Buying in a hot market can be risky, but there are still opportunities for savvy investors. Here are four tips for buying successfully in the current market.
Blogger: Ben Kingsley, chair, PIPA
Record-low interest rates have resulted in more households looking to invest in property, creating a lot of competition and heat within some property markets.
While concerns about a property bubble persist, investors should remember this is largely with regards to the Sydney market, and to some extent, Melbourne. The Australian property market is made up of many, many markets and smarter investments can be made elsewhere.
The key to identifying areas for growth is research, research, research. To ensure a smart buy in any market, it is essential you research intensively before making any property investment decision. Look for markets with strong local economies, strong population growth and a shortage of properties in comparison to population.
If you’re adamant about buying in Sydney or other especially hot markets, you’re going to have to do you research more thoroughly than ever if you don’t want to pay above market value. And as so much growth has already occurred in markets like Sydney, investors who are speculating will lose their money. Instead investors should only consider buying with a long-term view – 20-plus years. If you’re looking to make a quick buck, you need to invest in another market where there is still plenty of growth to come.
It is also important to do your own independent research. Even if the property in question has been valued by whoever is promoting it, remember the valuation has been paid for by them and may not be correct or current.
Seek professional advice
The property industry is an unregulated industry with high-value assets. Unfortunately this offers unscrupulous operators and spruikers the chance to make significant financial gains and tempts many to put their self-interests ahead of their clients’ best interests. And when the market is hot, they tend to come out in force. Moreover, when it comes to buying in a hot market, professional advice is more invaluable than ever.
In order to avoid becoming a victim to any dodgy operators and to make a savvy investment decision, look for a qualified property investment adviser (QPIA) who can work with you to develop a long-term property investment plan and help you identify the right property investment that fits in with your overarching wealth creation goals and aspirations. In an unregulated property market, the PIPA logo offers you confidence that you are dealing with a trusted professional.
Watch your budget
Interest rates are at historic lows and mortgage payments are lower than we’ve seen in decades. However, we don’t know how long the low cash rate will last and where interest rates are heading.
When it comes to assessing your buying capacity, avoid being tempted to push your budget to the limit. Eventually, the cost of borrowing is going to return to more normal levels, so you want to be able to meet your mortgage repayments when this occurs.
While lenders will factor in a buffer of around two to three per cent, my advice is to ensure you can meet your mortgage repayments at a rate of seven per cent. This way you’ll have plenty of breathing room and won’t be left in a stressed out mess if interest rates start to rise.
Remember, property is not transactional – it is usually a high-cost, long-term investment strategy. You need to think carefully about how much you would like to spend on any investment and whether you can pay the loan interest if the interest rates go up in the future.
Never sign a contract under pressure
Hot markets can get us all a little hot under the collar but an investment decision made under pressure rarely results in a positive outcome.
In a hot market, salespeople will often put pressure on you by saying you’ll miss out if you don’t act fast.
I’d urge all investors to be cautious of any pushy property spruikers and never sign any contracts if you feel you’re being rushed or pressured. Buying a property can be the biggest financial decision you ever make. You want to get it right.