While the experts remain divided, we still must accept that, whether property is booming, about to boom or headed for another downturn, we are still in the grips of economic uncertainty. The sharemarket is responding with more volatility than has been experienced for decades, and as a barometer which measures the stability of world markets, this paints the picture of continued unrest.
As a property investor, you have to be prepared for all contingencies. If you sit and wait out the turmoil, you run the risk of missing the boat in terms of buying property which grows well, quickly. If the traditional property indicators are anything to go by, it’s likely that many areas will experience a significant growth in value in the coming three to five years, and you are not going to want to miss out on that.
Conversely, the risk is that you buy property today which fails to grow in value, or worse still loses some of its value. It’s for this reason that many property investors are still playing the ‘wait and see’ game – watching while others invest, to see what happens.
The trouble with this approach, of course, is that in the event that properties do begin to once again gain value, by the time you decide to buy, it will be a little too late. Most of the good buys will be gone, and you will be competing with a large number of other investors for the available properties. Your yield will decrease (since rental increases usually come after value increases) and your ability to grow your portfolio may be diminished due to the higher buy- in prices.
So, what do you do? Since I am of the belief that, even in a downturn opportunities still exist in some areas, my preference is for you to buy now. In fact, I believe that all property investors should have a strategy which involves consistent buying of properties whenever they can afford them and they qualify for the loan, regardless of what the underlying markets are doing at any one time. This consistent buying then ensures that, as long as you hold for a considerable period of time, your average buy in price is as good as it can be, as you have probably bought property in all market conditions.
In the event that you do buy now and find further stagnation of the property market, efficient debt reduction then becomes the key to continual advancement of your portfolio. Since the bank will lend you $5 for every $1 of equity you have in your property (subject to you also qualifying in terms of your ability to service the loan), then it follows that reducing your debt can further fuel your leveraging power.
This capacity to reduce debt becomes your most important tool during these uncertain times. Since unstable economic circumstances usually result in lower interest rates, astute investors should ensure that they commit all available funds to debt repayment while the going is good.
A trick I like to use is to work out just how high interest rates can go before I experience real financial pressure. When rates do rise, I look to my budget and cut out all non- essential spending to make the mortgage repayments. The amount of extra money I need to service my debts with higher interest rates is the amount by which I need to adjust my budget. While rates are low, the amount I know I could scrape up if interest rates increase should become the amount I pay today as an extra repayment. Doing this buys equity in my properties, and equity in my properties increases my net worth and my cash flows, which in turn gives me additional funds for even more debt repayment. The ability to speed up equity acquisition in this way also brings me closer to the day that my passive income is sufficient to allow me to leave the paid workforce.
The difference between a good property investor and a great one comes down to what you are prepared to do to achieve your goals. Debt reduction is a very powerful tool, with the capacity to create stronger property portfolios, sooner.
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