Buying an investment property, as opposed to a house with the intention of occupying it oneself, is typically done with the intention of generating income (usually via rent). Therefore, factors that may be significant while searching for a home to buy, such as the property's closeness to your place of employment, may not be as significant when searching for an investment property. The decision to put money into real estate has been and will continue to be very common, and it is frequently seen as one of the most successful methods to put money into investments in Australia for a number of different reasons. However, because making mistakes may be very costly, it is always a good idea to think about why you are investing in the first place and whether or not it matches the conditions that you currently find yourself in.
The year 2020 has been a year full of upheaval. Is it, therefore, wiser to put money aside now and make an investment the following year, or does the housing market hold anything special in store for 2020?
Would you like to speak to a specialist? Book a complimentary discovery session by calling: (03)999 81940 or emailing team@klearpicture.com.au.
It is easy to forget that the year began with a debilitating drought and half of the country being on fire because of COVID-19, which is currently closing borders and wreaking havoc on the global economy.
It is now apparent that Australia will enter a technical recession, if not a full-blown one, given that the country's unemployment rate is projected to reach 10 percent and wage growth has been stifled to levels comparable to those seen during the Great Depression.
The government has announced a ban on in-person auctions and open houses as a direct result of the pandemic. Coupled with the fact that consumer confidence is at record low levels, it is predicted that the housing market will come to a grinding halt, despite a significant increase in values in the second half of 2019.
As a result of all of these factors, some economists are forecasting a reduction in house values of up to 30 percent in the worst-case scenario, with the majority of analysts thinking that prices will fall by at least 10 percent.
Therefore, if this is the situation, may this be an opportunity for those who invest in real estate to make a purchase? Or does the never-before-seen economic panorama and the current state of the market make such a venture too dangerous?
What should I do now?
Although I don't want to make light of COVID-19, my perspective gained from being involved in the real estate market for more than 45 years leads me to believe that the effects of this on our real estate market will, in the end, be temporary. I say this despite the fact that I don't want to make light of COVID-19.
Now, this viewpoint might be a little bit different from what some are saying, who are predicting that property values will decline anywhere from 10 percent to 30 percent; nevertheless, keep in mind that this too shall pass.
What happens to our real estate markets will be determined by how long we are in lockdown, how quickly our economy picks up, the degree of unemployment, and most crucially, the level of consumer confidence emerging out of our recession, which will be a strong barometer of all of the things listed above.
We are fortunate that our government has a lot of experience in handling monetary and fiscal policy during economic downturns, which has resulted in the lowering of interest rates, the introduction of quantitative easing, and the spending of more than $300 billion to create a bridge to get us through this, and they will undoubtedly spend a lot more to revive the economy.
At the same time, the various municipal governments have initiated their very own assistance and stimulation programs.
Sure, unemployment will reach double digits, and regrettably, some firms won't reopen, but the economy is expected to recover in the fourth quarter of this year or early next year, at which point we are probably going to be in the middle of a perfect storm for the property.
The International Monetary Fund has projected that the economy of Australia will decrease by 6.7% in the year 2020, but it anticipates a rebound in the domestic economy of 6.1% in the year 2021, presuming that the steps to limit the virus are successful.
In the event that Australia is hit by a recession that lasts for several years and is brought on by the implosion of the global economy, then, of course, property values will fall by a significant amount.
What kind of short-term effects do you anticipate the coronavirus having on the housing markets in Australia?
Our real estate markets won't be immune to the economic damage caused by the Coronavirus, but the magnitude of the impact on property values will depend on how long it takes to bring the virus under control.
Because discretionary sellers are not participating in the market at this time, transaction numbers are going to be considerably impacted over the next two to three months.
If you absolutely have to sell your home right now, putting it up for sale on the market is something you should definitely consider doing.
However, there will always be buyers and sellers who are required to complete a transaction within the next few moments. These transactions cannot be avoided.
It is possible that in order to close a transaction, sellers may reduce the price of their houses, and buyers will take advantage of this situation in order to secure a good deal.
However, this does not necessarily mean that property values will significantly decrease.
In point of fact, as a category of assets, bricks and mortar have historically fared quite admirably in the face of various previous economic catastrophes.
It is doubtful that there will be a big number of forced or mortgagee sales that could weaken market confidence because banks are offering deferments or breaks on mortgage payments this time around. This is good news for the housing market.
What are the monetary and tax advantages of investing in real estate?
The considerable tax incentives that are available to those who invest in real estate here in Australia are among the factors that make this type of investment one of the most alluring options.
One of the most well-liked of these tax breaks is known as negative gearing. If the costs of your investment exceed the income from your rentals and you end up with a loss, you are eligible to take advantage of this tax benefit.
