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The benefit of buying property in a slump

By Steve Jovcevski
April 07 2017
3 minute read
The benefit of buying property in a slump
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Case study: After the downturn in mining, the Perth property market began a decline that’s continued over the past few years, but it may have reached the bottom of the cycle. And the only way to go from there is up.

House prices in Perth may drop a little more, but I expect we’ll start to see a gradual increase over the next year or so. Which means that right now, when you can still buy a house for under half a million dollars, almost unheard of in Sydney, it may be the perfect time to pick up a bargain and ride the upswing.

But there are a couple of factors to be aware of before you buy. I’ve covered them below so you can decide if a Perth investment is the right strategy for you.

Why it’s on the way up

There are a couple of reasons why an investment in Perth will probably gain value in the next year or so. Firstly, there’s been a bit of an upturn in mining exports recently, which will give a boost to incomes and property prices in mining-focused areas like Perth.

But more importantly, there’s the fact that a Perth investment has all the fundamentals of a good property buy. It’s a major city, with plenty of infrastructure and potential for growth in jobs and population. That means that even if there’s a slump at the moment, chances are the market will revive.

Buyer beware: the drawback

But it’s not all sunny on the west coast. There are risks that come with buying an investment property in the middle of a slump.

At the moment, there’s a vacancy rate of 4.7 per cent in Perth, which is pretty high, especially compared to Sydney’s 2 per cent rate. That means low rent prices and even the chance that your property might be empty for a number of months. Before you make an investment in Perth, you need to be sure you’re in a financial position to cover loan repayments or any other costs you have without the income from rent.

Say, you’re buying a $500,000 property in Perth. You might take out a $380,000 loan, at an interest rate of 4.09 per cent over a term of 25 years, and be looking at repayments of $2,025 each month. Add to that the upfront cost of a $166 mortgage registration fee, $276 transfer fee and $17,765 in stamp duty. Before buying, ask yourself if you could repay $2,025 every month plus an upfront cost of $18,207 without any income from rent.

Ultimately, a Perth property is a good idea for a seasoned investor who’s financially comfortable and willing to play the waiting game in the property market.

Tips to make the best Perth buy

● Get the fundamentals right. Don’t just snap up the first deal you come across. In order to score an investment that will be good value for years to come, make sure you choose a property that has all the fundamentals renters or buyers are looking for. That means sticking within 10-15km of the CBD, with parking and in a location close to public transport, shops or schools.

● Drive a hard bargain. While the market is low and people are eager to sell is the best time to really push for a bargain price. This is the moment to make a lowball offer or ask for a discount, and remember that the lower your buying price, the more you stand to gain when the market begins to rise again.

● Consider development projects. For more adventurous investors, buying development sites and banking on a long-term investment might really pay off. Hold off on developing for now. Do it in five years’ time, when the market picks up. Just remember, this has the potential for a higher payoff, but also comes with higher stakes, so it’s not for the novice investor.

● Make sure your finances are in order. Because there’s the chance that you won’t have rental income for some time, it is important to have your budget set out and made airtight before getting carried away. Make sure you factor this into your costs, as well as other potential hurdles, like a rate hike on your mortgage. Plus, don’t forget to shop around for a good deal on your home loan rate so your costs are as low as possible.

Steve Jovcevski, Mozo