Investment Property: How To Avoid Getting Caught In A Real Estate Bubble
Property prices in Australia have been rising at an attractive rate in recent years, and low interest rates, as well as the opportunity to invest in SMSFs (self-managed superannuation funds), have increased demand for investment properties. Some people fear a real estate bubble is forming, and that prices are rising too high, too fast. So if you're in the market for an investment property, here are some tips to make sure you don't get deflated if the bubble pops.
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Don't pay more than you can really afford. If you're taking out a loan, a lender might be willing to loan you more money than you can actually comfortably pay back. Analyse your budget honestly, determine how much you can afford, and then only take that much as your loan.
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Pay as big of a deposit as you can afford, and take the loan with the shortest possible term. If you can establish a decent amount of equity in the property from the beginning, you will not worry so much if the market does decline somewhat. But if you make a small deposit and stretch your payments in order to afford a property, you can easily find yourself upside-down on the loan (meaning you owe more than the property is worth) if the real estate market declines by even a little bit.
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Don't use negative gearing and then count on capital gains to make your property profitable. Negative gearing, or paying more in investment costs than the property generates in annual income, has been popular recently and is a terrific tool during times of rapid price appreciation. You could deduct the excess cost of your property against your other income, and rely on the capital gains to provide your profit. But if gains aren't so certain, it's better to make sure the property is profitable on its own rather than hoping that real estate prices continue increasing.
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Evaluate the property in relation to current and future rents. Forecasting rents is maybe a little bit easier than forecasting real estate prices. You know what the market is currently paying, and you can predict a fairly reasonable increase in that based on inflation. Thus, you can value a property based on its current and projected future rents, and then make sure you are not paying too much for it.
No one can accurately predict what will happen in the housing market next year, let alone 5 or 10 years from now. But if you buy smart and take the appropriate precautions, you can limit your chances of getting wiped out if a bubble does occur. For more information, consult a real estate agent, such as MINT Property Agents.
