Choosing to build wealth through residential real estate requires a significant investment.
Not only is this a matter money, but commitment in time and emotional energy that’s required, as well.
In the beginning, you’ll need to work hard to support the costs associated with property ownership, so it’s understandable that many people suffer buyer’s remorse after making such a monumental purchase.
In a recent Real Estate Talk show I thought it would be beneficial to go through the five questions that you need to ask yourself – and answer honestly – before making your next property purchase.
Here’s a Transcript of the Interview:
(Alternatively you can listen to the short podcast at the top)
Kevin: Good morning, Michael.
Michael: Hi Kevin.
Kevin: Would it be correct is saying that you have encountered these numerous times?
Michael: Buyer’s remorse is a normal human emotion and it happens when you spend a large sum of money.
It could be when you buy a new set of clothes, a suit, or outfit for a female.
It could be if it’s a bigger purchase like a car.
Especially with a property, you tend to go look on the Internet to see if a better one has come around.
You think, “Have I paid too much? Is the market going to turn?”
I believe it’s worth preparing yourself for that, and you can do that partly by answering some questions to yourself to make sure you’ve made the right decision.
Kevin: Most of these questions, which I’ve had the privilege of having a look at, are all self-questioning.
Let’s begin by looking at the first question.
Michael: One of the big questions people ask is “what’s going to happen if the market falls?”
One day, it is going to slow down, and it may fall or stagnate for a period of time.
You should already have gone into your purchase with that in your mind and being prepared.
Sure, we’ve enjoyed some good times in some of our big capital cities last year.
This year, we know the market is going to slow down a bit.
In due course, it will even correct in some locations.
We know property values don’t go up in a straight line.
However, if you buy the right property in the right location in one of our big capital cities and you bought it at the right value, it doesn’t matter; it’s unlikely the value of your property is going to crash because it will be underpinned by other owner-occupiers in that location buying similar properties.
Kevin: The second question, seems like one that we don’t have much power over unless, of course, we choose to make sure that it’s not going to impact us.
Michael: Another worry people have is “How am I going to make my mortgage repayments if interest rates move up?”
Sure, interest rates are low at present, and they may even drop a little bit further this year, but in the medium term, as our economy picks up, it’s likely interest rates are going to head north.
So it’s important to avoid becoming a statistic and getting caught out when that happens by planning ahead.
One way of doing it is making sure that you can service your loans if interest rates do go up a little bit.
The alternative, of course, is to lock in on one of those attractive fixed interest rates that are available at the moment.
Kevin: There is definitely a lot to consider already. Let’s move to questions 3.
Michael: “What happens if my employment circumstances change?” If there is one thing we know its that life is unpredictable.
Most of us are requiring our personal exertion income to support some of the negative cash flow shortfall.
Are you in a steady job? Are you in the position that you could maybe earn some bonuses or see some more clients, patients, or customers to get some more money if you need it?
If you’re not in that position or if you don’t have the stability of a steady job, another way to protect yourself is having sufficient buffers set aside.
This would be that rainy day back-up I like having in a loan of credit or an offset account.
Also, protect yourself with things like income protection and life insurance because life has a funny way of getting at you, doesn’t it?
Kevin: It certainly does.
You mentioned there about “Will my income be able to cover the repayments?” It’s likely that’s not going to be the case?
Michael: It is, even in today’s lowish interest rate environment and especially if you’re buying the sort of property that’s going to have strong capital growth.
I think one of the mistakes investors make is not fully understanding all their outgoings.
They think they’re going to get 3.5%, maybe 4% rental yield, but that’s gross, and when you take into account agents management commissions and rates and taxes and all the other things, in fact, the return is much, much less than that.
First of all, analyze your property’s cash flow to make sure you can support it, and then check your own household budget to make sure that you have the surplus for it.
Don’t count on the negative gearing because it may or may not change.
It’s just that that’s cream, so don’t count on the bonus from that, even though I don’t think the laws are going to change.
Maybe you make sure you borrow enough by having that cash flow buffer we spoke about a while ago just to buy you some time to see you through the ups and downs in property.
Kevin: The final question puts an interesting twist on a comment that I’ve heard many times and that is – that you’ll make money out of real estate when you buy.
In other words, that’s indicating that you have to buy below market.
Michael: This falls under one of the biggest concerns of buyer’s remorse. “Have I paid too much?”
That’s, again, a normal human reaction.
The only way you can prevent that level of buyer’s remorse is by having done your homework, having done your due diligence, doing all the research, and knowing what’s going on.
But, as you have already hinted Kevin, the answer is no.
You don’t make your money when you buy your property by buying cheaply; you make it by buying the right property.
Many times, I’ve paid full market price – or occasionally even above what I think it is the market price could be.
This is to secure the right property because you make your money by owning the right property in the right ownership structures at the right location at the right price for the long term.
Don’t get upset if the market fluctuates up or down a little bit.
You’re going to minimize that if you’ve done your research, done your homework, and made a fair offer.
If you can’t get it, just walk away.
There will always be another deal.
Kevin: They’re five great questions.
They’re questions that can act like barometers, can’t they Michael?
Michael: Yes, they can.
We talked about it today in the context of buyer’s remorse, but really, it should have already all been answered before you even buy the property to make sure that you don’t become one of the casualties that occur unfortunately so often when people buy emotionally rather than buying strategically.
Listen to the full show at RealEstateTalk.com.au and while you’re there subscribe and receive our weekly podcast (or the transcripts) where I interview Australia’s leading property experts.