Some investors say they are keeping their cash in the bank as the time is not right to buy in a falling market. They seek the “Nirvana” when the market and prices are apparently at rock bottom.
There is no debate that rising interest rates from the record lows of September 2020 have been followed by falling property yields. However, does it make sense for an investor to wait and leave their money in the bank? Here are five key reasons why acting now will preserve your capital and grow your wealth.
Inflation
This is a killer blow to having cash in the bank. Inflation means money is worth less tomorrow than today. Ownership in income-producing property assets provides a hedge against inflation and protects your wealth.
Borrowing Costs
Say an investor borrows 50% secured against a property returning 5%. If they left the other 50% on deposit, this would earn around 3.7%, less tax. However, against an interest-only mortgage – say 6% on 50%, borrowing costs are less than 5%. Again, your return on equity is higher than leaving the money on deposit and you have protected your wealth from the insidious effects of inflation.
Construction Costs
Construction costs are increasing due to supply chain issues, higher fuel costs and labour shortages. The pandemic is still causing an international hangover, and with rising construction costs, new building slows down. In turn, prices and rentals for existing buildings increase which benefits owners of existing buildings.
Rental Growth
Offsetting the rise in property yields is rental growth. This protects a property’s value over the ensuing period. With very low vacancy rates in the industrial sector, rentals are increasing rapidly. Some leases have CPI-adjusted rent reviews as well as market. Rental growth increases a property’s value.
Picking the Bottom of the Market
This is extremely hard to do, and only few get it right. By the time investors realise the market has turned, it’s on its way back up like a slingshot. Competition for assets increases and many of those who tried to pick the bottom market continue to hesitate. We see them become frustrated and end up paying more for a property they could have purchased earlier at a lower value.
If you see a property that is right for you in terms of tenant covenant, rental rates and construction seize the opportunity! As the saying goes “don’t wait for good real estate, buy good real estate and wait”.
