When is it the right time to buy an investment property?
3 min read
So you’re thinking about buying an investment property. The decision to buy is a big one, so it’s important to do your research to determine the best timing for your circumstances. Here are some important things you need to know about timing your purchase:
Choose the right time for you.
You’ll want to consider what’s going on in your life. Ultimately it comes down to whether you are going to need a loan to purchase the property and if so, what your employment and income situation looks like at that time. You should also evaluate how much money you can afford each month (this is where a mortgage broker comes in handy!). If you are positively gearing your property, then it’s important to ensure the funds you are contributing, coupled with any rental income you generate cover the cost of the loan repayments and maintenance on the property.
What are interest rates doing?
The interest rate is used to calculate your loan repayments. The higher the interest rate, the more you’ll pay in interest. The lower it is, the less you’ll pay back each month.
It’s important to look at current interest rates if you’re planning to borrow money to buy a property because they could affect your finances in several ways:
- Interest rates are still at low levels in Australia. Despite recent increases since May 2022, most of the major banks are predicting rates rises will slow down and peak at a maximum of 3.35% by late 2022, then drop or hold steady through 2023/24.
- If your mortgage payments are high and there’s no way around them (due to factors like market fluctuations), then an increase in interest rates could mean that buying a house isn’t worth it anymore. When you look at buying property in the first place, your mortgage broker will help you calculate repayments on a range of different rates and provide projections based on what future rates might look like.
What’s the market doing?
Before you do anything, it’s important to understand what the property market is up to. You want to know how many properties are being bought and sold in your area. The number of properties on the market will tell you if there’s still room for rental growth or if it’s a saturated market where few investors can make money.
- Gross rental yield: This metric shows how much profit you’ll make per year by renting out a property. We’ll look at an example. Let’s say you made $30,000 in annual rental income and your property is worth $600,000. Using the calculation: $30,000 / $600,000 x 100 = a 5% gross rental yield.
- Vacancy rate: This tells us how long it takes for an empty unit (e.g., one that has been rented) before being filled again by another tenant; this helps gauge whether there’s enough demand for housing stock in your area or not so much as there could be high demand but low supply due to insufficient new construction activity occurring at any given moment. According to REIV, current vacancy rates in Melbourne fell to just 3.6% in August 2022.
- Median rent: The median rent in Metro Melbourne is $500 per week as at August 2022, according to REIV.
How’s the economy?
Here are some key questions to ask yourself:
- How’s the economy doing at large? Currently we are seeing rising inflation and rising interest rates, however experts are not talking about recession. In Australia right now, unemployment rates are very low at 3.5% and the labour force participation rate is 66.6% (ABS, August 2022).
- Is this place booming or struggling? Some areas will be experiencing economic booms while others are still recovering from recessions or slowdowns in productivity. For example, some cities could have strong job markets while others might be plagued by high unemployment rates or stagnating wages.
- How healthy is the housing market? If your city has high rental occupancy rates (meaning there aren’t enough apartments to go around), landlords may be more willing to negotiate on prices—but if too many homes are sitting empty because nobody wants them anymore, they may not want yours either! In Melbourne we are seeing a fall in housing values, which can provide great opportunity for investors to purchase property at a lower price than just six months ago.
There’s no one right answer for everyone when it comes to buying an investment property
But there are a few things to know:
- Interest rates: Interest rates will have a big impact on the timing of your purchase. If you can buy within your means comfortably, then taking advantage of falling prices, low vacancy and (comparatively speaking) low interest rates then now could be a good time to buy.
- Market trends and economic conditions: Market trends also play an important role in determining when exactly it’s the right time for you to invest in real estate as well as your personal situation at the current time (i.e whether or not someone else has already purchased properties similar). Economic conditions can also affect how much money is available from lenders and investors that could help fund future purchases so keep an eye out for these things as well!
Whether or not you decide to buy an investment property is a personal choice. If you’re looking for some extra income, and you have the cash or equity on hand to make a deposit, then it might be right for you.
Get in touch with Entourage, we can help you work out whether buying an investment property is the right decision for you.