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**INVESTOR ALERT**- thinking of investing in the current property market? Read on...

There are various reasons why people decide to buy an investment property.

It can be to buy an asset, seperate to the family home, with the goal that it will help you in funding your retirement. It might be in the pursuit of a second income stream, especially when you are considering short term rentals such as AirBnb. Or it could be because your accountant has suggested you buy an investment property for the 'tax benefit' of negative gearing.

So is it a good idea to buy a property right now? Haven't we all heard that the rental market is tight? And rents are rising at the fastest pace on record? Not to mention that overseas migration will impact on the need for rental properties? Surely these arguments point towards buying an investment property.

The answer to this question may well come down to cash flow.

I was on a zoom meeting this week with CoreLogic's Head of Research Asia Pacific Tim Lawless and he raised a very interesting point. While rents are indeed rapidly rising, the actual cost of mortgage payments has risen by a substantially larger amount. .

What does this mean? Holding an investment property costs you a lot more than it did.

For the increased rent that is coming in with many properties right now, the cost of holding that property (primarily by way of significantly higher interest rates) has ballooned. It means that with regards to cash flow, many investors are deeply in the red.

While the negative gearing tax benefits from an investment property may be larger right now because of the huge gap in rents vs holding costs, it doesn't compensate the investor for stretched cash flow.

Why is this? Whatever your rent is that you receive each month on your investment property, you then need to make up the rest out of your after tax dollars. You also need to meet all holding costs for that investment as well (rates, often water, insurance, body corporate). So each and every month you will need to contribute money out of your after tax salary towards the investment property. And that is what is hurting a lot of investors.

It is resulting in a greater number of investors currently leaving the market as a percentage of those who are currently selling their properties.

From a home loan point of view, the consequence of higher interest rates means that the borrowing capacity when trying to secure a loan for an investment property, has also taken a big hit. Customers can borrow significantly less than what they could 2 years ago, especially when banks are currently assessing your ability to borrow based up an 8% - 9% interest rate.

So in effect, it's a double whammy.

So does it mean that you shouldn't consider an investment property as part of your wealth building strategy or taxation strategy? Not necessarily. Everyone's circumstances are different. For some investors, they will be able to navigate the above obstacles to still find a way into the property investment market. For others, these obstacles will actually stop their investing hopes dead in their tracks.

What it is important for all potential property investors right now is to go into it with your eyes wide open. Understand how much of your after-tax dollars you will need to contribute each month, to meet your repayments and holding costs. Have a bank assess your borrowing capacity for an investment loan BEFORE you buy, so you know if you can indeed afford to even get into the market, And at what price point

And if it all comes down to the dawning realisation that you cannot buy an investment property right now, remember, this is just a moment in time. This time will pass. The lay of the land will change with regards to rent and home loan interest rates. When that time comes, it's then knowing when to act and being ready to do so.


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