The most requested topic of all: PROPERTY Investing.
I’ve personally bought 4 properties in the span of 4 years, i.e., 1 property per year.
This article will explain how I have done it as well as how to get good houses at a discount, so follow along.
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How to Invest In Properties Even in A Recession
When a recession comes, the news media, social media, and even people close to you predict market crashes.
Has this happened to you? It certainly happens to me.
They would urge you to panic and sell your properties (if you already own one) and warn you not to buy any properties.
Should we do that?
NO.
In fact, a recession is the best time to get into one for this reason: Government intervention.
Historically, the government intervenes during crises to stimulate the economy (e.g., a huge cash dump).
This causes a huge rebound in house prices, making them surpass whatever was the highest BEFORE the crisis.
Example :
The highest house price before the crisis was $560,000.
When the crisis hit, it nosedived to $400,000 as the highest
After government intervention, it rebounded to $600,000, which is +$40,000 higher than the highest house price before the crisis of $560,000.
You see where this goes?
As an investment mentor, I always urge my students to NOT procrastinate and seize the opportunities.
Now, to the scenario:
The Scenario
Let’s consider a scenario where YOU plan to purchase a $1,000,000 new house in Australia next year.
According to the bank’s analyst, there is a projected 15% decrease in house prices.
Like most Australians, you prepare a 20% downpayment and apply for a 30-year home loan to cover the other 80% of the house price.
The bank’s variable interest rate on the home loan is 5.63%, which sets your current monthly payments at $4,200 per month.
Use this tool to calculate your monthly repayments>>
So, the stats thus far:
House Price: $1,000,000
Projected Price next year: $850,000 (-15% lower).
20% Down Payment = $200,000
Loan Amount: $800,000
Loan Length: 30 years
Interest on the loan is 5.63%, currently
Monthly Repayments = $4,200 per month
But wait, there’s more….
Worst Ever Interest Rate Rise
Suppose the central bank has been raising the interest rate multiple times.
And now, your bank tells you they predict home loan interest to be 6.61% by next year, 2023.
Your monthly payments would become $4,630 per month, or +$430 per month that you have to find somewhere in your pocket next year to service your loan.
But now, the worst-case scenario happens.
Now, in 2023, the central bank went overboard with their interest rate rise, and it shot up to 8% by December.
Does this sound familiar?
Again, this happened to me: what my bank told me in 2022 about the interest rate and what the central bank did in 2023 were complete mismatches.
So after December 2023, the monthly repayment would be an eye-watering $5,273 per month.
You have to find +$1,073 per month in extra money so that the bank doesn’t take your newly bought house!
Within 2 years, your repayment has jumped by an extra $18,036 per year!
So, the stats thus far:
Interest on the loan is currently 8%.
Monthly Repayments = $5,273 per month
Extra Repayments Compared to Initial Purchase = +$18,036 per year
You have not bought the house yet at this point; you are still planning.
Should you make the purchase?
How to Navigate Interest Rate Rise, And Make Money At The Point of Purchase
Now, for discerning investors like ourselves, even with this bad of an interest rate rise, we view it as an exceptional opportunity.
Why?
Because of these 4 things (we already know 2 of them):
- The house price is projected to fall by -15%, or -$150,000, in value.
- The government would intervene at some point, and the house price would JUMP HIGHER than $1,000,000 after the big drop.
- The central bank is unlikely to keep increasing interest rates for more than 2 years. More than that, it would invite a huge economic collapse, and that is not what they want.
- After the rise, comes the fall, e.g., the interest rate will drop to a normal level. And this will boost the economy again, boosting investor sentiment.
The last 2 are new information for you, but it is historical. See below :
Meaning, if you were to buy during the recession, e.g., when the price is say $850,000, you would be generating profits IMMEDIATELY.
Let me rephrase it this way: with your $850,000 investment, you can now purchase a house VALUED at $1,000,000++.
You already made $140,000 at the moment of purchase, potentially more.
The best part is that 80% of $850,000 is the bank’s money, whereas you only paid 20% of that plus $18,000 in interest.
