Q: I have been saving with the hope of buying my first investment property, however prices seem to be pushing affordability out of my reach in Sydney where I had wanted to buy. When prices are so high, is property still a good investment?
A: Property can be a good investment in any market conditions; however you need to have a rock solid investment strategy and also know your financial limits.
If you’re buying for capital gains and hoping that the property will continue to sky rocket in value, you may be disappointed if the market you’re looking to buy in is already at a peak. However, that doesn’t mean there isn’t room for further growth, but I would be careful.
Capital gains strategies generally work better when a property is held onto for an extended period of time and history shows us that even if there is a decline in the market, chances are there may be another rise down the track.
If your investment strategy is for rental return, the rental yield or return on your investment might be reduced if you’re paying a lot for the property. Investigating median rents in the area/s you’re hoping to buy in can give you an indication of what your return may be so you can work out if the property is the right investment for you.
There’s lots of information available on suburbs with high rental returns on websites such as CoreLogic RP Data, and local real estate agents should also be able to give you some figures on local rental values of similar properties to what you’re looking to buy.
In addition to sky high prices in some areas, lenders are also starting to impose higher loan to value ratio requirements – which is how much you need to borrow in comparison to how much your new property will be valued at.
Lenders are also starting to reduce, or remove altogether, interest rate discounts offered to new housing investors. These changes are being imposed by the Australian Prudential Regulation Authority in an effort to slow property investor growth.
If you are in the process of looking to borrow for an investment home loan the longer you wait the harder it might be, because these new rules on investor lending are going to come in sooner than later and will make finding a lender for an investment property harder, but not impossible.
An accredited mortgage broker should be familiar with which lenders are tightening their investor buckets more than others, and can also give you more guidance around what loan to value ratio you may need, e.g. at least a 20% deposit in many cases under the new rules.
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