Buy Now Or Wait For The Bust?? Consider This Scenario Please

Say I buy an IP today for $200,000 in a rising market.

In 3 years say it's worth $250,000.

Then the market starts falling & declines in value over the next 4 years to be worth now $200,000.

So after 7 years from initial purchase the IP is worth the same money.

Then the market starts to increase & in the next 3 years doubles in value to $400,000.

So 10 years have passed & therefore completes the 10-cycle of doubling in value.

(Note: The above figures & years are approximate figures)

So here's my point: Instead of buying property ALL THE TIME; you could try & gauge the low point of the market (the BUST) & BUY UP BIG just before the market takes off & starts to rise (lots of people have done this in the past); hence saving around 7 years of going up & then falling back to the original figure anyway.

Just some thoughts of mine. See what others think???
 
That would be really useful, but you'd need a crystal ball and I'm all out of stock.

I think that certain markets still have a long way to grow before they reach a point where they'll drop significantly. If you choose wisely now, chances are you'll do quite well in 2-3 years time.
 
If you have the ability to predict which point is the lowest in the cycle, then good on you, that would be an excellent strategy

A property in good area do not drop back to the previous level. so there will be some gains to be made by just keeping it long enough
 
Well I think a lot of wise investors (I've been reading about them in API magazine recently) had a crystal ball because most of them all bought up big buying 5-10 plus properties when the market was down (depending on where you live this was around the 2000-2003 period). So you must be able to pick the market (hence having an imaginary crystal ball), because others did - hopefully I'll be one of those over the next 5-10 years.
 
Hi Watermelon man,

I would agree with your example of a property showing little growth for an extended period of time, and then suddently doubling. To avoid loosing time waiting for growth to occur, it may be worthwhile working out where the market is at any particular time before investing in property. The economy moves in cycles, and if these can be researched and understood, they can be a good indicator as to when is the best time to buy.

Having said that, over the past ten years a rising market has occured in at least one of our major capital cities at any given time.

For example a rising market occured in:

1997-2003 - Sydney and Melbourne.

2001-2005 - Brisbane, Adelaide and Hobart.

2005-2007 - Perth, NT.

2007- Brisbane especially so, and Melbourne appears to be rising.

(My dates above are approximate and not exact).

So perhaps it could be worthwhile buying into markets just before or as they are rising - rather than not buying IP's for an extended period of time. That way, its possible to have at least one part of a portfolio exposed to a rising market at any given time, while building up a geographically diverse portfolio.
 
So here's my point: Instead of buying property ALL THE TIME; you could try & gauge the low point of the market (the BUST) & BUY UP BIG just before the market takes off & starts to rise (lots of people have done this in the past); hence saving around 7 years of going up & then falling back to the original figure anyway.

Best of luck picking when to "gauge" that one. The last boom probably started in Sydney, and might have finished in Perth ... but it did a hell of a zig zag all over the country before getting there .... as PT_Bear said, I'm all out of crystal balls too :D

Cheers

Phil
 
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I think you're missing the point Phil...I mean I'm not talking about the whole of Australia - I'm talking about different areas (your own backyard maybe). In every area/location prices the market is cyclical & goes up & down along the way.
 
I think you're missing the point Phil...I mean I'm not talking about the whole of Australia - I'm talking about different areas (your own backyard maybe). In every area/location prices the market is cyclical & goes up & down along the way.

So why not just study all the major cities, and always pick the 'cheapest' one and buy that? That's the reason I bought one IP in Perth in 2004, and I definitely didn't see the mining boom coming.
Alex
 
Well I think a lot of wise investors (I've been reading about them in API magazine recently) had a crystal ball because most of them all bought up big buying 5-10 plus properties when the market was down (depending on where you live this was around the 2000-2003 period). So you must be able to pick the market (hence having an imaginary crystal ball), because others did - hopefully I'll be one of those over the next 5-10 years.

I don't think it was wisdom. Many of the API investors featured were newbies when they started. So I think it was a combination of luck and the fact that they actually went out and did it.

Thinking back to 2001, for example, in hindsight it was a great time to buy. However, back then it was all doom and gloom about the net bubble bursting and how Oz's 'old ecomony' would be an albatross around our necks.
Alex
 
I don't think it was wisdom. Many of the API investors featured were newbies when they started. So I think it was a combination of luck and the fact that they actually went out and did it.

