Three rules to follow when purchasing an investment property

Buy when yields are favourable:

As a contrarian investor, it’s important to follow the numbers, rather than the whims of the market. You should be taking the opportunities the market presents you, rather than following the crowd. At some point during the boom phase of an economic cycle, market irrationality will take hold, and investors will buy into the hype. Returns will begin to worsen, this is when wise investors will sit on the sideline, and wait patiently for opportunities to arise.

Buy when leverage allows for it:

Regardless of what stage you are in the economic cycle, focus on finding an ‘outlier’, that is, the opportunity no one else is willing or able to see. If an undervalued property presents itself, and it’s producing your required return, don’t shy away from the purchase because the market as a whole is showing signs of irrationality.

 

It’s important to recognise that property investment should be a long-term means of building wealth. Instead of focusing on the buying and selling, remember where you expect your portfolio to be in 10-years time. Often an extra purchase today will have a huge difference to the long-run performance of your portfolio. Timing the market is often difficult, and what’s more important, is looking for opportunities that align with your investment criteria, and making sure your portfolio remains well capitalised. Too much debt may make servicing difficult if rates were to rise, while an undercapitalised portfolio may be leaving potential future returns on the table.

Leave your emotions at home

When buying an investment property, it’s easy to forget it’s just that! It’s not a property you’re going to live in. It’s also not the only opportunity out there. Many first time investors will run out and buy the first property they see that smells of ‘potential’. Don’t fall into this trap. Set good rules around analysing an investment. Most importantly, do your research, and your due diligence. Don’t get sucked into your own world and forget that patience often pays.

Published by iRefi on

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