset so the cash flow is gonna hurt you for the whole period of holding that property. It's gonna come with headaches because it's gonna be an older type of asset with a lower improvement value. And that's why typically we don't advise clients to buy and hold in the modern era of property investment.
• 5:20
  And I guess on the buy and hold, I've heard you say things before, like the ugly duckling on the beautiful street, or maybe I'm putting words into your mouth here. I say a lot of things. But if you're looking at a long-term buy and hold strategy,
• 5:37
  would you see investors doing home improvements or would you be purely writing it out for capital growth? So what I'm getting at is, could there be potential over the course of a cycle to put some money back into that property to help increase the yield, help increase, I guess, the longevity of that property as well? Or from an investment standpoint, when we're talking buy and hold, from your perspective of investors purely looking at...
• 6:00
  buying that property and just holding it for the last. Absolutely. So when we, and we do have clients, we call them foundation assets. So a foundation asset for us is an asset that you buy and you never trade, right? And we've also got trading assets, which probably 70 to 80% of the portfolio for a lot of people because it's a different strategy. But for those foundation assets, we typically put in portfolio management plans and asset management plans.
• 6:25
  So looking at key milestones throughout that property journey, the first five years, first 10 years, first 20 years, first 30, and understanding what upgrades need to be made. So a perfect example was a property bought in Bourke Street, Leaderville, very, very much along the lines of that ugly duckling. It did need quite a bit of work up front, so we allowed a $25,000 upgrade.
• 6:46
  maintenance contingency on purchase, floors, painting, get it up to a rentability, a lot of landscaping needed to be ripped out. So when you're buying a property to rent and rent only, you don't necessarily want to beautify it to the point where tenants are going to come and destroy it. So it's been really practical with where you spend the money. And that's what we did with that asset. It was bringing it back to its, I suppose, origins, its raw bone and getting to a level where we could rent it out.
• 7:14
  And then we have a plan for that property in year seven to activate a cosmetic renovation to bathrooms and kitchen. And we believe that could increase the rental return by 400 to 450 per week. Based on that payback period, it's going to be about five years. So from year five to 10, we'll pay back that renovation. And then year 15, there's scope for quite a significant renovation to the property.
• 7:37
  if the client chooses to do it. So having a plan in place, and it's always about the opportunity cost. Okay, if I'm going to spend a dollar, what's the payback period of that dollar? And when should I do it? And often that's typically not when we first buy it because we want to generate an income because you've taken a big hit. You've just had to fork out a big deposit. You've paid stamp duty. Let's just get some income to start paying off some of this debt.
• 7:58
  Yeah. And in terms of trends, in terms of implementing this strategy, obviously you've been in the game for a long period of time now. You've seen it all. I'm great. I'm great, mate. Scary thought. You've seen it all. Who typically employs this strategy or is there no trends? Like, for instance, is it first-time buyers that are maybe a bit more risk-adverse will start with this strategy? Is there a specific asset type that people will be employing this strategy with?
• 8:26
  Yep. I think most people have come in to the investment framework with a buy and hold mentality because that's what they've been taught. They've heard another podcast suggest that that's the way you make money in real estate. You buy, you never sell. They've heard their parents talk about it, their family, their friends. They've heard agents talk about war stories. Someone bought something for $850,000 in...
• 8:47
  Mount Lawley in 1993 and now it's worth 2.2. Again, it's just the default. So it's obviously a lot of education. And for us, it's sometimes challenging to get clients to understand the opportunity cost they're missing out by just holding through cycles.
• 9:03
  Ask anyone that held a property in Perth from 2013 to 2019 if they could have had the opportunity to allocate those funds into another market during that period. Ask anyone in Melbourne for the last six years, anyone in Geelong for the last five years if they could have allocated their funds into another market and you start to see and understand the true importance of opportunity cost.
• 9:24
  And look, I personally can echo those comments. I got into the market in 2012, recently sold that asset type,
• 9:35
  a couple of weeks ago actually for an 85% profit. You tell that to your friends at the barbecue, you tell that to people at work and they say, well done, you must be right, but that's a really good outcome. But actually when you reflect on that period, back in 2012, so it's 13 years ago, it took me out of the market for eight or nine years, not from an investment standpoint, but even by a principled place.
