Thinking about diving into property investment but feeling a bit overwhelmed on where to start? You’re not alone. This blog is crafted to demystify the property investment journey for newcomers like you.
We’ve seen firsthand the hurdles and triumphs of first-time investors. Our aim here is to share insights to smooth your path into the investment world.
In this blog, you’ll get an idea of when / what / where to buy, and how to fast-track the investment journey.
Sounds good? Let’s go!
When to Buy
So, you’ve got your deposit ready, but the financial headlines are all doom and gloom with rising interest rates and falling property prices. Is now the right moment to jump in, or should you hold off for the market to bottom out?
Here’s a thought: don’t let market fluctuations dictate your decision. If you’re financially prepared, that’s your green light.
Rising interest rates are not a deal break nor the end of the world
Let’s use the present interest rates for context. Indeed, they’ve climbed to a peak not seen in six years, making mortgages more expensive than they were just a year ago, particularly those with fixed rates. Yet, variable interest rates remain appealing – they’re actually below the rates of many existing loans (refer to the chart below). Moreover, with fewer people applying for mortgages, banks and other lenders are getting creative, introducing enticing deals to attract new clients.
Low prices may not be as beneficial as you think
In theory, falling house prices should mean we can snag a bigger or nicer home for our budget. But in the real world, it’s not always that straightforward. Data from CoreLogic reveals that back in May 2022, there were more houses up for sale than we’ve seen over the last five years. But as overall property values began to drop, we saw these numbers start to converge. This suggests that homeowners are hesitant to let go of their properties for a song, particularly the top-notch ones. This trend hints at a tricky reality: the lower the prices, the scarcer the high-quality homes become.
Data shows that over time, getting into the market sooner rather than later tends to yield better returns than trying to time the perfect moment to buy
The property market is always buzzing with activity, leading to two distinct investor profiles. On one hand, we have market-driven investors who jump in when the timing seems just right, aiming to snag the best deals. On the other, there are goal-driven investors who make their move based on personal readiness and a clear focus on their long-term portfolio objectives. According to a hypothetical scenario outlined below, those who are goal-oriented tend to secure notably greater returns overall compared to their market-timing counterparts.
What to Start with
Many first-timers in property investment start by focusing on their budget, often opting for the seemingly more affordable choice: apartments, instead of houses. However, this decision might be one of the biggest missteps a new investor could make. While apartments might come with a lower price tag and potentially offer slightly higher rental yields, about 1.5% more than houses, their potential for capital growth is significantly lower, particularly in major urban areas. This is largely due to the glut of new apartment buildings flooding the market, leading to an oversupply.
The chart below highlights the disparity in value growth between houses and units in four major Australian cities over the last decade. The difference is striking, raising a crucial question: Is an extra 1.5% in rental yield really worth a 50% reduction in capital growth potential?
Where to Look
Just by glancing at the chart comparing median price growth for houses and units, it’s evident that in 2012, the cost of a unit in Sydney could have gotten you a house in any of the other three major cities, with the promise of much better capital growth over the next ten years.
Of course, we can’t hop in a time machine and go back. Instead, let’s explore what your Sydney or Melbourne unit budget could get you in today’s market, as of 2022.
As of June 2022, the median price for a unit in Sydney was sitting at $780k, while in Melbourne, it was a bit lower at $595k. Wondering how far that money could go in other parts of the country?
Taking Melbourne’s more modest median price as our yardstick, out of 330 regions with available price data, 129 had median house prices that didn’t exceed $595k.
Diving deeper, within those 129 regions, 83 boasted a commendable capital growth of over 10% in the past year, and the same number enjoyed a solid rental yield of at least 4.5%. To put this in perspective, Melbourne units had an average growth of just 1.4% and a rental yield of 3.4% in the same period.
How to Fast Track Your Investment Journey
Worried you’re getting a late start on your investment journey? Or maybe you’re just eager to reach your financial goals sooner rather than later? Either way, we’ve got some strategies to help speed up your path to investment success.
Always plan your portfolio at the beginning
Like we mentioned earlier, investors focused on their goals usually see better returns than those who react to market fluctuations. Starting to build a diverse portfolio early on sets you up for quicker investment success. That’s why having a clear portfolio strategy and sticking to it is crucial.
By planning your portfolio, you’re not just deciding on its size to meet your financial targets, which is incredibly motivating in itself, but you’re also figuring out how to diversify your investments to strengthen your portfolio and boost your earnings.
Keep in mind, your portfolio plan might need some tweaks as your financial situation evolves. Maybe your income grows faster than you anticipated, you tie the knot and start investing with your partner, or you decide to splurge on a dream vacation to the South Pole. Whatever changes come your way, having a solid plan in place helps you navigate your investment journey with clarity and effectiveness.
Always do your research before buying
Navigating the property market can be daunting, given its complexity with countless micro-markets, and even properties on the same street can vastly differ. This is why in-depth research is vital to ensure you’re investing in the right spot.
So, what makes a location the right choice?
Looking at the bigger picture, the ideal location boasts a strong economy marked by a solid industrial base, consistent population growth, low or decreasing unemployment rates, and significant infrastructure development. Additionally, signs of high market demand, such as reduced time on market for listings, low vacancy rates, and a healthy rental yield (above 4.5% given current interest rates), indicate a promising area.
On a more granular level, it’s important to scrutinize the specifics: Is the property at risk from natural disasters like bushfires or floods? How close is it to major roads or noise sources? What’s the crime rate like in the neighborhood?
Yes, it’s a considerable amount of effort to undertake this level of research. But it’s absolutely essential. Detailed due diligence not only secures the potential for your property’s value growth and rental demand but also simplifies the ownership experience.
By now, you should feel more confident about kicking off your property investment journey, understanding what to invest in, pinpointing promising locations, and keeping our speed-up tips in mind. If you’re still pondering over any queries, don’t hesitate to reach out.
