If I have given you the idea that it is a bad idea to buy an investment property right now, I might be wrong. And I might not be either.
There are a couple of twists in the future that could mean that you are better to buy now than later even though the market is still falling.
Let me explain.
Let’s work on the idea that the value of property still has 10% more to fall next financial year. If you buy a two bedroom unit for say $600,000 today then by June 2020 it will be worth $540,000. You will have lost $60,000. Clearly not a great deal so far. Then let’s say the market bottoms and after a couple of years, five years, however many years, it starts to climb and eventually doubles in value before you are ready to sell. Now it’s worth $1,080,000 and you sell it.
Forgetting the costs of selling and buying for a moment, the profit you made on the property was $1,080,000 minus $600,000 or $480,000. If you had waited until the market had bottomed you would have bought for $540,000 and made $540,000. So far, waiting for the bottom before you buy seems to be the go doesn’t it?
But like any profitable venture, the Australian Tax Office loves you for your courage and sacrifice and will want you to pay tax on your profit. If you had bought before the next capital gains tax changes come in to effect, you will still only pay tax on 50% of the capital gain. You will have made $480,000 and have to pay tax of $120,000 approximately. So you get to keep $360,000.
On the other hand, had you waited for the property to bottom in 2020 before you bought, you will have made a profit of $540,000 and then have to pay $202,500 in tax approximately. How did this go bad? The reason is that waiting past June next year will probably see the Capital Gains Tax rate move from 50% to 75% because that’s Labor’s policy and as I have said, I’m betting on a Labor budget next May. The longer you hold an investment property, the higher the growth and the bigger the tax bill.
My point is that waiting for the market to bottom makes sense only if you are focused on buying cheaply.
If you are focused on your long term wealth, that might not be the right way to think about things.