• 9:59
  And then from the opportunity costs. So having that 85% profit sounds great. And what year did you buy that? 2012. 2012. What did you buy for? You might be the person. Bought it for $340. Okay, $340. And what do you think it would have been worth in 2015, 2016? It was down 30%. Yeah.
• 10:18
  So at that point in time, there's four years wasted plus the opportunity. And that debt, you can't get out of that, right? When the bank valuation is coming in less than what you own the property, that's what you call very trapped. Negative equity is not a great place to be. I know that, yeah. I know that. And the thing is, I think there's still an education piece there for your average punter.
• 10:40
  I'd tell that story and this only recently happened to me with the sale and I think people would still think what are you talking about? Yeah, you did well. You've nearly doubled your money but actually once you start talking about opportunity costs I think our mentality is definitely on a buy and hold investor strategy I think that most people are thinking like that and
• 10:58
  I think being brought up, we're at a similar age. I think that's what we're kind of brought up on, is to get into the market and hold it. And I think it's more probably, the more education there is out there at the moment to see there's other options in terms of,
• 11:13
  trading assets and different markets, not necessarily always in your backyard as well. I think that's a key thing to talk about today as well. So based on your example too, those audience that are listening, it's a lesson learned there. Yes, you sold it for a 75% uplift. That growth was achieved. 85%.
• 11:29
  or 85 sorry, which you'll shout tonight, bye mate. But 85% was achieved from 2020 to 2025. That five year window, you were able to almost double your money. That seven years prior to that, essentially the market did nothing. So five years of growth, you could have achieved that in another market and recycled that debt into another market at the right time.
• 11:53
  But there is a caveat to this. And like I said, my view is buy and hold is lazy investing. However...
• 12:03
  you shouldn't be trading in two particular scenarios if you're really uneducated. So it's a lazy strategy. So if you're, some of our clients, you know, high net worth individuals that just want to sit in there, invest in the market, and just want to sit back and work for the next 20 years and don't really want to worry about it, then that's a strategy for them. And they're paying us to be more actively involved and help them manage that portfolio across Australia and other markets and maximize the markets, which majority do. And that's,
• 12:30
  So if you're uneducated, you haven't done your research, you're not familiar with markets, you're not familiar with property investing, then buying and holding can be a strategy for you. Just because by doing nothing, by default, you're going to be in a worse situation than by doing something, which is investing in your backyard. The other caveat is I wouldn't be trading properties necessarily if I haven't maximised my debt. What do you mean by that?
• 12:56
  So for the majority of people, the bank will land somewhere between five to six times your income. And the nature of property investment and the way to get ahead in property investment is through leverage. Not everyone loves debt, so this is where this gets a little bit challenged for clients. But when you look at, particularly when people are in the position to do so, to get those larger returns and having multiple properties in your portfolio, you have to get comfortable with debt. That's the reality of property investment.
• 13:25
  If you don't like debt, don't invest in property. Just put in the share market and see how that works for you when Trump's put tariffs on. But let's go sidetrack. That's another episode. Yeah. So if you haven't maxed your serviceability,
• 13:40
  then I typically don't recommend trading because by doing nothing, just having sustained time in any market, you will see growth. So we typically don't trade assets for clients until they've maxed out their borrowing capacity because then it's the opportunity cost that you're losing.
• 13:58
  So, okay, I met with a client, you've got three assets in your portfolio, and your debt to income is still at three times. Okay, you've still got quite a bit of serviceability there that the bank were willing to borrow, unless there's a clear reason to sell an asset. So, the data is so defining that we know that the Perth market's about to fall off a cliff.
• 14:20
  which in reality, there hasn't been a point in time where we knew with absolute confidence that a market was gonna fall so significantly that we had to sell today. So you get trends and we know over a period of six to 12 months in advance when a market will start to stagnate and then potentially cool. So in that scenario, when they still have,
• 14:39
  And when you say that, back to the trends point, we can see when a market's starting to cool, where are you saying that data's from? Is that from yourself with the research that you do or are you talking sentiment in the market or...?
