Buy on the slide or the turn?

[MichaelW]

Hi all,

OK, probably a really dumb newbie question, but is it SOOO easy to spot the turn that you can wait until it happens and not try and pick the bottom on the slide.

e.g. Here's median house prices in one of my watched suburbs for the middle half of house prices in that postcode.

2004 $690,500
2003 $741,000
2002 $757,500
2001 $550,000
2000 $517,000

They've been sliding since 2002 having jumped about 40% from 2001. I'm thinking if I spot a quality property for under $600,000 its probably good buying. But if we're going to slide and stagnate for a few years yet then I'll probably wait. Just don't want to miss the turn as I'm buying for growth not +ve CF. (Spann / Somers et al approach).

Don't want to resurrect the "Are you buying" thread here, just asking whether I should hang out and wait for the turn having not watched a cycle in an informed way as yet. I feel like a goose for missing the boat this cycle and am not going to do so again.

Thanks in advance,
Michael.

 

[Brenda Irwin]

Hi Michael, and thanks for a very interesting question which all of us have to consider at one time or another.

I have concluded, that each one of us needs to assess it on our own circumstances and what to we expect out of the deal. You have said you are mostly after capital growth secondary to cashflow.

What you need to assess is how much will a purchase impact on your income while you wait for capital growth and how much will it impact on your standard of living in that time. Will the capital growth be enough for what you have to sacrifice to get it?

A very important question is, are you committed enough to stick with the investment until the capital growth is achieved. Get a calculator and do lots of 'what if' sums and choose what will suit you best.

 

[willair]

Micheal,
why not look at this from another angle ,imho the only person who
understand the area is yourself,four years is a long time to be on the
side line watching everything happen ,i dont follow trends
you just have work out the risks involved with market changes,
then the periodical changes/down or up will tell you when to invest.
good luck.
willair.

 

[MichaelW]

Brenda,

Thanks for the reply, and from someone who's achieved as much as you have too! Read your thread and posts in detail on what you've achieved. Awesome!

To answer some of your questions then... I have a lot of disposable income, around $3k a month at present and growing. I have the equity and cash to buy anytime and up to $2M in borrowings. I also have the patience to wait it out if need be but would rather not sit on a non-performing asset. At present I am paying off the mortgage on my PPOR with the $3k spare a month, at this rate I'll own it mid-2007. So I'm in no rush to jump into IP right now and am happy to continue paying down my PPOR. My only concern is that I'll miss the turn. There are a lot of clued up investors now and I reckon the slightest sniff of a turn will see the market move a lot quicker than it has in the past.

Yield in the postcode I detailed is currently at only 3.84% which isn't great. So, there is a fair bit of sacrifice to secure the CG. I'll look at others suburbs too, but like the proximity and potential of the one I detailed. I don't know yield over the past 5 years so can't do Steve Navra's rental reality, but can see the direction house prices are headed.

Thanks again for your advice.

Michael.

 

[TomL]

Hi Michael .. pity you cant find out the rental reality, would be a handy indicator that could confirm whether you should buy. Maybe talk to some RE agents in the area to see what the yields were 5 yrs ago?

.. but ..

Brenda has some good questions, but there are some other fundamental things to look out for other than median price. Likewow posted some of his personal indicators in another post - what are your OTHER rules that tell you when to buy?

T.

 

[MichaelW]

TomL,

Here's a link to Steve's site and his Rental Reality as an indicator of buy price and timing, its the "Rental Reality, timing and market sentiment" article that I'd recommend.

http://www.navra.com.au/articles_display.aspx

I read LikeWow's post on indicators of market rising and like them. I guess my question here is broadly whether or not I can afford to wait until I spot these for fear of it being too late.

I'm not scared of entry, just of entering "after" its happened.

Once burnt, twice shy.

Thanks all,
Michael.

 

[scouse]

API for June? had rental yields for last 5 yrs, that might help with rental reality figures.

 

[likewow]

Michael,

If you keep your eye on the property market and the indicators, you will not miss the turn. It happens so slowly.

Most experienced investors will wait for confirmation that an upward trend has been established before diving into investment property in a big way.


So, even if you are a little bit late, theres no way you will miss out. I'd say a LARGE percentage of forum members who bought their investment properties way past the beginning of the previous price boom, which as stated previously is the preferred option as you will have definite confirmation of a long term upward trend.

Keep your ear to the ground in your area of research and your eye on this forum and you will be a wealthy boy in years to come.

 

[MichaelW]

Likewow,

Thanks, that was the positive affirmation I was looking for.

I know my buy-and-hold -ve/neutral approach for CG is not everyone's cup of tea. But, given that's my entry strategy I just wanted to test the water on timing and spotting the entry point.

I've been lurking here for a while and active on a couple of other forums, but will keep my eyes open.

Cheers,
Michael.

