Should You Buy An Investment Property in 2020?
For everyone that's looking to buy an investment property, The Markets Are Playing The Game Of Chicken - How Long Will You Last Before FOMO Demolishes You
I must have spoken to at least 3 dozen students who’ve been asking me about buying a property in the current market.
As many of you might know, we have a number of online property investing courses that focus on this very subject.
Common questions such as finding the right property, at the right price and in the right location, getting lending, and the most pressing question of all – when is the right time to buy… that’s what has been the hot topic I’ve been helping students through in the last few days.
As I wrote about it recently, the market is not yet in the state of implosion that is a general expectation from any analyst that is good at focusing on the fundamentals. Why fundamentals? Because price is a liar. The decision to buy now or any time for that matter, should never be made on the basis of how cheap something is – especially when you’re talking about a high capital item such as a property.
If your goal is to buy an investment property so you can use that as a stepping stone to buy more investment properties in future, then you’ve got to take an objective view and ask this fundamental question:
How long before I am able to refinance this property to create the deposit for the next property.
In the next 2-3 years, are you expecting for the prices to go up or down or sideways? What do the fundamentals look like?
In a situation like this, if you were to put down a deposit for a property, will you be creating a growth opportunity or creating a ball and chain that limits your ability to take advantage of the current environment of crisis?
Let me extrapolate this with an example scenario:
Lets say, you’re looking at a property worth $500,000. At a 20% deposit rate (I know it could be lower, but lets work with 20% for now), you’d need to come up with $100,000 as down payment with a mortgage of $400,000.
Lets say, you have good rental yield at around 5% and the property is cashflow positive (while unlikely, but lets assume it is).
Unless the property experiences a capital gain of $80,000 to $100,000, you won’t have the ability to refinance the property to buy another one, especially, not in the next 2-3 years. So what do you do? You’re stuck. You can’t sell it, because the market is not in a favourable state for a sale. You can’t borrow against it because there’s not much movement in price for any meaningful refinance. Depending on what would happen to your income over the next 2-3 years, you might not have the same borrowing capacity, not to mention, what happens if your tenants up and leave due to financial hardship.
All these are risk factors that are not in your control. So why would you want to lock up $100,000 of your hard earned capital into an illiquid investment that prevents you from the two most important things any investor must maintain in an environment of crisis:
Agility and Liquidity. These are the two most important things to remember.
During an environment of crisis, such as the one we are living through now, if you lose your ability to move quickly, at pace with the market, and if you don’t have the cash to take advantage of the multiple opportunities emerging during this time, you are only going to remain a bystander as others come in and make money during this crisis.
The general narrative in the market is driving more and more people to look for bargains in the market. Most investors are thinking that while money is cheap, this must be the best time to buy. Well… is it?
More and more agents and neighbors are creating this FOMO (Fear of Missing Out) that we should be buying investment properties, picking up those bargains while prices are so low and money is so cheap. Really?
What a short term view of the entire market situation! I urge you to remain objective and consider the bigger picture of what putting your capital into a property will do for you.
Consider what could be the outcome if you were to use that same $100,000 toward a more active, liquid and relevant market opportunity.
Disclaimer: I am not promoting the following strategy as any form of investment advice. Any investing carries risk. Before you take anything from this article or anything else we say on this website and turn it into a decision to make an investment, you must seek independent financial advice and assess the opportunity yourself. No advice given. No risk assumed.
So, with that out of the way, what if you were to place that $100,000 into a REIT based strategy. Here’s an example:
Supermarket Income REIT, listed on the London Stock Exchange. This is an interesting REIT that has a good track record with dividend payments, with its last payment coming in at just under £6 a share.
$100,000 invested in their stock using the Dividend Capture Strategy, in their most recent dividend payout (April 30, 2020) would look something like this:
- 100,000 AUD = £55,000 (approx)
- Share price 1 day before Ex-Div closed at: £107.25 which would have given you 512.82 shares
- Dividend Payment: £5.76 per share
- Total Dividend collected = £2953.84
- Stock recovery time: 27 days
Sold holdings on 27th of May at £109 per share
- Total Capital gains = (109 x 512.82) – 55,000 = £897.38
- Total Profit = £2953.84 + £897.38 = £3851.22 which comes to 7% return on capital.
This is just one example. There are hundreds of REITs and other dividend paying stocks where a smart dividend capture strategy, such as the one we teach in the REIT Masters course can be quite powerful.
So 7% return on capital in 27 days.
This particular REIT I have used in the example pays dividends every quarter and its typical recovery time is around 4-5 weeks on average. So you could recycle that $100,000 4 times to achieve the same result. Further to that, you could also duplicate this strategy across other REITs that have their dividend calendar in between that of this REIT.
Meaning, if you be smart about it, you could use the same $100,000 multiple times throughout the year, trading dividend paying REITs/stocks that don’t clash with each other and have a recovery timeframe that allows for you to do that.
There are REIT stocks listed across NYSE, LSE, ASX, NZX, SGX etc. that have a much shorter recovery time than Supermarket Income REIT. WP Carey, for instance, listed on the NYSE, has a typical recovery time of around 8-12 days.
The point I’m trying to make is this:
In an environment of uncertainty, putting money into an illiquid asset such as an investment property, especially in a time when the underlying fundamentals are not favourable, may not be the best move.
Don’t get me wrong. I’m all about buying property and building a rental income portfolio but now’s not the time for that approach. The market is shifting and the fundamentals don’t support this approach in the short term.
A SMART investor is quick to adapt to a changing market. A SMART investor does not put all her eggs in one basket and a SMART investor sure doesn’t ignore the fundamentals when it comes to putting their money to work.
So… what will you do?
Real Estate Investment Trusts
A few days ago, I produced a simple but fairly detailed handbook that explains how REITs work. If you haven’t already downloaded it, perhaps now’s a good time to take a look. It’s FREE.
HOW TO MAKE MONEY FROM REAL ESTATE WITHOUT BORROWING A SINGLE PENNY FROM THE BANK
JOIN US FOR A LIVE WEBINAR WHERE YOU WILL GET A FIRST HAND VIEW OF HOW TO USE THE DIVIDEND CAPTURE STRATEGY MENTIONED IN THIS ARTICLE TO MAKE MONEY FROM REAL ESTATE, WITHOUT EVEN OWNING A SINGLE BRICK.
MULTIPLE SESSION TIMES AVAILABLE.
We have now got all our webinars in one place. Choose the one that’s most relevant for your present circumstances and take action. The worst you could do right now is to do nothing, knowing that there’s an opportunity for you to use the current crisis to your advantage.