So, you’re wondering, When should I buy an Investment Property?
Now or Later….
Often we wait for the best time to do anything.
We sometimes wait too long and do nothing at all, but surely buying something is better than buying nothing at all.
With falling house prices and the prospect of further falls, leaves many investors wondering if it is a bad time to get involved in property investment.
You want to avoid buying at the top of the market and see the value of your property fall then have to wait for the market to rise again.
But it’s not as simple as that.
If you know about market cycles and you can make some great investments.
If you know where things are heading and buy before the crowd does — before prices start to rise strongly — you were likely to make big profits!
If you wait for the right opportunity, you may miss out.
Some investors seem to do well in good times and do even better in bad times? So, then market timing isn’t really important to them and vice versa.
So how important is timing the market?
Below is a graph of the median house price for Melbourne’s inner-ring properties over a 20-year period starting in 1998.
The current downturn is the fifth downturn over this 20-year period.
The following table shows the difference in equity as well as the overall difference in capital growth if you could get your market timing perfect.
A couple of conclusions can be drawn from this.
1. ‘Right’ timing doesn’t matter if you hold your investment over the long term
The investor who bought at the very worst time in 2000 is only $21,500 (or 0.58%) worse off than the investor who got the timing right by buying at the very bottom of the market.
But over 20 years, it remains irrelevant if you hold your property.
An investor who bought in 2007 just before the global financial crisis (GFC) hit, is only 1.91% worse off than if they would have bought just before the property market started to pick up in 2008 when the RBA dropped interest rates to stimulate our markets.
However, often an investor will wait for the ideal time to get into the market ie after the GFC. By waiting for the “best time’ they would have been waiting for market signals that the property market had moved on to the next phase of the cycle.
And these would only have come to light well after the bottom when prices started rising, auction clearance rates rose, and other investors had moved the market to the next level.
2. Owning the right assets is critical
The longer you hold your investment property, the less important best timing of your purchase becomes.
More important than timing is the quality of the asset you own because investment-grade properties will outperform the averages with regard to capital growth.
When the market turns, many people wait for signals to change and often are worse off than those who made a poorly timed decision but took action and bought a property.
The graph above shows that if you own the best property — for ‘wealth-producing’ rates of return over the long term — your asset base will grow more substantially and give you the cash flow you require to develop financial freedom.
Good asset selection is more important than the correct timing.
3. Time in the market is important
Compounding is the key to becoming wealthy.
For example, if you had $10 000 in an interest-bearing account and it earned 3% interest ($300), you would be practicing compounding if you left the interest in the account to grow further. This means you’d now be earning interest on $10,300, not just the original $10 000.
This keeps building year after year and it’s much the same with property.
Just look at the following graph which shows what would happen to the value of a property that grows in value at 7% per annual (of course this is an average — it doesn’t happen each and every year).
While this property doubles in value over 10 years, the power of compounding means that almost half (45%) of its increase in value over the 15 year period shown occurs in the last five years.
Again, timing is not as important as owning the right type of asset and holding it in the long term.
4. No crystal ball
In Australia, their many property experts, everyone has an opinion, some property experts can get it wrong despite having done all the research available.
As there is no exact science, other factors must be assessed; ie population growth, supply and demand, employment levels, interest rates, affordability, and inflationary pressures.
Presently, investor sentiment is the lowest it’s been for decades, despite the economic fundamentals being quite solid.
With reports of falling property prices or an impending housing crash, many investors become scared and don’t do anything, this is predominately near the bottom of the market.
But, when property markets are booming, we all hear of investors seemingly making large gains overnight abound, people, want to jump on the bandwagon and cash in. Often this is a time when the market is near its peak.
Emotions impact us, override our confidence, thinking and we often ignore information that conflicts with your current views.
So when property values keep rising and this spreads through a new generation of investors, driven by FOMO (the fear of missing out) they drive property values up even further.
Alternatively, when people think the real estate market is going to crash, the fear of buying early keeps them out of the market, and their negative sentiment gets reported in the media and the feeds on itself.
What can we learn?
- There are multiple property markets within Australia. Some are still growing, others are projected for growth and some markets will experience falling prices over the next year.
- Instead of waiting for the best time the market, buy the best assets you can. Timing your purchase well will give you a one-off benefit. However, owning the best property — an investment-grade asset that grows at wealth-producing rates of return — will result in your portfolio outperforming over the long term.
- Poor or no capital growth can be managed by ‘manufacture’ capital growth through property renovations or development.
- A Boom will not last forever, nor a bust. When they come around and don’t overreact and avoid being sucked into booms and spat out during busts.
- Our property markets are not only driven by fundamental data, timing, and irrational and erratic behavior of an unstable crowd of other investors. Long-term performance of the property is influenced by the fundamentals, its short-term performance is much more affected by market sentiment.
- Treat your property investments like a business and stick to a plan, and take the emotions out of your investment decisions. Don’t make long term investment based on quick short term views.
- Know that property is a long-term game and set up financial buffers to help you ride the property cycles.
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