Wait or Buy Now

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From: Charlie McCormack


Hi All,

I would just like to get peoples thoughts on the following if you have the time.

Predictions are said that interest rates are set to rise another quarter percent.

Some people are also stating that this will cause cheaper property prices due to over commitments in some areas.

Should one obtain a cheaper interest rate and lock it in for 5 years and then pay a higher premium for property now, or;

Should one wait until interest rates rise and wait for property pricing to fall.

What would people expect the average of property pricing to fall if any?

Cheers
 
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Reply: 1
From: Mark Petterwood


Charlie,

Picking the absolute right time to buy is something that has been holding investors back for a long time.

The real key as to when to buy is when you can afford it.

Do your homework and figure your costs out on a higher interest rate.

A booming market doesn't mean you have to pay too much for a property. Don't get emotional and be patient, when you see something that you think is the right price then buy it. If it is too much move on.

If you pay the right price in the right location the property should not go significantly backwards.

Higher interest rate generally means less people buying and thus more tenants. Hopefully rents start to go up and catch the capital growth a little. (a 6% rental yield in the South Eastern suburbs of Melbourne would be a nice thing again.)

The key is - due diligence - do your homework and don't pay too much just for the sake of buying an investment property.


Regards




Mark
 
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Reply: 1.1
From: Rixter ®


Charlie,

I have heard it asked " What is the best month of the year to buy IP?" and the usual reply Ive seen is "February along with March, April, May, June, July, August, September, October, November, December and January"....hope you get the drift

Happy Investing,
Rixter :)
 
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Reply: 2
From: Glenn Mott


Hi Charlie,

5 years can be a long time to fix your interest rate unless you definitely need to know what your outgoings are going to be for that period of time. Funny things happen in world economic markets and unforeseen world events cause changes here, a good example being the "Asian Crisis" in the late 90's.

Interest rates were on a downward slide until the economies of Thailand, Indonesia and Malaysia (3 countries that import a lot from us) fell in a hole. To my limited economic understanding, when Australians borrow money, it is generally for do-dads such as cars, electronics and white goods (all made overseas). Therefore, to stop us from buying things from overseas, and getting the import/export balance too much out of whack (my own economic jargon), the Reserve bank puts up interest rates. Our interest rates went up on a number of occasions shortly after the beginning of this crisis until the retail rate (the price you and I pay for our money) was around 8.5%. At this stage, all the legends who write newspaper columns about investing and business were suggesting that it was time to fix interest rates as they were definitely on an upward path! In the years since hitting that peak, interest rates have hit record lows and have been part of the reason why we have enjoyed strong capital growth nation-wide since.

As interest rates were coming down, I was paying around 7-7.5% variable (I can’t remember the exact figure) on 190k with one lender. Another lender had a product with no application fee and an introductory rate of 5.19%. This worked out to a saving of around $4000 for the introductory period, with my costs being stamp duty on the mortgage and the search fees. I did end up refinancing, and that introductory rate will convert to a standard variable rate in September. Fixing when rates were going up would have hurt my cash flow badly now and you may find the same scenario applies to you.

When thinking about the likely direction of interest rates, I try to apportion risk like insurance companies and banks do. For example: In my opinion, the possibility of rates going to the following rates in the next 12 months:

16% - 2.5% chance
14% - 7.5% chance
12% - 10% chance
10% - 12.5% chance
8% - 27.5% chance
7% - 40% chance

To me, this looks as though we have a pretty good chance of seeing interest rates between 7 and 10% in the next 12 months. Beyond this I will not forecast for myself. Commonwealth have an introductory rate of 5.04 % for 12 months for one of their products at the moment with no application fee. If you applied for one now, it would probably be July – Aug before everything was finalized, meaning you would pay 5.04% on your loan through to July-Aug next year in a time when it is very likely that interest rates will be 2-4% higher than this.

Please do your own figures. I am not a licensed investment advisor.

Glenn
 
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Reply: 3
From: Nigel W


>Predictions are said that
>interest rates are set to rise
>another quarter percent.

More than predictions I think...but we'll know tomorrow.

>Some people are also stating
>that this will cause cheaper
>property prices due to over
>commitments in some areas.

"People" say lots of things. Sometimes they're right, sometimes they're wrong and sometimes they're only right at the wrong time ie too late.

>Should one obtain a cheaper
>interest rate and lock it in
>for 5 years and then pay a
>higher premium for property
>now, or;
>
>Should one wait until interest
>rates rise and wait for
>property pricing to fall.

