Is it just not a good time to buy an IP

Australia’s Big Short

Sorry as indicated in my first post I am new to investment property, but the more I read into it, the more it does not look like a good time to buy. So say I can't afford to service at the 7.5% on both OO and IP, is it probably best I try to save more first?

Australia’s Big Short

 

It depends on where you are intending to buy and with what budget. At what budget can't you afford a property? What is the yield of the properties you are interesting in buying? Depreciation also comes into it and can help with cashflow but not necessarily serviceability.

There are places other than Sydney and Melbourne to buy property.

If you have an OO property, is there equity you can access? ( although this is getting more difficult )

 

It all comes down to individual properties and the value they present. For those who live and breath property it can seem concerning - but lets face the reality here - Australian property is not a financial product, it's an essential commodity that for the most part is used for owner occ purposes.

So whilst there are more strenuous rules being put on those who have significant investment portfolios - the smaller investors and owner occupiers of Australia have come off lightly and will continue to be able to afford to invest.

 

I believe in hurdling the rate at 5-6% but per the article, 9%!!! Yes, s*** could happen but think of the missed opportunities.

And I think the real risk in question is what type of props/where this guy is buying in that gets close to a 9% gross yield.

Otherwise agree with his article, and thanks @Corey Batt for a dose of calm. Needed that. My issues start in 3 yrs or so if things persist but I have a lot to lose and a lot to gain.Being rash is not advisable at times of crisis.

 

What you are looking at here is risk and risk mitigation. The risk is that your loans will go to P&I at 7.5%. The question is, what measures can you take to manage the risk?

One option is to buy at a lower LVR. This means saving more for a deposit.

Another option is to have a significant cash buffer.

Another option is to buy a property where you can improve the value and increase the rent so that the increased rent will cover a higher (potential) repayment.

Also, you don't necessarily have all of your risk mitigation in place before you buy. For example, if you were getting to a place where you are comfortable but not fully covered for a worse case scenario, you could buy something anyway with a plan to cover your worst case scenario in the future. For example, if a great renovation project came up in the area you could buy it, renovate and rent then save all your surplus funds in an offset account. This serves a dual purpose of reducing interest paid and increasing your cash buffer.

It's up to you how you handle this but I think it is helpful to think about this in terms of risk (what could happen) and risk mitigation (what will I do if that happens). I hope this helps.

 

Those interest-only loans are a ticking timebomb.

There are some figures here showing how some of the banks are exposed: Young borrowers at risk in mortgage madness: hedge fund

I think this article has some interesting stuff too - https://www.moneysmart.gov.au/borro...-mortgages/australias-interest-only-mortgages

Shows $88 billion borrowed in 2012. Some portion of that on five-year terms coming to and end in 2017... just as APRA changes the rules.

2015 - $153 billion in interest only loans going out. How much of that won't be able to be refinanced onto I/O at the end of five years? 2020 is going to be an interesting year for property with a lot of loan terms expiring. Just three years away.

 

Sleep factor is important. Will you be able to sleep at night if the rate increases by 3 or more percent? What's your buffer like? Will your rent cover your mortgage repayment on I/O? Do the sums (look at personal income, personal expenses and mortgage repayments and other expenses... stress test. higher deposit is preferred.)

 

Hypothetically, if you have a reasonably priced owner occupied home and one or two investment properties, and an average income, you are most likely going to be fine. if things get difficult you should still be able to refinance your loans back out to 30 years P&I at the end of your IO period. It's just really important that you use the IO periods to pay down any non-deductible debt, or save into an offset rather than spend the extra on lifestyle.

If you're at the start of your investment journey, it's never been more important to chat with an investment focused broker who will be able to devise a strategy with you to ensure that you won't come unstuck.

 

I agree about the looming P&I cliff. That said, it's not something that will come out of the blue. Investors will have had up to 5 years to prepare for it. Some will prepare, some won't.

Personally, I started restructuring my portfolio 2 years ago to prepare for tough economic times. I am ready for the transition to P&I today, 3 years ahead of time. This means that I will be a position to buy in 2020. Other investors are prepared too. Some haven't or won't prepare. They may be forced to sell. If they are there will be people ready to pick up the properties. 2020 will be a bad year for some and a great year for others. For those who aren't ready, it's not like they weren't warned.

 

Thank you everyone, Jess, how shall I go about getting advice from an IP savvy broker? Costs likely to involve for such services?

 

I think I am like urself was preparing for this a year plus ago. As Emza said 2020 lots expiring 2 of mine are too - but I hope to sell one once the 15 unit permit comes out hopefully to some commie @Kangabanga haha lol and other is positive geared with the highest rent in the whole suburb so will just sit on it

Again I started from a flipping background and never had more than 5-6 properties so I remember Those times when I was closing loans in less than a year. Basically banks did not want to lend me as maybe credit rating Was bad or blacklisted and they either water 30-40% deposits. So really not much diff to what is happening now

 

Let us know if anymore commie money continues to come in

@Perthguy IF china does go the way of Japan, and that is what I see coming around in next few years, Australia will be looking at a prolonged recession/depression like environment that may last quite a few years. Don't think there is another major economy that can pick up the slack once China goes down. In which case, Aus property might not be the best asset class to reinvest in.

China is trying to engineer a soft landing, but in their highly corrupt and speculative markets which are poorly regulated, I think a hard landing will be what happens.

An example of small shocking even that only can happen in China/HK financial markets
Hong Kong Small Cap Stock Plunge Wipes Out $6.1 Billion in Value

 

Sure. I'm not bullish on oz property anyway, so I will definitely be flexible and look for the economic indicators if I go to buy again. Otherwise, if the economy is really down the toilet is there a good asset class to invest in? I mean in a depression it's not like stockmarket returns are going to be that fantastic. Could be a good time to pick up some cheap shares though.

 

I guess cheap shares with good yields will be the asset class to buy in depression. might be stocks in staples like Telstra or food production companies.

Maybe shares in lithium mining companies, it's gonna be all the rage if Tesla model 3 succeeds this year.

Otherwise like MTR has done, maybe invest in assets overseas.

 

Maybe. Moving into a new investing environment, be prepared to be flexible. Adapt or die.

 

@Perthguy nice mate. We have done very similar to you. Over the last 24 months we have consolidated some property in Asia that had massive growth to reduce the overall LVR of our portfolio to less than 20% now. Also have a huge buffer, 7 figures. We now have our Snore At Night Factor.

Very excited to pick up some great deals post 2020. Exciting times ahead.

 

There are lots on here - have a read of the finance section and see who you relate to
Costs vary but often there's no cost at all.

 

Yesterday was a good time to buy an IP.... if you don't have a time machine today will have to do

 

There is no need to rush into anything, do you number, factor in rate increase, manage your risk
if the number stack up any time is a good time.

Having said that I think it pretty late in the cycle and depend on how much you pay the chance of you experience some pain is a possibility

Most savvy investors know what is coming and paying down debt and build their buffer.

don't ask a mortgage broker or anyone who has vested interest in properties a question
should I buy a house now.. the answer is always yes
just like the stock broker and financial advisers on shares, it always yes

do your number, work out your risk, when it a go zone, you go to a broker people for a loan but don't ask them for their opinion whether or not to buy.