Speculating on property is always (or should be) a significant financial decision, and even more so in times of economic uncertainty. As market conditions fluctuate, you may find yourself questioning whether it is a wise move, whether now is the right time to enter the property market and what factors you should consider to help navigate this often complex landscape. As PropFundrs is focused on saving you time and money, we've outlined some of those factors below.
Understanding Economic Uncertainty
Firstly, it is good to understand why you are currently living through a period of economic uncertainty, as this will give you the means to evaluate how long the period could potentially last, what the likely outcomes will be or what factors could cause a further downturn or the reverse. Economic uncertainty can stem from various factors, including inflation, rising interest rates, geopolitical tensions, or shifts in consumer confidence. The knock-on effect is that these factors can affect property values, rental demand, and overall market stability. However, while uncertainty can pose substantial risks, it can also present unique opportunities for you.
The Case for Property Investment
Long-Term Appreciation: Regardless of how short-term fluctuations pan out, historical data has shown that property values tend to appreciate over time. Over the long-term, investment in real estate has shown much resilience. Therefore, if you're looking for a long-term investment, bricks and mortar could still be a solid choice, even in uncertain times.
Passive Income Potential: If you take a view that you are in it for the long-haul, then speculating in property could provide you with a passive income stream particularly when the economy looks uncertain. By renting out your property to reliable tenants, this could provide a steady income stream, helping to offset mortgage costs and other expenses. This can be especially valuable during economic downturns.
Diversification: Investing in property can diversify your investment portfolio. Rather than place all your eggs in one basket, real estate can give you a different option, as it often behaves differently than stocks and bonds. This can potentially help mitigate overall risk to your portfolio.
Tax Benefits: Property investors can benefit from various tax advantages, such as depreciation, allowable expenses or mortgage interest deductions. In turn, these benefits then enhance your overall return on investment.
Potential Risks to Consider
Market Volatility: Property market volatility can rise to the fore in uncertain economic conditions. With fluctuating prices, selling or purchasing a property may take longer than expected. This can have a knock-on effect on your financial planning and may require more time and effort spent on securing a purchase or sale.
Financial Challenges: Inflationary pressures and rising interest rates can make borrowing more expensive, affecting your cash flow. This can then impact your overall investment strategy and short-term financial growth. It’s crucial to regularly assess your financial position and understand how interest rates will impact your mortgage repayments, potential refinancing or new mortgage application for a property.
Tenant Stability: Often the fall-out from economic uncertainty can lead to higher tenancy vacancies, as tenants may also be struggling financially. It's essential to have a plan for tenant turnover and consider the potential impact on your income. Building up a 10-25% buffer throughout the year(s) to cover increased costs, tenancy voids, unexpected emergency repairs and so on, is best practice. This can then help finance you through the difficult periods. Also, consider holding off on rent increases if these are not financially necessary: a good tenant in situ who pays on time, maintains the property well and who you have a good working relationship with, is more valuable than that potential 5% increase, which could cause them to reconsider their tenancy! It's not always about the money!
Ongoing Maintenance: It is a known fact that properties require regular, ongoing maintenance. During an economic downturn this could become costly, especially if there is a need for significant repairs or upgrades. Again, setting aside a contingency amount for potential repairs and allowing this to grow until needed, could help to mitigate some of the uncertainty.
Strategies for Investing During Uncertainty
Do Your Homework: By understanding local market trends, tracking property values, and focusing on economic indicators, you can produce a more solid picture of the area you are hoping to invest in. Even though some areas could be facing downturns, other areas may be showing potential for growth, even in uncertain times. An example of this is how property trends changed during Covid 19: with the move away from city and urban areas due to lockdown, rents and property prices increased in rural communities and commuter villages. Although this trend has now somewhat reversed, the change created opportunities for different markets and allowed people to capitalise on this.
Focus on Cash Flow: Prioritise properties that provide strong rental yields. A positive cash flow can help you weather economic storms and provide financial security.
Have an Exit Strategy: Always have a clear plan for how you’ll manage your investment(s) during downturns, including how you’ll handle voids, potential property sales, refinancing requirements or new mortgage applications. Building up a contingency fund, will also help when it comes time to exit, as you may require vacant possession of a property before a sale, leaving a requirement to meet possible monthly ongoing mortgage payments.
Consider Different Property Types: If you have only focused on one property type, now might be the time to extend your reach. Diversifying into different types of properties (residential, commercial, or industrial) can help spread risk. Each sector usually responds differently to economic changes: for example, during Covid 19, commercial properties took a downturn, whilst residential increased but as people now move away from home or hybrid working arrangements and go back to full-time, in office roles, commercial property is once again on the uptake. With all strategy changes, remember to do your homework before switching. Ask an expert: talk to us here at PropFundrs to see if we can help you with your property strategies.
Summary
So, should you speculate on property when the economy looks uncertain? From looking at the historical data available, if you take a long-term approach, then investment in bricks and mortar is always viable. However, investing in property during uncertain economic times requires careful consideration and thorough research. While there are potential risks involved, there are also significant opportunities available for those willing to navigate the challenges. So, do your homework, understand the market, focus on cash flow, ensure you have a solid strategy in place and all of this will allow you to position yourself to make informed investment decisions that will (hopefully) stand the test of time.
And whether you choose to invest now or wait for more favourable conditions, the key is to stay informed and be prepared to move when the conditions are right. PropFundrs are here to help with our educational offerings and mentoring. Get in touch to find out how we could be of service to you and help you save time and money (Support@PropFundrs.com).
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