This is what a crisis gives you.
Now all we need is to handle a bit of 2 year pain servicing the super high mortgage before it returns back to a much more manageable level, e.g., when interest rates come down (again, look at the historical graph).
But, as investors, we can do better.
Read the next one, and you will be shocked.
Secret of Wealth Building With Real Estate
Unlocking the ultimate potential of real estate requires thinking against the grain, which not many people know.
But here we are, and I’m letting you in on the secret.
The immutable law of real estate investing can be boiled down to this analogy:
We are like farmers raising chickens (on the house or property) that consistently lay eggs.
What we want is the egg!
Selling the house is akin to slaughtering the chicken.
So, don’t sell the house for profit, ever!
Have you hard Someone says, “All of my family’s money is tied up in the house. What if an unexpected situation arises and I need to sell the house to meet urgent expenses?”
Or does that relate to you?
Cashing the egg the right way will avoid all of these issues.
So, then, how can we cash out the profit?
Consider this story:
An individual living in a $3 million house but facing financial strain. The house, inherited from their father, fails to generate cash flow as they reside in it.
One day, the person invites a local wealthy individual for dinner and expresses their intention to sell the house to alleviate financial burdens.
The wealthy individual responds, “Simply take the house to the bank for a mortgage!”
Baffled, the person asks, “Do you mean I can take the house to the bank and borrow money against it?”
“Will the house still be mine?”
The wealthy individual confidently reassures them:, “Certainly! The house remains yours, as long as you meet the loan repayment obligations.”
Pondering the advice, the person hesitates, “But wouldn’t I be in debt if I did so? Eventually, I’ll have to repay the borrowed funds.”
A smile adorns the wealthy individual’s face. “How much did your father pay for this house when he bought it?”
“Although the property market has experienced recent drops, isn’t the house still worth $3 million?” he continued.
“If you trust in historical trends and understand that house prices tend to rise in the long run, you can perceive your house as a productive hen!”
Moral of the story is, if immediate cash is required, mortgaging the house to obtain cash becomes a viable option.
More importantly, the house remains under your ownership.
As the housing market rebounds in three to five years, your investment will appreciate in value.
The cash acquired from the mortgage can then be used to acquire additional properties, multiplying your future earnings.
The difference between an average individual and a shrewd investor lies in their approach.
While average individuals might consume the eggs, investors like us use them to acquire more chickens, symbolizing the purchase of additional properties.
So, now that your interests are piqued, which houses to buy?
Read below.
Which Property To Buy
Put yourself in a new home buyer’s shoes (the majority of buyers), since they are your primary customer when it’s time to sell the house you bought.
Would they buy a newly constructed home? Or a second-hand home, a.k.a “used”?
Most would buy newly built homes.
The house you bought when it’s time to sell it or cash it out is considered “used” or, to some, “broken”.
Who wants that house? Considering a new home buyer has 200 newly built houses to choose from in the same area,
An example is a volume builder (in Australia, Metrocon Housing), where they build 100–300 homes in one go for one spot.
But these newly built houses are mostly on the city’s outskirts.
So, where can an investor leverage?
Is there a way to sell a second-hand home that is considered “used” or “broken” that a new home buyer would still flock to and buy?
Of course! That only happens in major cities.
Because what they buy is not necessarily the building itself, but what the LOCATION can do for them!
Significant pros of living in a major city:
- Close to workplace: The Majority of people work in the city.
- Great, frequent, interconnected public transport systems
- Easy to get food: major grocery shops, restos, cafes
- Close to a variety of leisure centers
- Great selection of quality schools and universities
- And many more…
Given that a city can only grow so much before land becomes very scarce, there is a point where new houses can’t be built anymore.
In fact, most major cities in the world already reached this point a long time ago, e.g., supply is extremely limited.
But people would move heaven and earth to live there due to the aforementioned pros.
A prime example is Hong Kong (a major city), where real estate prices average HKD$4.5 million for a single-bedroom apartment, equivalent to AUD$900,000.
Essentially, in markets where housing supply is scarce, real estate investment flourishes.
