The price we pay for a property has little impact on our success as investors.<\/p>\n
So, the desire to buy below market is probably driven more by ego than fundamentals.<\/p>\n
![\"Property](\"https:\/\/cdn.propertyupdate.com.au\/wp-content\/uploads\/2022\/06\/property-timing2.jpg\")
<\/p>\n
Timing the market is a flawed strategy<\/span><\/h2>\nNo one in the world has developed a reliable system for predicting how asset classes will change in the short term.<\/p>\n
\r\n
<\/div>As Mr Buffett says; \u201cforecasters will fill your ears but never your pockets.\u201d<\/em><\/p>\nTherefore, if you think you can implement a strategy that involves picking the bottom of the market, think again!<\/p>\n
Not only is it impossible to do, but many of the indicators used to measure the health of the property market are lag indicators.<\/p>\n
That is, by the time the indicators change, prices would have already rebounded somewhat.<\/p>\n
How important is it to buy well?<\/span><\/h2>\nThis is a good question and one that I have spent a lot of time analysing.<\/p>\n
I financially modelled a $750,000 property investment<\/a> and measured the sensitivity to the following factors\/assumptions:<\/p>\n\n- \r\n\r\n<\/div>Capital growth<\/strong> \u2013 this is the average rate of appreciation in value over the next 20 years.
\nMy base case assumption is a nominal rate of 7% p.a. (assuming an inflation rate of 2.5% p.a.).
\nThe range I used was 4% (being only 1.5% above inflation) and 10% (which I have observed in blue-chip locations over the past 30 years).<\/li>\n- Buying above or under fair market value<\/strong> \u2013 I measured the impact of buying 10% below market value versus over-paying by 10%.<\/li>\n
- Capital gains tax<\/strong> (CGT) \u2013 I measured the impact of paying no CGT (e.g. owning in an SMSF) versus paying the maximum CGT (e.g. the ALP\u2019s policy is to halve the CGT discount).
\nThe midpoint I assumed is based on current laws at a tax rate of 39% p.a.<\/li>\n- Interest rates<\/strong> \u2013 my midpoint is 6% but I sensitised using a range of 4% to 8% p.a.<\/li>\n
- Rental yield<\/strong> \u2013 this is the amount of gross rental income you will receive compared to the property's value (expressed as a percentage). I have assumed a normalised mid-point of 3% but then also tested a range of 2% to 5%.<\/li>\n
- Rental growth rate<\/strong> \u2013 this is how much the rent will increase by on average each year.
\nI have used a growth rate range of 3% \u2013 being slightly above CPI and 7% \u2013 which is relatively high.<\/li>\n- Negative gearing<\/strong> \u2013 as has been well publicised, the ALP will ban negative gearing on existing properties (if you own existing investments, these are excluded, so you won\u2019t be impacted).
\nAs such, I sensitised the impact of negative gearing on an investment.
\nI compared no negative gearing versus maximal benefit at a tax rate of 47%. The midpoint was 39%.<\/li>\n<\/ol>\nWhat I did is held all factors the same (i.e. at the midpoint\/base case) and changed one variable from high to low to measure the impact on after-tax cash (assuming you hold the investment property for 20 years and then sell it).<\/p>\n
This included the cash flow cost plus the after-tax sale proceeds.<\/p>\n
And the winner is\u2026<\/span><\/h2>\nAs the chart below illustrates, buying under fair market value has very little impact on the success of your investment.<\/p>\n
A property\u2019s capital growth rate is by far the most important factor.<\/p>\n
A distant second is capital gains tax, then the interest rate and finally rental income.<\/p>\n
![\"market](\"https:\/\/www.prosolution.com.au\/wp-content\/uploads\/2019\/02\/market-timing.png\")
<\/a>What steps should you take as a result of this?<\/span><\/h2>\nIf you are investing in property, forget about the timing, just focus on the\u00a0quality<\/em> of the asset.\u00a0<\/strong><\/p>\nTo do that, I always recommend engaging the services of a reputable buyer\u2019s agent.<\/a><\/p>\n
Therefore, if you think you can implement a strategy that involves picking the bottom of the market, think again!<\/p>\n
Not only is it impossible to do, but many of the indicators used to measure the health of the property market are lag indicators.<\/p>\n
That is, by the time the indicators change, prices would have already rebounded somewhat.<\/p>\n
How important is it to buy well?<\/span><\/h2>\nThis is a good question and one that I have spent a lot of time analysing.<\/p>\n
I financially modelled a $750,000 property investment<\/a> and measured the sensitivity to the following factors\/assumptions:<\/p>\n\n- \r\n\r\n<\/div>Capital growth<\/strong> \u2013 this is the average rate of appreciation in value over the next 20 years.
\nMy base case assumption is a nominal rate of 7% p.a. (assuming an inflation rate of 2.5% p.a.).
\nThe range I used was 4% (being only 1.5% above inflation) and 10% (which I have observed in blue-chip locations over the past 30 years).<\/li>\n- Buying above or under fair market value<\/strong> \u2013 I measured the impact of buying 10% below market value versus over-paying by 10%.<\/li>\n
- Capital gains tax<\/strong> (CGT) \u2013 I measured the impact of paying no CGT (e.g. owning in an SMSF) versus paying the maximum CGT (e.g. the ALP\u2019s policy is to halve the CGT discount).
