Q. The recent interest rate rises have made me nervous about buying an investment property. Should I wait until things calm down, or go for it and buy now?
A. Investment property is a long-term growth asset and if you keep this in mind – coupled with a strong focus on the correct asset selection – then it will perform no matter what stage the economic or property cycles are at. The golden rule is to buy the best assets you can afford when you can afford them.
Don’t try to time the market. Instead, carefully plan your purchase and institute a list of actions that won’t only provide safeguards against rising interest rates, but will place you in a strong position for the longer term. The first action is to take that long-term view. Properly selected assets should outpace inflation and double in value every 7–10 years.
The assets that will hold firm in the event of any market slow-down are located in areas where high demand will continue to outstrip limited supply. These are in the high land value inner urban zones – 2–12km from the major CBDs. Be conservative with your borrowing and aim to have some equity in the asset.
Concentrate on the right location and capital growth, rather than the amount of accommodation.
Don’t procrastinate by waiting for inflation or interest rates to level off. This will rob you of capital growth, and the prime investor sectors of the market don’t show any signs of slowing in 2008. Waiting may mean that even if interest rates stabilise, the entry price will have increased considerably over the next 12 months.
Investors can take advantage of this type of economic climate. The interest on your investment borrowings is tax deductible and this cushions the investor against rate increases. Remember too, that when interest rates rise or remain relatively high, not only do more homebuyers stay out of the market, but some investors are also deterred. The result is that rental vacancy rates remain very low and rental yields will rise!
Monique Wakelin - is a co-founder and director of Melbourne based Wakelin Property Advisory. She is a noted and independent expert commentator on the residential property market. www.wakelin.com.au