• 14:54
  Our research program, right? Our data house, I suppose you're well aware, we spend a million dollars a year on research to understand what markets are doing around Australia. And that, for the last decade, we've got often a two-year window when we can see what things are going to happen to markets, be that rise, stagnate or fall. But at the very worst, a 12-month indicator, and we're very confident on a 12-month forecast now. We've been able to...
• 15:18
  proved that for 10 years. So that ability gives us information to be able to advise clients on when they should be potentially trading if they've absorbed their entire opportunity cost, which is their serviceability. But a client I met with this week has three properties in Western Australia, so no diversification in the portfolio, and is looking to make investment into Melbourne, which absolutely along with my advice, because it aligns with diversification and potentially aligns where the Melbourne market is going in a positive direction.
• 15:48
  However, they've come into the meeting saying, look, we want to sell two Perth assets to capitalise on the profits and then reinvest that into Melbourne, which in reality for most punters probably looks like and appears like a good idea, which would be a great idea if they didn't have more serviceability available to them.
• 16:07
  So the potential is that they could have sold those two properties in the next three months and the Perth market continues to go on a run, which we've shared the belief that it will for the next two years. So then they're essentially taking money off the table and trying to reallocate that into another market. And they've already done the right thing by diversifying to begin with. So to actually exit the market altogether, they're losing a bit of that diversification. Exactly. By staying in the market, they might get upside in Western Australia for the next 12 months to two years across those three assets they have.
• 16:37
  and by increasing more exposure, more debt, they're going to get access to Melbourne. And there was no reason in that scenario that they couldn't afford to do both because I understand banks are very conservative. They're not going to give you more money than you can't afford to borrow. And that sounds very bullish. It's like, you know, I don't want to take on six times...
• 16:55
  debt to income mortgages i don't want to be stressed about you know understand these are typically investment only loans for a lot of these investment properties and the bank puts a serviceability buffer of three percent of what you can actually afford so there's a lot of safety in that but again you should be speaking to a professional i want people to go out there tomorrow and just take out debt to income of six times but
• 17:15
  They're the scenarios. Once you've consumed your opportunity cost, which is the serviceability, so if a client comes, that same client comes to me, three properties in Perth, and they've absolutely maxed their capacity, they're at five and a half to six times, then the conversation becomes very simple. Okay, we do need to start to look at trading because you have maxed out your serviceability. Perth has done extremely well for you. We need to get some diversification in the portfolio and we need to look at a trading strategy. Doesn't mean we go and sell all three properties in Perth and buy three in Melbourne.
• 17:45
  Right off the bat, we might start to divest one asset to replace it with another and start to trade that serviceability. And that's what we're talking about. It's just transferring the debt. The bank will give you X amount of chips. Where do you want those chips on the table at any given time?
• 18:02
  So, Lachlan, the big thing when I think of a trading asset is a lot of amateur punters, a lot of amateur investors just buying in low-income areas and low price points from an affordability standpoint. And those areas have a lot more of a runway to go on. They generally go on a bit of a run, but it can be risky to exit those markets. Is that how you see a trading asset or can –
• 18:25
  They're the ones you should be trading, right? So they're, like I said, when you look at our foundation assets, they're very blue chip, owner-occupied type assets. They're ones that you never sell. They're in family belt locations, school catchment areas, family type homes. These investment stock, we call it, now that's out of fringe, high volatility. When the market runs, think of Armidale, it does 35% in a year. Over 60% of the market's made up of investors.
• 18:52
  The moment the market stagnates or cools, all the investment activity comes out and that's when you see such volatility. You see those markets fall. So they're the ones that if you time the market, absolutely you can do really well. But they're your hot potato. You get in, you get out, you take a 50% upswing, entry fees, exit fees, you walk away with a capital gain and you're not stuck with the, you know, the runt of the litter when the market cools that you can't trade. Because people forget that. In 2015 when there's...