\nThe midpoint I assumed is based on current laws at a tax rate of 39% p.a.<\/li>\n- Interest rates<\/strong> \u2013 my midpoint is 6% but I sensitised using a range of 4% to 8% p.a.<\/li>\n
- Rental yield<\/strong> \u2013 this is the amount of gross rental income you will receive compared to the property's value (expressed as a percentage). I have assumed a normalised mid-point of 3% but then also tested a range of 2% to 5%.<\/li>\n
- Rental growth rate<\/strong> \u2013 this is how much the rent will increase by on average each year.
\nI have used a growth rate range of 3% \u2013 being slightly above CPI and 7% \u2013 which is relatively high.<\/li>\n- Negative gearing<\/strong> \u2013 as has been well publicised, the ALP will ban negative gearing on existing properties (if you own existing investments, these are excluded, so you won\u2019t be impacted).
\nAs such, I sensitised the impact of negative gearing on an investment.
\nI compared no negative gearing versus maximal benefit at a tax rate of 47%. The midpoint was 39%.<\/li>\n<\/ol>\nWhat I did is held all factors the same (i.e. at the midpoint\/base case) and changed one variable from high to low to measure the impact on after-tax cash (assuming you hold the investment property for 20 years and then sell it).<\/p>\n
This included the cash flow cost plus the after-tax sale proceeds.<\/p>\n
And the winner is\u2026<\/span><\/h2>\nAs the chart below illustrates, buying under fair market value has very little impact on the success of your investment.<\/p>\n
A property\u2019s capital growth rate is by far the most important factor.<\/p>\n
A distant second is capital gains tax, then the interest rate and finally rental income.<\/p>\n
<\/a>What steps should you take as a result of this?<\/span><\/h2>\nIf you are investing in property, forget about the timing, just focus on the\u00a0quality<\/em> of the asset.\u00a0<\/strong><\/p>\nTo do that, I always recommend engaging the services of a reputable buyer\u2019s agent.<\/a><\/p>\n
- \n
- \r\n\r\n<\/div>Capital growth<\/strong> \u2013 this is the average rate of appreciation in value over the next 20 years.
\nMy base case assumption is a nominal rate of 7% p.a. (assuming an inflation rate of 2.5% p.a.).
\nThe range I used was 4% (being only 1.5% above inflation) and 10% (which I have observed in blue-chip locations over the past 30 years).<\/li>\n- Buying above or under fair market value<\/strong> \u2013 I measured the impact of buying 10% below market value versus over-paying by 10%.<\/li>\n
- Capital gains tax<\/strong> (CGT) \u2013 I measured the impact of paying no CGT (e.g. owning in an SMSF) versus paying the maximum CGT (e.g. the ALP\u2019s policy is to halve the CGT discount).
\nThe midpoint I assumed is based on current laws at a tax rate of 39% p.a.<\/li>\n- Interest rates<\/strong> \u2013 my midpoint is 6% but I sensitised using a range of 4% to 8% p.a.<\/li>\n
- Rental yield<\/strong> \u2013 this is the amount of gross rental income you will receive compared to the property's value (expressed as a percentage). I have assumed a normalised mid-point of 3% but then also tested a range of 2% to 5%.<\/li>\n
- Rental growth rate<\/strong> \u2013 this is how much the rent will increase by on average each year.
\nI have used a growth rate range of 3% \u2013 being slightly above CPI and 7% \u2013 which is relatively high.<\/li>\n- Negative gearing<\/strong> \u2013 as has been well publicised, the ALP will ban negative gearing on existing properties (if you own existing investments, these are excluded, so you won\u2019t be impacted).
\nAs such, I sensitised the impact of negative gearing on an investment.
\nI compared no negative gearing versus maximal benefit at a tax rate of 47%. The midpoint was 39%.<\/li>\n<\/ol>\nWhat I did is held all factors the same (i.e. at the midpoint\/base case) and changed one variable from high to low to measure the impact on after-tax cash (assuming you hold the investment property for 20 years and then sell it).<\/p>\n
This included the cash flow cost plus the after-tax sale proceeds.<\/p>\n
And the winner is\u2026<\/span><\/h2>\n
As the chart below illustrates, buying under fair market value has very little impact on the success of your investment.<\/p>\n
A property\u2019s capital growth rate is by far the most important factor.<\/p>\n
A distant second is capital gains tax, then the interest rate and finally rental income.<\/p>\n
<\/a>What steps should you take as a result of this?<\/span><\/h2>\nIf you are investing in property, forget about the timing, just focus on the\u00a0quality<\/em> of the asset.\u00a0<\/strong><\/p>\n
To do that, I always recommend engaging the services of a reputable buyer\u2019s agent.<\/a><\/p>\n
- Buying above or under fair market value<\/strong> \u2013 I measured the impact of buying 10% below market value versus over-paying by 10%.<\/li>\n
![\"Mortgage](\"https:\/\/cdn.propertyupdate.com.au\/wp-content\/uploads\/2021\/05\/mortgage-broker-800x490.jpg\")
<\/p>\n