People get very excited about statistics. The problem is that you don't buy a statistic, you buy a particular house, on a particular street, in a particular part of a particular suburb...etc

It is ALWAYS the right time to buy a property when it's MARKET PRICE (as you can negotiate it) is less than its INTRINSIC VALUE. Which is just a pompous way of saying you should only buy if you think it's worth more than the seller does!

(and if you think about the converse, the seller only sells if their opinion is that the property is worth more than they are selling it for...including influences such as divorce, needing cash quickly, valuing getting an estate finalised more than achieving the best price etc)

So look at the numbers - they tell the story.

What is your plan with regard to this property? What other properties do you plan to buy and when?
What is the best price you can negotiate?
how much deposit will you need and how much return will you get on your cash in the deal?
how can you add VALUE for a few dollars and some sweat? what is the rental return and will it cover all the costs associated with holding the asset?
what is your cost of finance? Can you spend none of your own money and still make money? Have you done a sensitivity analysis (ie can you still afford the property if interest rates go up 3% and council rates increase by 10%?)
What happens if you lose your job? Is the property self-supporting?
What is the history of growth (yes stats do come in handy sometimes) and is it likely to be repeated? Why?
Is there some special value to you of this property - ie it's next door to your other property and this will make a valuable development site etc

ALL of which really boils down to - is it a dead cert I'll make $X'000 profit from this deal in Y time frame...(whether than be rent or growth, hold or sale, short term or long term or anything in between).

Begin with the end in mind.

>What would people expect the
>average of property pricing to
>fall if any?
>
where's that crystal ball?

Good luck, and remember - you can't go broke making net profits!
 
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Reply: 3.1
From: Steve Navra


Hi Charlie,

I would have to agree with Mark and Glenn and add that the 'CORRECT' time to buy will be based on the individual projects merits.
In other words 'due diligence' is necessary.

IF you are able to find a project where the 'numbers' add up (Value fits rental reality) then it will represent value, irrespective of where the property cycle is at. At this point in time, it IS extremely difficult to source value properties simply because the market sentiment is so high. (But they ARE there to be found!)

The logical result is that there is much more homework to be done to find value at this particular time and that as interest rates creep up so it will become increasingly easier to find value assets. (As the market comes back to a realistic level. Reflected by yields again being around the 5% to 5.25% mark.)

Personally, I do not fix my interest rates because the variable rate over a 5 year period is generally about 0.5% to 0.75% below the fixed rate for the period. It is more to do with being able to cashflow through the more expensive time periods. The answer here perhaps lies in having the correct cashflow structure in place.

Note that asset loans of $1000,000 with a 0.75% difference would result in a $37,500-00 saving over the five years. ($7,500 X 5 years) Worse still, if invested wisely this would be worth $50,567 at say a 15% return!)

Hmmmmmm, I think I would prefer this amount in my back pocket, rather than generously donating it to your favourite bank.

Regards,

Steve
 
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Reply: 3.1.1
From: H T


Steve

I have well over 1 mill in debt and dont get that sort of discount. Is that a typical discount for those sort of funds?

HT
 
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Reply: 3.1.1.1
From: Steve Navra


Hi HT,

No, no, no! I am not suggesting a discounted rate - I am suggesting that if you calculate the average variable rate over a 5 year period, it generally works out to be between 0.5% and 0.75% less than the 5 year fixed rate for the 5 year period.

(The banks are savvy enough to build the % difference in to protect themselves for holding the extra risk.)

Does this answer the question?

Regards,

Steve
 
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Reply: 3.1.1.1.1
From: Mark Petterwood


Hi,

Interesting point that HT raises though.

Discounts on Standard variable rates.

Westpac - up to 0.7 off SV rate
NAB - up to 0.5 off SV rate
CBA - up to 0.5 off SV rate
ANZ - up to 0.5 off SV rate.

All have conditions - all aren't actively advertised - usually cost an annual fee - usually very achievable for people who have over $250,000 debt.

If you are paying SV with no discount ask your bank or broker to check it out for you.

Remember everything is negotiable - apart from stamp duties

Regards


MArk
 
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Reply: 3.1.1.1.1.1
From: Charlie McCormack


Thank you to all who replied to my post.

I appreciate this very much and hope to stay in the game a long time, I have found this to be the most enjoyable and rewarding (not monetary although it is nice) experience.

I'm starting with cosmetic renovations on single projects and hope to one day have somewhat larger projects.

It beats developing software day in day out.

Thank you again.
 
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