• 19:20
  14,000 properties on the market in Perth, you think you're going to sell a three-by-one in Armidale for $750,000? Maybe, but I don't want to be banking on that. Do you think I can sell a family home in Padbury for 1.3 mil? I'll bet you I can. Because there's so many people that want to live in desirable location with great school catchphrase, amenities to the CBD. So yes, to answer that question, I think it was a question, is that foundation assets...
• 19:49
  Think owner-occupier type assets. Where you want your family to grow up and live in, they're the assets we keep in the portfolio long term if we're buying and holding. Investment belt, investment stock, you know exactly what it is. Low socioeconomic areas, high investors in the areas, typically higher renting and lower entry points. That's the definition of trading.
• 20:15
  what's your top tip for someone looking to implement the trading asset strategy? When to exit the market? That's the big question, right? Get out, yeah. When do you ride it as long as you can or is there a certain point you would make? You certainly want to get out. I'd rather be out too early than too late. And that's when greed kicks in, right? People are like, just set a strategy. And for a lot of our trading assets, it's 60% upside.
• 20:42
  So we're not overly ambitious. Like I said, we're always typically conservative with our forecast. But with trading, we go into a market with the objective to achieve 60% upside. Once that's been achieved, there is the ability to exit that market. Again, I'm not advising to exit unless we've absorbed the entire opportunity cost, which is the serviceability.
• 21:02
  But if it's achieved that and they've maximised their debt and they've achieved 60%, okay, it's now an opportunity to trade that into a market that represents better value at a point in the cycle. So, yes, I'd rather be out too early than too late. Don't get too greedy. But if you're timing the market, you need to be very well educated. You may need support. It's not a game for the faint-hearted because if you time it poorly, you can lose money.
• 21:30
  100%. I think that's some of those areas you've mentioned. If you don't exit at the right time, you're going to lose a lot of that capital growth that you've had over the last couple of years. You could be like yourself with negative equity and then you can't do anything. You're trapped. That's the worst place to be because you can't sell it because what you'll sell it for is less than what you owe the bank. People forget that it does happen. And we're going to see that in the next half decade. I've got no doubt about that. So just be careful.
• 21:55
  So we've touched on both the buy and the hold and the timing the market strategy. Can an investor have a blend of both within their portfolio? Or the best question is, would you advise? Is that a good strategy to have a mix or combination of both trading and a buy and hold strategy?
• 22:17
  Yep, depends where they are on their investment journey. Absolutely, you can, particularly if you've paid off your prime place of residence debt. And that's where it's another strategy, and I know we're talking lots of different strategies, but for a lot of people that we speak into, you come in and say, why do you want to invest in real estate? And most people just want to make money. Markets going gangbusters, I want to capitalise on it. I want to retire early, all those sorts of things. But in reality, if you zoom out and say, okay,
• 22:44
  I want to live in a home that I love, that I can raise my family debt-free. It's typically a milestone for a lot of people. Our job as advisors is to get them as quickly as possible because for a lot of people, they're taking a loan out for 25 or 30 years. That's a long time to pay off your prime place of residence. Through trading assets, through trading investment assets, we can get that down typically somewhere between six and eight years. Their debt on their homes completely wiped off.
• 23:11
  So once that's achieved, that's a big tick. And that's why it's like, well, why would you trade these assets? Because primary place of residence debt isn't good debt. There's no tax advantages of having that. So the sooner we can get rid of that, the better. And does that mean by trading foundation assets we have to do it? Absolutely. Wipe that debt off. And then if you don't do anything in your life beyond play off your primary place of residence debt, you're going to live a pretty comfortable life.
• 23:33
  So once we tick that off, then we can start considering buy and hold strategies because we don't need to be as active. We don't need to trade because, you know, you've ticked off one of the largest milestones is own your primary place of residence debt free. So, Lockhart, what's the verdict? It's better to buy and hold. Time in the market is more important than time in the market. Fact or fiction do you call bullshit?
• 23:56
  I call bullshit. Blindhole strategies for the majority of people is a lazy strategy. Make sure to join us next episode. Stay informed, stay curious and keep going on the bullshit.