After that, this loss will be deducted from any other taxable income you have, such as your wage or the income from your investments.
You can also apply to the Australian Taxation Office (ATO) for a Tax Withholding Variation to enjoy tax benefits each time you receive your pay instead of having to wait a year. This will allow you to claim a tax deduction for the depreciation in value of your investment property.
If the amount of money you make from your rentals is higher than the amount of money you spend on them, this indicates that you are favourably geared. In this scenario, you will be required to make tax payments on the money that you have earned.
You are considered to have neutral gearing if the income from your rental property is sufficient to pay all of your expenses. Because of this, you won't have to take money out of your own pocket to support your investment, which is something you have to do when your investment is negatively geared.
Before you purchase your first property for investment purposes, it is imperative that you make sure you fully comprehend all of this information.
Should I put my money into land?
Be aware that there are potential drawbacks and hazards associated with pursuing this course of action if you are considering making the initial purchase of an investment property in the form of a block of land.
The fact that you do not receive any revenue from a parcel of property is by far the most significant of these drawbacks. As a result, you would be providing financial support for this venture out of your own pocket. This could have a significant effect on the flow of funds through your business.
A parcel of land is more difficult to sell than a piece of real estate that already has a house built on it. Even if it is available at a lower cost to purchase, there will be a smaller market for you to sell it in.
When compared to the cost of purchasing a home, the initial investment required to acquire a piece of vacant land is significantly less.
What steps should I take to be financially ready before I buy a house to rent out?
There's no question. Purchasing your first property as an investment can be an intimidating experience. It is in your best interest to consult with a mortgage broker in order to gain clarity on the amount of money you are capable of borrowing or the readiness of your finances.
It will be easier for you to construct a solid base if you have a crystal clear awareness of both your financial capabilities and responsibilities. Before you invest any money in real estate, you should therefore make the effort to consult with a property-focused accountant or financial counsellor.
Because of the time, it takes to secure financing, investors frequently pass up a lucrative opportunity. Because of this, it is a good idea to get pre-approved for a loan before even beginning the search for an investment property. You will have a better idea of your ability to borrow and will have an easier time acquiring an investment loan if you first obtain a reputable pre-approval.
Before you make your first investment property purchase, it is strongly recommended that you consult with a qualified financial counsellor. They are able to assist you in determining whether or not you are prepared to make the significant move.
Advice on the Purchase of a Property for Investment
Your ability to successfully invest in real estate can be significantly impacted by the amount of time and effort you put into research and planning. Here are some suggestions that will assist you in getting things off to a good start.
Achieve clarity in your objectives
Along with the prospective benefits of the property investment, it is a smart idea to take into consideration the actualities of the investment. Consider why you're investing in the first place and whether or not it makes sense given your unique set of circumstances; doing so will not only help to direct your subsequent actions but will also contribute to their success. For instance, you'll need to make sure that you can afford to make your loan repayments without significantly altering your lifestyle. You'll also want to think about whether or not you're comfortable with the risks that are involved, such as the possibility of a drop in market value or a significant increase in interest rates.
Research by Yourself
Researching your alternatives beforehand will help you better understand each one. And there are a lot of things to think about, such as whether you want to rent an apartment or buy a house, where you want to live, and how much of a mortgage you can afford to take out for an investment property.
You should also give some thought to whether you intend to acquire the property in order to generate income right away or as a longer-term investment. The next step is to conduct research about the possibilities for capital growth, rental revenue, and ongoing costs associated with the property.
Prepare a spending plan that is feasible given your current resources
Lenders typically need a minimum deposit that falls somewhere between 10 and 20 percent of the total loan amount. In addition to this, you will need sufficient up-front cash to pay for things like stamp duty, legal and conveyancing fees, insurances, maintenance, and interest on any loans you take out.
Consider how the interest rate you pay on your loans could have an effect on the value of your investment. Many people in Australia have loans with variable interest rates, which implies that their overall borrowing expenses are subject to change. It is important to analyze how changes in interest rates could have an effect on your investment and to investigate the possibilities presented by loans with fixed and variable interest rates.
Verify the details of your credit history
Check to see that the information contained in the report on your credit history is accurate. It is recommended that you carry out these steps before beginning the inspection of the properties. Visit the website of the ASIC for a variety of resources and additional details.
Set your timeframe
It is helpful to keep yourself responsible for your objective by establishing a schedule for accumulating a deposit and then acquiring a house. Doing so will also offer you something to work towards in the meanwhile. However, bear in mind the current state of the market, and prepare yourself mentally for the possibility that circumstances could shift.
Determine who will be in charge of managing the property
You might wish to hire a property manager or real estate agent if you don't have much free time or if you live a significant distance away from the investment property you own. Bear in mind that the property management costs for this service will need to be paid.
