Statistics show (Census Data 2011) that 7.9% of Australians own investment property. However, this percentage falls to 1.42% when you look at how many investors own two investment properties -- and it falls further to only 0.43% for those who own three investment properties.
Why do so many stop at just one property? Let’s look at some of the thoughts people have that hold them back from investing in property in the first place, or from building a multi-property investment portfolio.
I could lose my job and the bank will foreclose on my loans.
Whilst it is true that the employment market is tightening, Australia’s unemployment rate is still low by global standards at 6.3 per cent. In other words, there are still 93.7% of people employed! In the unfortunate event that you do lose your job, you can overcome this fear by rationalising the situation:
- If you have been planning your investment journey with the help of good professionals, you should have a buffer available in case of an event such as this.
- If you are unemployed, the only thing that changes (for your property) is that you will not be able to claim back taxes whilst you are not earning a wage. However this is not lost, it is simply carried forward. So as soon as you find a new position, you can claw back the missed taxes from the period of unemployment.
- Your tenants are paying most of the costs associated with holding the property. You are only funding a small percentage of the costs and provided you are not out of work for a prolonged period then you can cover this shortfall with savings or more careful budgeting.
- You should be able to find a new job fairly quickly. Perhaps you won’t find your ideal job straightaway, but you may be able to find something (even part-time work) that will allow you to continue to hold your property; just think about your own work history: how long have you been off work (not by choice) in your entire career?
- The last thing banks want to do is foreclose on loans. If you use your buffer to cover your expenses, then banks will not get involved. If you have no buffer you should contact your lender as soon as you lose your job and try to work with them to keep the property.
- Perhaps you are investing with a partner. Most investors are joint owners with their spouse or another partner and the likelihood of both investors losing their jobs at the same time is slim. Usually investors can cope with one wage for a short period until the other finds new employment;
Interest rates are at all-time lows. It’s never been more affordable to borrow money to invest, yet still I hear people fearful of rate rises who use this as an reason to put off investing. To counter this worry it is good to remember that the Reserve Bank of Australia (RBA) – the organisation that sets the cash rate which is the major influence on bank interest rates – has only ever increased the interest rate in 0.25% increments in recent years. You have to go back to 1994 to see more significant rises and the RBA monetary policy has changed greatly since then.
From October 2009 to November 2010 there was an upward trend in interest rates, with seven consecutive 0.25% increases. This meant a change in cash rates from 3.25% to 4.75% - a total of 1.5%. Should interest rates rise similarly today repayments on an interest-only loan of $400,000 over 30 years, would increase from $2,147.29 to $2,528.27. This increase of $381 is reduced by the extra amount of tax you can claim, so if your marginal tax rate is 39%, you can then claim $149 back in taxes, which means that your net increase is a mere $232 per month. Taxation actually acts as a “cushion” when interest rates rise. Remember this increase in this example is incremental over a 12-month period.
The property market is in a bubble that is about to burst.
Historically, it is the sharemarket that falls in value dramatically overnight, not the property market. Remember that 100% of people buying shares are investors, whereas only about 30% of property buyers are investors, the rest are owner occupiers. During a crisis owner occupiers seldom sell. Also the property market takes longer to adjust as property transactions take longer -- even a quick sale will take 60 to 90 days after allowing for marketing and a settlement period. We are currently seeing some very hot areas in the market, particularly in some of Sydney’s outer suburbs, so it is wise to avoid these over-heated parts of the market. However, the entire Australian property market is never booming at the same time, so with careful research and due diligence it is possible to find property that is fair value and a good investment.
My advice to investors procrastinating over their first, or next, investment is to start your research, talk to sound advisers and take that next step!
Join Philippe for his next Free Property Evening in Sydney on 5th May, with special guest Craig James from CommSec.
Philippe Brach is CEO of Multifocus Properties and Finance
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.