How do you know when it's time to jump back into the market and add to your portfolio?
Blogger: Ryan Crawford, founder & group director, Crawford Realty
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 per cent (seasonally-adjusted) to a new record high. They were also up by 30 per cent over the year.
Post-Budget though, and 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 out of fear that they will lose money and with the view that they should hold out so they can bag themselves a bargain when the market hits its low.
In my opinion, this isn’t an 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 market.
The best time to buy your next property is as soon as you’re financially ready to do so!
Regardless of how the state or national markets are performing overall, there will always be pockets of growth and high yields to be found – in both urban and regional areas.
If you are ready – financially – to invest, then you mustn’t waste time waiting for the broader market to bottom out on the assumption that you’ll secure the lowest price and the best deal. You need to seek out the pockets of growth that are out there now and go for it!
Wasting time while you wait for Australia’s alleged housing bubble to burst, will only see valuable profit-making time lost. 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 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 ‘crash’.
Here are the five steps you can take to determine whether you’re ready to invest again – regardless of where the broader market is at:
Step 1: Review your equity position.
What is the current net value of your assets? You can 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 be able to approach your lender and refinance your loan to release this equity.
Be mindful of a couple of things here. Your lender may conduct its own valuation and given the conservative approach many lenders take to valuations, it could come in below your original valuation. Your lender will also want to retain some equity, usually around 20 per cent, 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 per cent deposit, then your budget for your next investment property is $500,000. This could still get you a decent inner city apartment or a renovation project or a small house in a regional or outer suburban area, for example.
Alternatively, you may have a deposit ready from cash savings, or you might be able to use a mix of cash and equity.
I should note the risk involved with the equity release approach. If the property you are refinancing should drop in value you may find you suddenly owe more than the property is worth. But as I said earlier, if you have made sensible, well-researched investment decisions, your properties should never decline in value. Growth may be slower than you would like at times, but you shouldn’t find yourself in the unfortunate position of owing more than your asset is worth.
Step 2: Talk to your mortgage broker or shop around lenders
Find out how much you can borrow. If you’re determined to use your cash/equity as a 20 per cent deposit then that will set the amount you want to borrow.
Otherwise, if you’re happy to put down less deposit and pay Lender's Mortgage Insurance, you may be able to borrow more which will allow you to purchase a better quality property. I've written a couple of blogs previously on how to maximise borrowing capacity.
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 know 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.
If nothing fits the bill, then you need some more time to create a bigger deposit and improve your borrowing position.
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.
About Ryan Crawford
Ryan Crawford is one of Australia’s most successful property investors under 40 and a leading expert in positively geared property investment. In less than a decade, Ryan built a portfolio of more than 40 positively geared properties and is now dedicated to helping others plan and implement successful property investment strategies.
Since establishing Crawford Property Group in 2008, he has coached thousands or everyday Australians to financial freedom through positively geared property. Ryan is regularly featured in the media as an industry thought leader and commentator, including Channel 7’s Today Tonight, national newspapers and investment magazines.