When is the right time to buy your next investment property?
Recently released data from the ABS showed property investment activity to be at an all time high in April with investor finance commitments for the month rising by 2.3% (seasonally-adjusted) to a new record high. Interestingly new investment figures were up by 30% over the year!
However, Post-budget, it seems a different trend is emerging with investor confidence in the market dwindling, according to initial findings by Digital Finance Analytics.
There’s now plenty of talk in the media of Australia’s property bubble and the prospect of a looming crash. Many investors are being scared off from investing in the current market and adopting the view that they should hold out to potentially bag themselves a bargain when the market hits its low.
Investors have been trying to perfectly time property market swings for decades and although highly lucrative if you get it right, its not always the most effective or efficient strategy to grow wealth through property investment!
The right time to buy your next investment property should not be dependent on the movements of the broader marketplace
In my experience the best time to buy your next property is as soon as you’re financially able to do so!
Waiting for your local market to bottom out on the assumption that you’ll secure the lowest price and the best deal, may end up costing you more than your realize in the long-term. Experienced investors understand that there are pockets of growth in many marketplaces around the country at any given time with rewards for those willing to find and secure a property in these locations.
Economists have long been predicting the old age story of doom and gloom heralding a major crash in the Australian marketplace. If the historical performance of property in the country is anything to hedge our bets on then yes, downturns and upswings will come around once every 8-10 years in capital cities and shorter periods general in regional locations. Waiting for the national market to reach its bottom before investing is a very difficult thing to pinpoint. Chances are, that by the time you hear from the property economists and researchers that it’s reached its bottom, prices are already on the up and you’ve missed your narrow window of opportunity.
One of my key recommendations to investors is: ‘don’t follow the pack’. There is no need to be at the mercy of the broader market. With the right advice, research and property selection, you will always profit, even during a national or state downturn.
Here are the five tips to determine whether you’re ready to invest again – regardless of the wider marketplace:
Step 1: Review your equity position.
Assess the current net value of your assets? Work this out by having your property or properties valued and then deducting the balances of your loans from the current values. Say, for example, you find your current investment property has increased by $150,000. You may then able to approach your lender and refinance your loan to release part of the equity.
Be mindful of a couple of things here. Your lender may conduct thier own valuation and given the conservative approach many lenders take to valuations, it may well come in below your original valuation. Your lender will also want to retain some equity, usually around 20%, so you may find that your original calculation of $150,000 equity has now reduced to say $100,000 based on the bank’s lower valuation and its need to retain some equity. If you want your equity to act as a 20% deposit, then your budget for your next investment property is $500,000.
Alternatively, you may have a deposit ready from cash savings, or you might be able to use a mix of cash and equity.
Step 2: Talk to your mortgage broker
Find out how much you can borrow. If you’re determined to use your cash/equity as deposit then that will set the amount your able to borrow.
Often when growing a portfolio quickly investors don’t want to wait until they have 20% deposit in equity, opting to grow faster by placing only 10% down against the new purchase., if you’re happy to put down less deposit and pay Lenders Mortgage Insurance, you may be able to borrow more which will allow you to purchase a better quality property. Tips on how to maximise your borrowing capacity can be found here and here.
Step 3: Determine your loan serviceability limit
It’s critical that you only borrow what you can afford – you must make sure that you’ll be able to service the loan payments.
If you’re pursuing a strategy of negative gearing, this is particularly important. You will need to work out the maximum you can afford to be out of pocket each month.
If you’re seeking a neutral or positively geared investment, you will be in a much more secure position. However, you still need to be confident that you’ll be able to service the loan should the rental market deteriorate or if interest rates rise – two factors that will negatively impact your cash flow.
Step 4: Set your budget
By this stage you should have a clear understanding on how much deposit you have and the maximum price you’re able to pay for your next investment (your borrowing capacity). You should also know how much you’re prepared to pay towards the interest on the loan each month (assuming an interest-only mortgage) which will determine the rental yield you need your next investment to generate.
Step 5: Property search and selection
Based on your strategy (negatively or positively geared), you’ll now be able to begin your property search, which will ultimately determine whether there is a good investment out there that fits your budget and loan serviceability.
I’ve written several blogs on how to indentify potential hotspots and how to undertake market assessment and property due diligence.
Also keep an eye out for next week’s blog where I’ll be looking at some of the best locations around the country for high yields.
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