Thinking back to 2001, for example, in hindsight it was a great time to buy. However, back then it was all doom and gloom about the net bubble bursting and how Oz's 'old ecomony' would be an albatross around our necks.
Alex

Hi Alex,

Thats right - I remember this time well. There was also talk of an interest rate rise around of the start of the year. The property market stalled in Melbourne for a couple of months. We bought our first IP in the inner areas of Melbourne during these months. The market then took off again!! Within a few short months we had made $100,000 on that property!! (We still hold it today and its appreciating beautifully!).

If only we had bought up multiple properties during that "window of opportunity". In reality though we had very little knowledge of property investing. Furthermore our incomes barely supported the -ve gearing on the one IP at the time!!

So while hindsight is a wonderful thing, its also easy to look at things through rose coloured glasses and think you could have done better - if only we had.....

The reality of this situation for us though was that we were doing the best we could with the knowledge and cash we had available at the time!!! Anway thats slightly off topic, and perhaps worthy of another thread!!
 
I think it's also important to keep in mind that API need to sell mags. For every one "lucky" investor, there are probably thousands that bought one property and its doubling every 7-10 years - and there's nothing wrong with that.

API will pick the best examples. Happy stories sell more magazines.
 
I think it's also important to keep in mind that API need to sell mags. For every one "lucky" investor, there are probably thousands that bought one property and its doubling every 7-10 years - and there's nothing wrong with that.

API will pick the best examples. Happy stories sell more magazines.

Hi ILoveProperty,

Yes, the get rich quick idea is extremely appealling and will help to sell a book or magazine. The go slow approach is not as well accepted in this fast paced world that we live in!
 
Watermelon Man. In the scenario you present, I suggest very few real people would have both the financial strength and the personal commitment to see the ten years out. And why should they? 7.2% pa is a poor return on a volatile asset. The opportunity cost is excessive.

Holding your initial cash in a term deposit for seven years and regularly adding that amount you would need to spend to meet -ve cash flow on the early purchase, you would be able to buy the property with a much larger deposit at the seven year point.

Holding any asset which flat lines for seven years without giving a nice quarterly dividend check is pure folly. (I don't think of owning a PPOR as "folly".)
 
I get the impression that most investors on this forum are actively trying to build an investment portfolio (probably consisting mostly of property) so IMHO it would be wrong to focus on one property and one possible scenario. For instance, our strategy is to leverage off growing equity to get into more IP's.

So in the scenario Watermelon man gave:

Purchase property $200K. Over 3 years value increased to $250K giving me $50K equity to leverage into another IP. 2nd IP then continues to increase in value and this increased equity used to leverage into IP#3 and so on. Now you might say that the flaw is that 2nd IP would actually fall in value along with the original IP. This is where it is important to diversify rather than concentrate on a single market, to spread your risk. Just look at Aust's. current fragmented property market - Perth, Darwin and Qld booming, even Adelaide to a certain extent, whilst Sydney and Melbourne have been flat if not falling in some suburbs.

Now if I'd done nothing and waited to buy the original IP just before the next boom 1) I run the risk of not picking the trough and buying in too late and 2) I have missed the opportunity to leverage into more properties.

Flatout
 
So you must be able to pick the market (hence having an imaginary crystal ball), because others did - hopefully I'll be one of those over the next 5-10 years.

And what happens if you get it wrong? I would also be working out those calculations as a worst case scenario vs best case scenario to see what the potential gain is compared to what could go wrong.

Is it really worth a lot of buy/sell churn if your risk is $50k/$100k/bankruptcy? Can you make 90% of the profits with a lot less risk? If 50% of your risk is that last 10% profits I personally wouldn't bother. Can you make 90% of the profits by being patient?

Also, what about entry and exit costs? The more you jump in and out of the market, the more of a factor they become. (We just paid $10k duty to buy a single IP)

What if you sell at $250k thinking it's the top, but then the market goes to $300k before dropping back to $250k. You can now buy the same property again, at no profit and you will also loose all the costs associated with selling then re-purchasing. Worse still if the market only drops to $280k, then you've lost and can not even re-buy the house you originally owned.

As for the API crystal ball winners. Sure, some of them probably put in a lot of research and others would have just got lucky, but you can bet there are even more that put in as much or more research and still lost money.

Good luck with whatever you decide, just remeber there is a down side to every investment and it is worth working out how bad it could be.