Think about whether or not you really need insurance
Some of the items that you need to take into consideration include acts of nature, building repairs, belongings, and loss of rental income. The kind of protection you'll get and the amount of the premiums you'll have to pay can be very different from one insurance company to the next and from policy to policy.
Put some money aside for the little matters
When you are putting money together to buy an investment property, you need to think about more than just the deposit. Before you begin renting out your property, you may want to make some improvements. In addition, you will need to create a budget to cover ongoing property costs, such as the following:
- council rates
- water rates
- strata fees
- projected costs associated with the vacancy, including lost rent and advertising expenditures;
- alterations, improvements, and upkeep;
- property management fees;
- insurance policies, such as those for property owners and landlords;
- additional fees, such as a tax on the land.
The rise of assets and income from rentals
You need to invest in real estate that not only can provide income for you through rental payments but also has the potential for some form of financial gain. It makes no difference which approach you take; this is always the case. In a word, you need to do some number crunching in order to establish whether or not the investment actually makes good sense from a financial perspective. In addition to this, you need to make sure that the return on investment that your property generates is equal to the return that you would have received if you had invested in an other asset class, such as shares.
Capital growth
The majority of real estate investors aim to experience capital growth, which is characterised as an increase in a property's value over time. The Australian real estate market has experienced all three of the cycles that the real estate market goes through: periods of growth, stagnation, and fall. When all of this is taken into account, it becomes abundantly clear that investing in real estate should be done for the long term rather than with the intention of a quick return.
Rental return
Do some research to find out what the typical monthly rental rate is for properties in the area that are analogous to the one you own. Consider if the amount of rent you expect to collect will be adequate to pay the expenses associated with keeping the property while still allowing you to earn a profit on the investment.
The yield of a property is an essential figure that can be computed by dividing the entire amount of rent received over the course of a year by the purchase price of the property. This calculation may be done at any point throughout the ownership of the property. After this, the number is multiplied by 100 to produce a percentage that represents the yield. If you bought a piece of real estate for $300,000 and are renting it out for $300 per week, which comes to $15,600 per year, the gross yield on that investment would be 5.2 percent per year. Another example would be if you bought a piece of real estate for $600,000 and are renting it out for $600 per week. This amount can then be contrasted with other figures, such as the yield you would get by investing in shares.
Is it a good time to invest in real estate at the moment?
The simple answer is yes, but only if you are one of the fortunate few who has maintained your financial stability in the face of declining home prices and reduced competition.
The significance of maintaining a long-term perspective, which always trumps reactive thinking in the near term, is one of the most important things that I have picked up from experiencing previous economic setbacks.
And for my part, the property fundamentals are the ones that have always truly mattered to me and have been the primary force behind our markets over the long term.
A number of factors come into play, including demographics, supply and demand, affordability, availability of credit, and movements in the local economy.
Tenant
Naturally, we are all familiar with the proverb that advises us to be fearful when others are greedy and to be greedy when others are afraid....
When everyone else seems to be panicking and running around like the end of the world is near, it can be tough to focus on making important financial decisions like purchasing a new home or making investments.
Having now invested in real estate through eight different cycles, I can say with certainty that it is precisely these kinds of conditions that offer the most promising opportunities.
This indicates that the moment to start getting ready to capitalize on the opportunities that the market will provide is right now, which means that you should get started right away.
There has been an increase in housing values following each worldwide disruption, and there is no reason to believe that this will be any different because, as I mentioned earlier, the fundamentals are still robust. There is no reason to suggest that this will be any different.
I believe that right now is an excellent time to buy a home or investment property at a price that you were unlikely to be able to get a couple of weeks ago, when the real estate markets in major capital cities were booming. If you have a stable job and your finances are in order, then I believe that now is an excellent time to buy a home or investment property. This possibility is available to those individuals who are not only financially stable but also have a job that is secure. There were much more people trying to purchase something than there were those selling it.
Because of the human nature of many prospective purchasers, it is possible that they will opt to wait for some time until things become clearer before completing a purchase. This is because waiting gives them the opportunity to reflect on the situation more thoroughly. This suggests that sellers will be more inclined to accepting offers rather than holding out for a price that is higher than what they had anticipated receiving for their property.
Would you like to speak to a specialist? Book a complimentary discovery session by calling: (03)999 81940 or emailing team@klearpicture.com.au.
Keep in mind that you shouldn't rely on long-term decisions, such as purchasing a home or an investment property, on the news from the previous half an hour.
Those individuals who are willing to act independently in the face of widespread opinion will, without a shadow of a doubt, be rewarded with possibilities in the market. When they reflect on the past in one year, and most certainly in five or ten years, they will remember the unprecedented events of 2020 as a fantastic opportunity to purchase a house. This will be the case regardless of when they do so.