With the media constantly trying to grab headlines with talk of a bubble, unaffordability and busts, is now a good time to be investing in property? What should you do with your cash and deposit funds and what is the benefit in purchasing residential property?
Like with most things, unless you have a crystal ball that can predict the future, you can never definitely know the perfect time to start (or continue) investing in property; but we have put together a guide on the top seven things to consider before you invest in your next residential property.
Please also note that this should not be considered as advice, this article should only be considered general commentary and you should seek advice on property investing from your accountant or financial adviser.
Step 1: Remove all emotions from the deal
As with any investing, the number one rule is to completely remove emotion from the process – As Warren Buffet says “Only when you combine sound intellect with emotional discipline do you get rational behavior.” Property has a really interesting place in the Australian psyche but it is important to remember if you’re buying an investment property you ultimately won’t be living in it, so it doesn’t need to be to your taste – it needs to be functional and cater to the tenants that you will be renting out.
Step 2: Do your research before starting
Historically, Australian property has been a relatively safe long-term investment and you’ve got to remember that past performance should not be used as a future indicator; however, over the years, Australian property has been seen as a safe long-term investment that has not suffered any major corrections like other asset classes such as shares. It does move in cycles and the better your understanding of these cycles, (and the local, national and international influences) the better your buying decisions.
Step 3: Understand the market
Property in Australia has a high proportion of owner-occupied homes, but what is the typical demographic in the area you are looking at buying?
According to the Australian Bureau of Statistics, approximately 70% of Australian households are home owners and there has historically been little speculation on the property market. Also looking at the ABS’ records, since 1900 when they started recording Australian house prices, the market has not suffered a 20% fall in median house prices in one single year. This was also the case during the Global Financial Crisis between 2008 to 2010 which saw significant falls in property prices in the United States and the United Kingdom; however, Australian house prices actually increased in value during this period.
Step 4: What are you trying to achieve by investing in property?
As much as the market and external factors need to be considered when looking to invest in property, you need to also look at yourself and determine what it is you are looking to achieve when investing in property. What are your goals? Are you speculating for capital growth or are you looking for consistent rental income to be generated and for potential tax benefits? This is where you need to formulate your goals on property investing, and then meet with your accountant and financial adviser to put together a plan to achieve these – ultimately you need to look at the bigger picture, and how this works with your individual plan.
Step 5: Understand the lending and finance landscape
Australian lending is highly regulated. Unlike other overseas markets, the Australian banks and lenders are closely regulated by the Australian Prudential Regulation Authority (APRA). They oversee lending activities by the banks and indirectly control the proportion of investment to owner-occupied lending. This, in turn, reduces the risk of unsafe lending practices which contributed to the Global Financial Crisis in the United States of America and, ultimately, caused the risk of unsustainable rises in house prices.
Step 6: Does your finance and home loan fit in with your strategy?
This is another factor that is often overlooked. New property investors do not realise the importance in having their home loan structured in a way that fits with their overall goals and strategy. If you are looking at holding the property short term, you may need a lending solution that offers more flexibility compared to an investor that is looking at holding the property over the medium term.
It is not just about finding the cheapest home loan rate, but about finding the right deal and structure for you that sets you up to help you achieve your goals into the future. You need to work with a mortgage broker that understands property investment, various trust and company structures that could protect you in the future.
Step 7: And have you hedged your risk?
Not only are Australians one of the most underinsured countries in the world, but according to Lifewise.org.au, only 4% of the total population with children have adequate levels of life insurance cover, but very rarely do they set up a financial buffer to help themselves in difficult times. This comes back to your strategy and making sure you aren’t overextending yourself to buy the biggest and most expensive investment property you can afford, but looking at an investment that fits into your overall strategy to help you achieve your goals.
In conclusion, I would argue that now is not a bad time to consider investing in property, but it is not as simple as working out how much you want to spend and going out and buying the first property you see. You need to spend time understanding what it is you want to achieve, research the area in detail, and surround yourself with the right consultants and specialists to ensure you are structured in the right way and ultimately hedge your risk to make sure you are not caught out in the future.