I'd love to fly.
I could jump of a cliff and try,
but the risk of plummeting to my death is too high.
Ant 2007

Hehe, I'm a poet. :D
 
...you could try & gauge the low point of the market (the BUST) & BUY UP BIG just before the market takes off...
I don't know of anyone who can consistently predict when growth will occur, so that strategy will fail more times than it will succeed.

Change your mindset - don't think about booms & busts. Think about good value. If you see a quality growth asset that is cheap/good value/pays for itself, then buy it. It'll cost nothing to hold and any growth is free - it's all upside. You don't have to use a crystal ball to predict the WHEN part of future of growth because it doesn't matter how long it takes. 90% of Syd,Bris,Melb IP was in this category in 2000/1, most of ASX was in 2003 - currently neither are (IMO).

Don't wait for the bust - it didn't happened, wait for rents to catch up with prices.

Markets can stay irrational for longer than you can stay solvent - Milton Friedman
 
And what happens if you get it wrong?

Is it really worth a lot of buy/sell churn if your risk is $50k/$100k/bankruptcy? Can you make 90% of the profits with a lot less risk? If 50% of your risk is that last 10% profits I personally wouldn't bother. Can you make 90% of the profits by being patient?

Also, what about entry and exit costs? The more you jump in and out of the market, the more of a factor they become. (We just paid $10k duty to buy a single IP)

. :D

What happens if YOU buy a property tomorrow & the property value dives in 6 months? Maybe YOU might get it wrong too.

Who said anything about buying & selling??? I certainly didn't! I said why wait 5-7 years when you could buy in the bust just before the boom & hold those properties & never sell.
 
What happens if YOU buy a property tomorrow & the property value dives in 6 months? Maybe YOU might get it wrong too.

Who said anything about buying & selling??? I certainly didn't! I said why wait 5-7 years when you could buy in the bust just before the boom & hold those properties & never sell.
Well nothing beats a study of history, go do some homework and crunch some figures and then you will have a whole set of new questions. That's the way I have handled my investing thoughts.

If you know there is going to be a bust sometime soon which won't be fatal then of course you should wait for it.
 
What happens if YOU buy a property tomorrow & the property value dives in 6 months? Maybe YOU might get it wrong too.
I don't really purchase by trying to pick the bust times, but rather what I consider is good value for money at any time. You're right though, there is just as much chance of anything I buy dropping in value due to a down turn, but then so will other properties in that area.

Who said anything about buying & selling??? I certainly didn't! I said why wait 5-7 years when you could buy in the bust just before the boom & hold those properties & never sell.
Sorry, my misunderstanding. So if you wait for the bust before the boom, saving 7 years of non-growth (or however long/short that time is), what do you use your money for in the mean time?

Or looking at the worse case scenario again, what if you hold off buying waiting for the bust, and actually find that prices continue to grow; then when they do drop, it's higher than when you first started planning. In that case, your $/house purchasing power will be less.

If I'm reading correctly, you're focussing on your initial purchasing power and trying to pick a buy time to get more house for your $, but you could easily miss judge it and get the reverse.

It's the risk assessment that seems missing. It's like buying anything. You can try to pick the perfect time and spend 100% of your money and either win big or lose big. Or you can buy a little at a time over the years and in some cases you'll pick the perfect time, in others you'll pick the wrong time, but you are no longer gambling on all or nothing choices, you're averaging out the wins and loses in the hopes you pick more wins.

Like dollar averaging in shares (my latest education :D )

On a tangent, you might have more houses to choose from and hence more chance to find a bargain during a slow market instead of just before a boom but that's just a random thought to consider. I'd much rather find a good house thats been on the market for 3 months than the same house in a maket that changes weekly.
 
Looking at my current actions, and looking back at my investing history, a lot seems to come down to what I could "afford" at the time.

For instance, when we could "afford" to buy property (which happened to be 2000), we bought one as often as we could, for as long as we could, until the banks would lend us no more (and we could not afford the shortfall any more - all ours are CF-)

At that stage (which just happened to be 2003), we could only afford to buy a bit of shares and managed funds - so that's where we put out money.

Today, I still can't "afford" another property, because in my particular circumstance, it is far easier (in terms of capital outlay, time input required, etc) to obtain a 100% loan on a managed fund than getting a property loan, let alone extending (refinancing) my existing IP loans.

Cheers,

The Y-man
 
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