Investing in major cities is the key to a successful real estate investment; don’t let anyone tell you otherwise!
How to Buy A House in Major Cities
Market data shows that house prices in major cities like Melbourne, Sydney, and Brisbane in Australia have consistently doubled in value every ten years!
source : CoreLogic
In fact, some high-end homes in popular city areas have seen their value double in just five years!
But this is the most frustrating and difficult part.
Because of the crazy growth, if you are about to enter the market now, it is YOU who are paying the big bucks upfront!
Given that inflation and house prices outpace salary increases worldwide, this is a big barrier to entry for most, considering house prices in Sydney easily STARTS at $1 Million.
Those who missed the opportunity to buy a house in big cities when they had enough money for a down payment now have to consider properties in smaller cities.
Unfortunately, that is the next logical step: Go to smaller cities that are urbanizing and get property with a good location while you can afford the downpayment and loan servicing.
There are very rare instances where house prices drop significantly in major cities, mainly due to selling pressures.
Let me give you some examples:
- The house owner got divorced, and the house needs to be sold quickly as part of the process.
- The house owner passed away, and relatives need to sell the house quickly since owning that house is a financial burden.
- The house owner can’t service their mortgage and needs to sell.
- Panic selling due to regional economic crisis
I’ve summarized all the above into property investing guidelines below.
If you are still unsure why, re-read this article again.
QUICK WINS
PROPERTY INVESTING GUIDELINES
NO 1 :
Buy in major cities. If its beyond what you can get, 2nd best is smaller urban cities.
NO 2:
Use refinancing to extract profits. DO NOT SELL THE HOUSE to cash out profits.
NO 3:
Use the extracted profits to buy the next investment house.
NO 4:
To get discounted price, buy in a time when there is a selling pressure, e.g. recession.
NO 5:
To get discounted price, buy in a time when regional economic pressure causes the house prices to fall.
NO 6:
Repeat until you are satisied with your housing portfolio.
Using Stock Investing to Fast Track Property Downpayment
Even though I’ve been a stock investor way longer than a property investor, I have a major preference for investing in tangible assets rather than paper stocks.
I’m not saying this is the right way to approach it; it’s just what I prefer.
My students are different; some like stocks, some like a mix of both.
If you prefer tangible assets like me, then there is a way to fast-track the money for a property downpayment.
What I do is leverage my stock investment skills.
So, instead of saving up money and putting it in the bank, I put that money wisely in the stock market.
As you know, the bank gives quite a pitiful interest rate, whereas the stock market starts at at least 10% per annum.
If you are good at finding undervalued companies and get in at the right time, the returns can easily be 50% per year.
The main reason I can purchase 1 property every year is because of the above.
I cash out the returns from my stock investment plus the increase in property values that I own (by refinancing) for a down payment on the next property.
I have written a couple of articles on stock investment below if you want to check it out:
I developed the SFA Investment Class, partly because of how stock investment helps tremendously in getting property downpayments.
Why not get every help that you can get?
The class is a one-year guided class and mentorship in which my students learn about all the important criteria and risk management so that they can go on the ground running : managing their investment themselves.
In the program, I give:
- In-depth stock investment knowledge that leaves no stone unturned.
- One-on-one mentoring that guides my students through the entire process
- Action Plans for Applying What My Students Learned to Real-World Investments
- Practical Tips.
- Weekly updates of current economic and investment insight
I also put my students in a private WhatsApp group where they will meet others in the same situation as them as well as have direct access to mentors and group discussions.
I like to promote the spirit of camaraderie in investments, which I feel is few and far between in the industry.
Some of my students are now doing investment work together where they analyze different stocks from multitudes of industries, collate the analysis, rank the top performers, and invest there. It’s great to see.
Anyways, if the above program fits you, I would like you to be part of the team>>
I guarantee that within the first two months, you will feel far more confident about your investments and have a solid plan to interweave it with your property empire dream.
Either I’ll see you in the class, or in the next article.
Until then..
James Lim
SFA Founder
Member of Australian Investors Association (AIA)
The University of Queensland Speaker
