Real estate investors’ golden rules for an uncertain 2023

Are you among Australia’s 2.2 million property investors or want to join their ranks? This advice can help you through a tricky 2023.

Surging interest rates. Falling property prices. Rising rents. One out of three pieces of welcome news does not deliver a stellar outlook for Australia’s 2.2 million real estate investors this year.

Capital city rents climbed between 5 and 13 per cent over 2022 amid ultra-low vacancy rates, but this extra investment income did not come close to matching the 40 per cent rise in loan repayments amid a string of eight straight Reserve Bank of Australia interest rate rises.

The national rental vacancy rate is near 1 per cent, putting properties in demand, but many investors cannot afford to expand their holdings because of high repayments and the extra 3 percentage point repayment buffer that banks add to loans before approving them.

However, there are a few golden rules that can help investors get through the current tricky period, and newcomers potentially join their ranks.

Almost three-quarters of investors own a single rental property, and Property Investment Professionals of Australia chair Nicola McDougall says investor activity is at its lowest level in 18 months.

“I will never understand the ‘greedy landlord’ narrative when most of us are just trying to not rely on the public purse via the pension in retirement and investors provide the vast majority of rental housing in the country,” she says.

“Today, many potential investors simply can’t qualify for finance given the three percentage point servicing buffer that is still in play. I expect investment activity to continue to dwindle … which will further decimate rental markets.”

Property Investment Professionals of Australia chair Nicola McDougall say the “greedy landlord” narrative makes little sense.

Author, university lecturer and investor Peter Koulizos believes 2023 will be a better year for property than 2022.

“Nationally, property prices have dropped, manly led by Sydney and Melbourne,” he says.

“It’s not over, but the worst is over, and the market will turn when people believe that interest rates will stop going up.”

Here are six key rules for real estate investment this year.

1. KNOW YOUR DEBT

RBA rate rises have pushed up many variable mortgage rates from around 2.5 per cent to 5.5 per cent, and many fixed-rate home loans will deliver a painful shock when they revert to variable this year.

“Make sure that you are comfortable with the fact that you can still make repayments,” Koulizos says.

“And make sure that you can sleep at night even if interest rates do go up again.”

2. HAVE A PLAN B

Strong inflation and employment data may propel interest rates higher than expected this year, and investors need to prepare for nasty scenarios.

Some with multiple properties may need to sell one to cover surging the repayments on others, Koulizos warns.

“If you only have one property, the last thing I would do is sell it because then you have zero, and this pain is not going to be forever,” he says.

Refinancing may be an option, and Koulizos says another saving grace is that “rents are skyrocketing”, driven by low supply and soaring immigration.

3. LOVE THE LOCATION

“Location is the most important thing,” Koulizos says.

“Close to the city or close to the sea. And houses are better than units for capital growth.”

Regional properties became more popular during the pandemic as millions more people worked from home, and continue to attract interest because they are more affordable in an era where borrowing power is shrinking.

Suburbanite principal and property advisor Anna Porter says cities such as Adelaide and Perth offer good potential for investors in 2023.

Suburbanite principal Anna Porter says 2023 is not the year to stretch yourself thin.

4. BEYOND YOUR OWN BACKYARD

“Diversification is key in 2023,” Porter says.

“There’s plenty of opportunity for investors if they know what to look for.

“Look outside of your backyard – you can still get a great investment property in South Australia with less than $500,000. Owning a home and investment in the same city is not diversification.”

5. KNOW THE NUMBERS

Porter says it is critical to do your homework, especially on vacancy rates.

“Speak to valuers and local agents to make sure the numbers stack up,” she says.

And make sure it’s affordable.

“You’ll want to budget ahead – this is not the year to fall victim to stretching yourself thin,” Porter says.

6. BEWARE OFF-THE-PLAN AND SIGHT UNSEEN

“Not only is the market uncertain but developers and builders are seeing exponential increases to costs which aren’t slowing down,” Porter says.

“We’re seeing values decrease, especially in oversupplied areas, and buyers having to cut their losses as value is being wiped off their original purchase price.

“Always get a professional to inspect your property. The market won’t be quick to rectify a lemon in your portfolio.”

Originally published as Real estate investors’ golden rules for an uncertain 2023