Property investment: how to make a move in an uncertain market

The end is nearing for rising interest rates and falling home prices, so is now the time for real estate investors to make a move?

Surging interest rates and sinking home values have driven away real estate investors and other buyers, but the time to act is potentially approaching.

Australian Bureau of Statistics lending data shows investor and owner-occupier mortgage commitments both dropped 35 per cent in the year to January 31. Home values in a majority of cities and towns are lower over the past 12 months.

As mortgage repayment costs soar, more people are priced out of the market, giving investors – who typically have more equity to employ than owner-occupiers – the potential to bag a long-term bargain.

Get RARE Properties founder and author Rasti Vaibhav says while there are short-term challenges, there are plenty of opportunities for those who look beyond them.

“When put in a long-term context, it’s clear that the trend in property prices is up, but when conditions change, many investors elect to sit on their hands instead of actively looking for opportunities,” Vaibhav says.

BE GREEDY

“This can be a mistake. As (billionaire investor) Warren Buffett says, it’s wise for investors to be fearful when others are greedy, and greedy when others are fearful.”

Investment specialists say traditional rules around investment borrowing still apply, and it’s wise to get pre-approval from lenders.

Property investor and author Rasti Vaibhav says there are short-term challenges.

The Investors Agency co-director Bobby Haeri says:

• Consider interest-only loans for investment properties.

• Shop around for the best interest rates.

• Do not use all of your pre-approval capacity if you want to grow a portfolio.

• Seek properties that are positively geared.

While negative gearing delivers bigger tax deductions, positive gearing produces pure profit, and Haeri aims to buy properties with a gross rental yield of at least 5.8 per cent.

“Speak to a quantity surveyor who can give you advice on tax depreciation which could save you thousands each year,” he says.

Vaibhav says real estate was a seller’s market during the pandemic but now the tide has turned.

“Buyers are in control, which means you have far more room to negotiate,” he says. “If you can secure a property without competition, you might get an excellent deal which gives you plenty of upside potential.”

Look for growth areas, Vaibhav says. “There is no single Australian property market. No two locations are ever the same. Focus on the markets that have the best growth potential.”

HIGHER INCOME

Wealth Through Property principal Scott Levoune says there are 16,000 different markets in Australia and while 95 per cent may be flat or falling, others are increasing in value.

“The rental market for rent value versus property value has never been stronger, and this will lead to higher prices for properties in the years to come due to the higher yields,” he says.

“A property is only worth what people offer, while high interest rates and further increases may lead to distressed sales or vendor discounting.”

However, investors should not buy based on distress or wait for a market based on fear, Levoune says.

“Multiple considerations are needed – for example, the immediate pressure in the market followed by long-term growth characteristics as well as the cost of living for that suburb,” he says.

“You want to follow the trends and not just pure data. You want to see the days on the market dropping and not increasing, and online search interests increasing and not dropping.”

Levoune says investors should learn lending strategies that save their borrowing capacity, find a buyer’s agent who specialises in building portfolios, and understand their own financial position to avoid putting themselves under strain.

“Do not buy where the herd is investing – investor-driven areas are dangerous for low returns and properties not performing,” he says.

Property investor Monica Rouvellas says there are still good markets to buy into.

TREATING IT AS A BUSINESS

Entrepreneur Monica Rouvellas has been a real estate investor for 17 years, and its success has allowed her to fund her latest business venture Muzikboxx, a platform that helps music teachers.

Rouvellas says she treats her properties like a business, which helps her benefit from finance opportunities and minimising tax.

“Any investment I make I run the numbers to see if the business will be profitable, and I only will invest if the property will be profitable,” she says.

“There are still plenty of good markets to buy across Australia where prices are not dropping.”

Originally published as Property investment: how to make a move in an uncertain market