Should you buy real estate now or wait until interest rates fall?
At first glance it may make sense to wait for interest rates to fall before buying a property but is that the sensible decision when all the financial variables are factored in?
The prospect of an interest rate cut later this year or perhaps early 2025 has property investors in a quandary.
Interest rates are always a hot topic when it comes to investing in property, because it can really hurt your cash flow as well as define whether your property will be a positively or negatively geared property.
A lot of investors also choose to purchase their property with interest-only loans, and so buying during periods of rising interest rates can impact their decision-making.
Many experts are predicting that rates will be relatively stable this year, and an interest rate rise is unlikely.
Most are also predicting we might even see an interest rate cut by the end of the year, which seems to feel like it is just on the horizon.
The big question really is, should you buy now, or should you wait until the interest rates fall to buy an investment property?
Buy now or wait on the RBA?
To be blunt, you generally shouldn’t try to time the market.
The best time to buy property is when you can afford to buy property, and the short-term pain of higher interest rates for a few months will reap benefits over the long term because we all know that property investing should be done with a long-term mindset.
The ups and downs of interest rates should be considered along with your overall investment strategy. Focus your attention on whether a property is likely to bring in better cash flow over the life of the investment rather than the next few months but be sure to be able to cope with current interest rates, including a buffer.
If your strategy is focused on capital growth you should be looking at what your property is likely to be worth in the long term whether that be 10, 20 or more years down the track.
Supply and demand impacted by rates
When taking interest rates into the equation, keep in mind that when interest rates are higher you are likely to have less competition from other buyers.
This can help buyers wield more negotiation power compared to when interest rates are low.
When rates do drop, there is likely to be more buyers who can afford to buy property. When demand is up, prices are too, so you are likely to be paying more if you wait to buy when interest rates are lower. It’s really a catch-22.
This is another reason why we don’t take interest rates into account.
If you wait until a rate cut, a lower interest rate on a higher total mortgage debt might cost you more than a higher rate on a lower value mortgage.
This is why smart investors don’t wait for low interest rates or try to time when property prices will drop. Instead, they look for where is the best place to buy at the time that they have their finance ready.
In fact, when interest rates are higher, you will:
- have less competition so can negotiate a lower purchase price
- have more time to purchase the property and can shop around and conduct due diligence and research
- be buying property while others are sitting on the sidelines
How to buy an investment property like a pro
In order to buy an ‘investment grade property’, take your focus away from interest rates and instead put your energy into your buying strategy, whether you want a good yielding property or a long-term capital growth property (or whether you want to develop and manufacture your own equity).
Consider buying properties that are well-located, good quality assets in ‘up and coming’ areas close to amenities.
Properties that are located close to excellent schools will always be in high demand, particularly in Sydney where families are known to pay a premium to relocate just to be within a certain school ‘catchment zone’.
Try to look at where you can get the best asset for your budget and be flexible on location across states.
Key to clinical negotiations
When it comes to negotiating, don’t wear your heart on your sleeve.
Being emotional and falling in love with a property will only make you more attached and will risk overpayment for a property.
Experienced investors understand what a property is worth and are prepared to walk away if they don’t get their deal for the right price.
When investing in property, it really comes down to the making the numbers work and being prepared to walk away if they don’t.
