It depends on which market. And 2 common strategies to buy a property.
Many investors want to get a great deal – to ideally buy when property prices are at the bottom of a market, not at the top. Is now the right time? This is a question I get asked often.
The problem with this type of question is it’s too general to answer without digging further.
The first thing we need to clarify is:
Which ‘market’ are you referring to?
Is it the suburb you live in?
The CBD?
The country?
There are many macro and micro property markets throughout Australia, all moving at different rates and in different directions.
Most markets over time increase in value. However, history has shown us that there has never been a market that has continually increased without a period of correction – when a market adjusts to supply and demand. It may be a decline in value or a sustained period of no growth.
I want to buy when house prices are low
If you had a crystal ball, most sane people wouldn’t buy in a market that was about to go down – or correct itself if prices have been going up for some time. It wouldn’t be a great idea, especially if the investment was cash-flow negative.
No-one has a crystal ball so we need to look at market conditions and factors.
One way to get an idea of market conditions is by looking at the debt-to-income ratio: the percentage of an investor’s monthly gross income that goes toward paying off debt.
With interest rates being so low over the past few years (Source: RBA), investors have been able to borrow more. This has raised house prices in some markets, in particular, Melbourne and Sydney.
However, when borrowing ceilings are reached, the market can’t climb any further.
At times like this, smart investors will look at other, more affordable markets such as:
- Regional areas
- Other states
But what if you don’t want to invest outside your backyard?
If you don’t feel comfortable investing outside of your backyard – and it will cost too much to invest – wait until it’s a buyer’s market again.
If your investment is cash-flow neutral – or ideally cash-flow positive – you give yourself the best opportunity of holding onto that asset for as long as it needs to grow in value.
It may take a little while. But history has shown it will happen.
So to determine whether it’s the right time to buy property, you need to think about:
- Which market you can afford
- What options you have if your market is unaffordable
- What stage the market is at
In terms of strategy, here are 2 common strategies used often by families.
2 common ways to buy an investment property
1. Take command of your equity
If you own a home it may be possible to use equity to buy property instead of savings. Equity is the amount you actually own of that property (property value less what you owe). An experienced property investor once said to me:
“If you don’t utilise your equity it is like having a cheque sitting in your kitchen drawer that you don’t put in the bank. It is your money and you should have it working for you.”
2. Team up to fast track
Saving can take a long time, especially with the amount of deposit that is needed these days. Look at other possible options that can help you get on the property ladder more quickly. This may mean a joint venture or short-term help from family who already have equity.
If you go down this road make sure it is clearly documented on your arrangement as this may save potential issues down the road.
Do your due diligence
Work out what is affordable for you and build in buffers to those calculations. You may not be able to afford in the suburb you live so look at other areas within your price range that are showing good signs for growth.
In saying that don’t just buy in an area because it is affordable as more often than not these will be slow growth and you may face tenant issues associated with the demographic. Do your research.
Summary
It may be the right time to buy an investment property – or not. The key is to know which market you’re dealing with – and what stage the market is in.
Naturally, you don’t want to buy at a peak in the market so make sure you get your timing right. Or look outside your backyard for better options if you need to.
Then when you’re ready to continue, there are two common strategies often used by families: using existing equity in the home, or teaming up with other people.
Which strategy is right for you?
Can you afford to buy – and stay – in the market you’re interested in?
What other value-for-money options are there?
A personal review of your situation will clarify these questions and get you started on the right track. Book in for a call back when it suits you.
