Tricks of the Trade- Buying Investment Property in a Falling Market

Buying investment property can be tricky enough in good times. Buying during a downturn can be a mixed blessing, too, but there are positive elements in this type of market that need to be understood. Readers should note that this is very much a real “due diligence” exercise, and you must have your facts straight about any intended purchase in this type of market. Don’t guess about anything, get your numbers right.

Values and risk management in a falling property market

A falling market can be a great opportunity- If the property purchase has proven intrinsic upside values.

These values can be:

  • Unrealized development potential
  • Undervalued property or land assets
  • Commercial options
  • Subdivision or consolidation of title
  • Future location value based on projected developments

This may seem a bit too good to be true, when you see the upside value. You may also wonder why the vendor isn’t aware of that upside. As a matter of fact, they often are, but have their own reasons for selling. In some cases, vendors sell to make a loss against other consolidated profits. A falling market can be a blessing to some investors in this regard, creating a built in offset against capital gains. In other cases, they simply don’t have the capital to hold the property. The falling market creates financial pressures on vendors in different ways.

Then there’s the risk factor, which is very easily defined- Buying a lemon in a falling market. This equates to losses up on losses, and it’s a situation to avoid at all costs. This is also where “due diligence” comes in with a vengeance.

The investment property must:

  • Be liability-free, with no built-in added costs on the premises or land. These costs can kill an investment and turn it into a black hole.
  • Have no expensive title issues. (This is a case where you do look a gift horse in the mouth, and get a professional opinion of the horse’s dental hygiene on principle.)
  • Be what it appears to be in terms of investment values. You may need to do some research, but it will be worth it. Check everything and double check it with an independent valuer if necessary.

The falling market environment

Falling markets are typical killers for property investment. Wondering how far a market will fall is pretty futile. The fact is that the falling market has to be factored in to the investment strategy before you even purchase.

For example:

The property market has fallen by 5%. You factor in another 10% as a scenario, and instead of filling your books with a semi-fictional investment property value, you make a conservative valuation for accounting purposes. This gives you actual accounting figures for your property portfolio, not guesswork, as well as reflecting the commercial realities.

The good news about buying in a falling market

Markets don’t fall forever. Resistance to price drops is very strong, simply because people don’t want to lose money. You can defray the drop in value with rental income or other commercial options so your cashflow is minimally affected.

You can make money in a falling market. Just remember to do your homework and make sure you’ve got all bases covered.

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