 

[keithj]

Median prices are averages for a whole suburb - 100's of sales, mostly by average emotional people buying PPORs. Aim to be an above average buyer by buying a good value IP at a below average price. There are always good value properties on the market based on todays sentiment. As you point out averages and therefore sentiment has declined over the last 2 yrs, and may continue to decline (but at a slower rate IMHO). So your patience is admirable.

As a diversified investor, I invest where I can get the best return, and at present that ain't any property that I can find. Why would an investor buy an asset that they know will underperform for the next N years when they could invest in another asset class that is currently performing better and appears as though it will continue to perform better. I understand that there are far better IP investors than me who are buying those good value properties right now. However, I believe that investor sentiment will remain negative towards property and even though buying now may give instant equity/cashflow, returns will be no better than CPI for the next few yrs.

I'd say paying off your PPOR is better use of your excess cash than IP investment. Maybe mid 2007 will be the around the time sentiment towards IP improves. And keep an eye on those median, and other indicators.

KJ

 

[WillG]

Hi all,

OK, probably a really dumb newbie question, but is it SOOO easy to spot the turn that you can wait until it happens and not try and pick the bottom on the slide.

e.g. Here's median house prices in one of my watched suburbs for the middle half of house prices in that postcode.

2004 $690,500
2003 $741,000
2002 $757,500
2001 $550,000
2000 $517,000

They've been sliding since 2002 having jumped about 40% from 2001. I'm thinking if I spot a quality property for under $600,000 its probably good buying. But if we're going to slide and stagnate for a few years yet then I'll probably wait. Just don't want to miss the turn as I'm buying for growth not +ve CF. (Spann / Somers et al approach).

Don't want to resurrect the "Are you buying" thread here, just asking whether I should hang out and wait for the turn having not watched a cycle in an informed way as yet. I feel like a goose for missing the boat this cycle and am not going to do so again.

Thanks in advance,
Michael.

Hi Michael,

Good question but it has to be about the numbers.

For example
1. Purchase $600k IP in 2004. Rent @ 5% gross yield
2. IP decreases in value 3% per year for the next 3 years

Cost of holding the property for 3 years.
Interest (@ 6.5%): - $117k ($39k * 3)
Expenses (@ 20% of income) : -$18k ($6k * 3)
Income : $90k ($30k * 3)
Equity Decrease : -$52.5k

Net Loss: $45k
Total Loss (including equity): $97.5k

Buying an IP at a time where capital growth goes backwards will multiply losses over the years and will all eat away at equity. When the 'tides turn' you may not be in a position to get some bargains because of your 'negative equity' position - This is NOT the position you want to be in.

Note: I haven't factored in the cost of paying less off your PPOR

 

[MichaelW]

WillG,

Great post, thanks. Of course, its premised on a 3% pa reduction in value for the next 3 years. If this were a 3% pa CG then you'd be covering costs and turning a slight profit.

My post was really about timing. The last thing I want to do is buy a negative geared asset with little or no CG in the medium term. The median house prices I posted have been sliding for years, I was just wondering how long they'd keep sliding and whether spotting the turn is an easy enough thing to do.

I think the answer to those questions are really 1. Who knows if they'll keep sliding, that's speculation. 2. But yes, you'll spot the turn if you keep an eye on them. Which means... 3. Buy on the turn and not on the slide.

Thanks again for your informative post tho' Helps put it all in a hard numbers perspective of the risk involved with poor timing.

Cheers,
Michael.

 

[quiggles]

Share investors have a simple saying: the trend is your friend. Buying on the slide is cool, just so long as you have turned your area's general slide into a precipitous drop on the actual property you will buy.

Otherwise, wait for the turn and get in on the ground, or first floor.

Right now, given the magnitudes of spare cash you appear to have, paying down the PPOR may well be your better option.

 

[MichaelW]

Quiggles,

Thanks. I've decided to play a patient hand and wait out the market for a while. This doesn't mean I'm going to take my eye off the ball, just that I'm going to pick my point of entry carefully. My mortage on my PPOR is at 6.5% P&I, so I'd need to do very well elsewhere to justify not paying this down for now.

Given the market tends to move farely slowly, I think I'll pump my spare cash off the mortgage such that I'm debt free in 2.5 years time. This is probably about the right time for re-entry to be appropriate and I'll be in great shape to do so. I'll be debt free, rent free and have a combined income of over $200K all looking to park itself in investment properties. Even if I spot the turn in less than 2.5 years, I'll still have significantly reduced my mortgage (and therefore interest) on my PPOR.

Thanks for post,
Michael.

 

[meggala]

by the looks of things you know the area well so keep your eye on the market and look for good oportunities. not saying to buy now but if the right opportunity arises be ready to strike. I was in the position and just missed out on a great ip casue my budget wouldnt go high enough. so they are out there especially if your patient. because went you want one you you wont able to find one.
cheers
meggala