Combining 2 strategies

Combining 2 strategies.

Strategy 1 - Buy and hold long term
Strategy 2 - Buy at the bottum and sell at the top

The closer in to a CBD, the less property values fluctuate due to the higher demand and lower supply.
The further out (outer ring), properties fluctuate much more wildly because during the boom a lot of investors enter the market and can not afford the locations that have boomed, and also a lot of non-investors have FOMO and can only afford these locations, then when the economy turns or interest rates rise, people who bought here are the most likely to default and during the slump when confidence is lowest, inexperienced investors are most likely to sell here thinking it was a terrible investment and will never go up.

The inner vs outer location (or growth vs yield) debate just doesn't end. It comes up everywhere, in ever book, and every few months in new threads on here. And really, you need both to really go far. Low equity and you can't keep purchasing. Low cash flow you also can't keep purchasing.
Outer ring has higher yields (mainly due to the lower long term sustainable growth), so people say how it costs them nothing to hold. But also that it is the most dangerous because it will fall the most during a correction.
Inner/middle ring has low yields and costs you money for the 10 years until inflation makes it positive cash flow, but is (generally) a much lower risk investment since it is in a location where people have a higher income and can afford their mortgage and will be more OO.

I was thinking today about the Jan Somers idea of buy and hold and use equity to keep accumulating, and eventually sell down 1-2 when you want to retire. This strategy has been mentioned a fair bit on the forum earlier the year when I joined and Sydney was still going nuts but has not been spoken of much the last few months.

Anyway, I was thinking today that these strategies could be combined by purchasing both inner and outer ring, but for their different and specific reasons so that you can get both cash flow and equity.

Lets say you purchase one 500-600k middle ring house in a good OO suburb and one outer ring house in a cheap ex-houso location for 330k. You would want to purchase at the bottom of the cycle (for both properties really).
But most important is that you would get a much bigger discount for the cheaper one for reasons mentioned above (bottum of cycle combined with being a lower demand location). You would want to purchase the cheaper one at below the last peak of 10-ish years earlier because the fluctuation 'down' is an important part of the strategy for this type of property. This way when the long term running average of the city doubles during the upswing and the flow-on effect, this property would be closer to tripling.

Provided it has been such a long time since it's last boom, you should only need to hold the cheaper one for around 5-8 years, but also you also would get a much higher yield for the cheaper one so it would cost you almost nothing in holding costs.

After the price of the outer ring property has gone up (usually at the end of the boom after the inner locations have boomed), you sell down and pay off a chunk of your better quality property.

It seems like employing both of these strategies in tandem would provide a significant benefit over choosing one or the other. The important part is in the understanding why you chose each of the properties so that you don't purchase the cheaper one when prices have risen and that you know that you need to plan to sell when it has risen, and similarly that you have bought the better located property to hold for the long term and that.

I'm thinking that this would make the debate of 'inner/middle ring low yield vs outer ring high yield' pretty much irrelevant because they can both be used as long as you actually know why you are using each one, and there is no actual reason to choose one or the other - you can do both.

Would welcome any thoughts on this.

 

Buy at the bottom and sell at the top is a great strategy!

The only problem is that both the low and high points can only be identified in hindsight, sometimes many months or even years after it actually happens. And it is even more difficult if you are looking at major cities where some areas or suburbs move at different rates and times to other areas.
Marg

 

This ^^^^^ if it doesn't impinge on lifestyle, cash flow and short, medium and longer term goals.

I sold some properties and made good coin but after crunching the sums would have been better of holding onto them for more equity and no effect on overall cash flow. Exception would be a CGT free PPOR.

 

The whole 'use equity to keep accumulating' thing is pretty much limited these days - it will work for a couple of IP's perhaps, but not to build a massive portfolio in a short space of time in the same way it used to.

Active development is a much better way to get there now. You need a way to reduce debt as you go, which is pretty difficult in traditional buy and hold strategies.