Investment strategy moves as market softens
As the national property market softens in some areas and surges in others, the changing landscape requires a versatile and carefully managed investment strategy.
Many property owners will be looking to consolidate after surging prices over the last two years and impending interest rate rises.
But for others, the softening market may offer great opportunities to intensify their commitment to property.
Established property investors find that the cost of holding a property falls significantly over time as their rental and other sources of income keep rising, while the value of the debt falls in real terms.
The rental growth may even be sufficient to make the investment property cash flow neutral or even positive.
Naturally, many investors use the improvement in their financial capacity to buy a second investment property, which further increases their prospective retirement nest egg and makes the investment more tax efficient.
For homeowners in their late 30s and 40s, the decision to re-enter the property market is often driven by a need for more space for a growing family.
Changing living requirements in the aftermath of the pandemic, particularly surrounding work-from-home and the hybrid working trends, are also a major factor.
So, they trade up to a bigger house that is afforded by the equity built up in the first home and the rising family income as they climb the career ladder.
Alternatively, some homeowners decide to sit tight and instead use their equity and growing purchasing power to buy their first investment property, as part of a goal to secure their retirement.
The criteria for when and what to buy a second time around are, effectively, the same as buying the first property (or third or fourth for that matter). Be clear about the primary reason for re-entering the market and be willing to accept the opportunity costs this can entail.
Is it for lifestyle reasons or for investment purposes? If you need a bigger house to accommodate the teenage years then great, go for it.
But be aware that the process of upgrading often moves homeowners out of investment grade property (i.e. 2-bedroom houses in inner suburbs) into property where there is less competition and hence lower capital growth prospects. So, the rate of capital growth, in percentage terms, can be slower.
Invest or renovate?
If the real aim is to build more financial assets, then it’s worth considering whether it’s better to be buying an investment property rather than upgrading the home.
Buying an investment property rather than a home generally makes financial sense for those disciplined enough to stick with investment grade property in the inner suburbs of the major capital cities.
Once the purpose test is answered, it is then a case of ensuring finances are adequate to commit.
It is important to discuss with the lender current levels of equity, salary, rental income, debts and living expenses. This is especially important, given the predicted interest rate rises.
For the second time investor, the other main consideration is spreading risk through diversification.
Owners who have invested in, for example, a two-bedroom 1970s style unit in a particular suburb the first time round, shouldn’t buy the same style of property in the same or similar suburb just because they’re familiar with it.
Rather, to avoid over-exposure to any localised fluctuations in value, they should consider a different style of unit in a different area or, depending on their finances, a house, again in a different but equally well-performing location.
For some who have successfully bought their second investment property, there is the question of whether to keep on accruing.
It may indeed be a feasible and wise option, but remember that quality always trumps quantity, and it is the amount of equity that has been built those matters, not the number of properties owned.
While there is often hype about individuals who have bought their twentieth investment property, it is far better to avoid those cheap, low growth assets and to remain disciplined, and to buy intermittently and well.