A ‘few years’ tenure is not enough

Property is a long game. Buying and selling in a short space of time works on occasion, but it’s generally not optimal for the vast majority. This is why we say, “A few years tenure is not enough.

There are three reasons, (four, if the property is brand new) why we don’t recommend a purchase if the intended ownership tenure is just a few years.

Why might someone purchase a property if it’s only for the short term, you might ask?

There are a few situations that can initiate a decision like this. The buyer may be anxious to get a foot on the property ladder. They may feel they have struck a hotspot where they believe they can make a quick gain. They could be facing a notice to vacate and feel that ownership is a better option than finding another rental. Or they may have sold and are anxious to secure ‘anything’ in order to have continuity with their ownership status. Some parents do so to provide a home for their university students close to campus. The list goes on… there are many motivators.

However, we caution against this unless the owner has renovation/building experience and/or a trade background. Actively adding value in a short space of time is a very difficult task and many risk overcapitalisation when they attempt to do so.

So, what are the four reasons why we recommend not buying with a short ownership tenure in mind?

First and foremost, market volatility in a short period is the most significant threat. Take this house price movement chart below which spans our capital cities.

In a short period, depending on when the acquisition and divestment decisions were triggered, the potential for market losses to impact profit is high. However, over the long term, the market volatility is less of a threat to a seller. This eleven year chart below shows less static than a 2019 – 2023 chart would display.

The second reason relates to the turmoil and upheaval of two significant moves. It goes without saying that nobody likes unpacking, packing and moving.

The third reason relates to overcapitalisation risk, or at the least, reduced gains. The buying and selling costs over the short period threaten to whittle away any gains, and can often leave a buyer in a lesser financial position than when they first purchased. Take this real-life example; a buyer purchased a townhouse in a desirable, leafy eastern suburb in late 2019 for $1.63M.

They sold it for $1.78M last month. Taking into account the stamp duty, agent’s selling fees and the marketing and staging costs alone, the $150,000 profit, (possibly not subject to capital gains tax if the property was inhabited by the owner as their principal place of residence), would have been eroded somewhat by these costs. If the property had been purchased as an established property, (as opposed to brand new/off the plan), the land stamp duty would have been $89,650. Typical agent’s selling fees would sit around 1.5-1.8%. Based on 1.5% plus gst, the selling commission on the $1.78M sale would have sat at $29,370. Styling fees would generally be around $5,000, and marketing costs would likely be at or above this figure also. That would leave this vendor’s $150,000 gain at a net profit of around $20,000 for their three-and-a-bit year ownership period.

And the fourth reason relates to land to asset ratio, specifically for brand new properties. This property example above actually falls into this category also, as it was purchased new in 2019. The rate of depreciation is at its highest when a property is brand new; much like a car or a computer. The value of the physical building drops as the years tick by like an inverse log chart until eventually, the dwelling has negligible value and the land component dominates the total value.

Given the rate of depreciation is at its highest in the earliest years, buying and selling such an asset in a short space of time is dangerous because the land’s rate of appreciation may be eclipsed by the dwelling’s rate of depreciation, hence the property’s overall value could drop in the early years.

Before signing a property contract with a short ownership tenure in mind, buyers should seek advice and ask themselves if their capital is at risk with such a move, and whether there are other places they could safely guard their money in the interim while they work out a longer tenure strategy.

We prefer to know that our clients have at least a ten-year hold plan when it comes to property.