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Can You Continue Buying Investment Properties?

borrowing activityWriting an article for the website Property Update, Shannon Davis asks when the time to stop thinking about expanding the property portfolio should be. The real estate game, after all, can get addictive. Once property investors begin to understand how the property market can “supercharge their wealth”, there is no looking back. They keep jumping from one property to another in order to increase their wealth base. However, is it an endless lane? Let us find out what Davis has to say.

Top banks tightening lending norms

Top banks feel that there is a lot of borrowing going on and to reduce the risk associated with defaults, they have now decided to put a criterion-minimum 20% upfront. This can put a lid on the aspirations of the best of investors. The question then on your mind quite naturally would be, “Can I afford to purchase another investment property?”.

Look carefully into the fundamentals of your portfolio

To figure this out, think about your portfolio fundamentals. Never rush into making deals just because the market is peaking. If you fail to acquire the right properties or do not structure your funds well, even the rising market will leave you with losses. Davis suggests a simple path for finding out whether you should expand your property portfolio.

How long can you survive?

First, find out how long you are likely to survive if things suddenly make a downward turn. For instance, what if your marriage breaks, or your rental property is severely damaged, or you are injured and out of work for six months.? Put another way, will you make the cut if you suffer from a sudden loss of income stream?

Is your property investment safe?

You also need to figure out how safe your investment is. Does it meet all the Due Diligence criteria? Are you buying closest to the peak values? Let’s hope not! Davis asks us to dig carefully into what your purchasing power is and how it relates to the potential of the housing market (immediate future).

You can read the original article here.

Points well made, Mr. Davis!

I think a lot is being made out of buying investment properties at the wrong end of the property cycle. In my opinion, while there is definitely a plateau, a trough and a crest (peak), most of the times even the experts fail to rationalise when they might have arrived.

Also, the right kind of properties bought at peak can still give great returns and poor buys can leave a bitter taste in the mouth even when bought at the time of plateau. So the idea, more than anything else, is to conduct solid research. Not to say that you can ignore finding out just how much borrowing you are good for and what is your cash flow (for meeting mortgage liabilities).