While every investor would love to buy at the bottom of the market and sell at the peak, the reality is that hindsight is the only way to know with certainty when a market peaked or bottomed out.
Although many experts will do their best to provide an educated guess as to the future of any investment market, the reality is that there are so many unpredictable factors that even the experts don’t really know the answer. Just take a look in the papers — for every article telling you now is a great time to invest, there will be another warning you of the impending doom.
This is why successfully investing in property is less about timing the market and more about picking the right type of investment for the right reasons (as well as being able to wait until it’s the right time to sell if your predictions don’t pan out).
Most beginner investors make the common mistake of diving blind into a property investment without really understanding the nature of the investment or what to look for. For starters, the question “is now a good time to buy property?” assumes that every property in Australia will experience the same level of growth at the same time, regardless of the type of property or its location, something which is highly unlikely.
So, if you are thinking of dipping your toes in the investment property pool, here are 10 questions I, a Certified Money Coach at Women With Cents, suggest you ask instead.
#1 What Is My Investment Timeframe?
Are you looking for a short-term investment you can profit off in the next 5 years? Or do you plan to buy and hold? Searching for a property to flip and make a quick buck will require a different set of criteria to a property you want to hold onto and generate a passive income from over the long term.
#2 What Type of Property Am I Interested in Owning?
“Property” is an asset class which encompasses a range of different investments: residential, commercial, industrial. Within each of those categories, there are further subsets – for example for residential property there are apartments, studios, townhouses and freestanding homes.
All of these investments will have their own characteristics and considerations. Then there is also the location of the investment. Not all property has the same level of demand at the same time — each location and each type of property will have its own level of demand and price movements.
#3 Where Are the Areas of High Demand?
This is where understanding the short-term demand versus the long term demand is important. If looking long term, you want to identify areas that have strong projected population and employment growth. Ultimately you need to understand who is expected to move into these areas and the properties that they will be interested in.
You can also get a hint at areas of expected growth based on what infrastructure projects are planned, and what private/commercial enterprises are setting up shop in the area.
#4 What Is Driving Demand?
This question is especially important if you are interested in long term growth. Do you understand where employment growth is coming from and what factors are likely to impact it for better or for worse?
As an example, this is where many investors in Perth were caught out, due to not understanding the bigger picture and what was driving the mining boom — once demand for iron ore slowed down, the jobs disappeared and, with those, so did the property prices, with Perth experiencing a steady decline in median residential property prices since they peaked in 2015.
#5 What Does the Supply Chain Look Like?
Understanding demand is only one side of the equation. Remember that prices are ultimately a function of supply and demand. When demand is low and supply is high – this will push prices down. When supply is low and demand is high, prices will naturally go up.
To help you identify this, you want to know what land release is planned in the area, as well as what housing development projects are currently under way or in the application stage (investigate the nature and size of the development) and see how this compares to projected population growth.
For example, many parts of Australia currently have an oversupply of units and as a result unit prices haven’t moved in several years and in some cases have even lost value, which means that buying a unit in these areas is unlikely to result in any profit, especially in the short term.
#6 How Are Bank Valuations Stacking Up?
How the bank values certain properties can offer you insight into how risky the investment is. For example, when COVID hit, many banks took the conservative approach to valuing properties in anticipation of an impending recession.
This took many buyers by surprise who suddenly found themselves needing to come up with extra cash to fund their purchase because the bank valued the property at a lower figure than the price the buyer had agreed to.
Over the years, banks have also been known to blacklist or impose added restrictions on lending for certain properties or postcodes. Despite popular belief, banks won’t necessarily accept any property as security. They may reject it, or they may require you to come up with a larger deposit in order to fund your loan (for example in some cases a bank will be willing to lend up to 90% of the value of the property, while in other cases they may only be willing to lend to 60-70%).
The less the bank is willing to lend you, the higher the risk of that investment.
#7 How Much Can I Borrow to Invest?
Before you go shopping for an investment property it is important to know how much you can borrow. These days, there is a lot more to getting a loan than just choosing the bank with the lowest interest rate.
One important factor to consider is their lending policy which can vary significantly among banks. In other words, what criteria do you need to meet in order to be eligible for a home loan? In recent years, as a result of newly introduced banking regulations, the banking royal commission banks have been tightening their lending criteria, making it harder than ever to get a loan.
#8 How Solid Is My Backup Plan?
While it’s easy to get swept up in the promise of future gains, the fact remains that there are numerous obstacles that have the potential to get in the way of even the best laid plans.
The secret to successful investing is to maintain control over the timing of selling out of the investment, rather than outside factors forcing you to sell at a suboptimal time. Job loss, divorce, illness, rising interest rates, rental vacancies, property damage, recession are just some examples of the financial curveballs you can encounter on your investment journey.
The best way to protect yourself is to consider these scenarios upfront and prepare a backup plan. Start by checking how your cash flow would cope if interest rates rose to 6%. What would happen if you lost your job for three months or the tenants defaulted on their rent? Make sure that the level of debt you are considering will not derail you financially the moment anything doesn’t go according to plan.
To further boost your safety net, make sure you have adequate income protection and trauma insurance, as well as strong cash reserves. This way when life happens (which it will!), you won’t be held hostage by your investments.
#9 How Much Risk Am I Prepared to Take?
Buying a property yourself is just one way of getting into the property market, and a risky one at that. It means that not only are you taking on a lot of debt in order to invest, most if not all of your money is tied to that one investment. It makes it impossible to pull cash out quickly in an emergency (you can’t sell just the bathroom to access $20,000), and it places added pressure on getting the investment decision right.
Other options that can make it easier to diversify and invest in smaller chunks can include managed funds, AREITs (Australian Real Estate Investment Trusts) or even fractional investing platforms. Each of these options will have their own benefits, risks and limitations, so it is important to carefully consider all the fine print before making a decision.
#10 Who Can I Turn to for Advice?
Before making any investment decisions, it is important to carefully consider your strategy, reason for investing and do your research so that you understand what you are getting yourself into. Local council websites, Infrastructure Australia, the Australian Stock Exchange website and property research services are all good sources of information to get you started.
It’s also worth speaking with multiple experts such as real estate agents, financial advisers and buyers’ agents so that you can benefit from differing points of view.