How important is it to buy a property at the bottom of the market?

If you are contemplating investing in property, should you buy now or wait? What if prices fall further this year? Maybe you would be better off waiting?As my analysis below reveals, buying for less than market value or at the bottom of the market (i.e. buying well), has very little impact. The price we pay for a property has little impact on success as investors. So, the desire to buy below market is probably driven more by ego more than fundamentals.Timing the market is a flawed strategyNo one in the world has developed a reliable system for predicting how asset classes will change in the short term. As Mr Buffett says; “forecasters will fill your ears but never your pockets”. Therefore, if you think you can implement a strategy that involves picking the bottom of the market, think again! Not only is it impossible to do, but many of the indicators used to measure the health of the property market are lag indicators. That is, by the time the indicators change, prices would have already rebounded somewhat.How important is it to buy well?This is a good question and one that I have spent a lot of time analysing. I financially modelled a $750,000 property investment and measured the sensitivity to the following factors/assumptions:Capital growth – this is the average rate of appreciation in value over the next 20 years. My base case assumption is a nominal rate of 7% p.a. (assuming an inflation rate of 2.5% p.a.). The range I used was 4% (being only 1.5% above inflation) and 10% (which I have observed in blue-chip locations over the past 30 years).Buying above or under fair market value – I measured the impact of buying 10% below market value versus over-paying by 10%.Capital gains tax (CGT) – I measured the impact of paying no CGT (e.g. owning in a SMSF) versus paying the maximum CGT (e.g. the ALP’s policy is to halve the CGT discount). The midpoint I assumed is based on current laws at a tax rate of 39% p.a.Interest rates – my midpoint is 6% but I sensitised using a range of 4% to 8% p.a.Rental yield – this is the amount of gross rental income you will receive compared to the properties value (expressed as a percentage). I have assumed a normalised mid-point of 3% but then also tested a range of 2% to 5%.Rental growth rate – this is how much the rent will increase by on average each year. I have used a growth rate range of 3% – being slightly above CPI and 7% – which is relatively high.Negative gearing – as has been well publicised, the ALP will ban negative gearing on existing properties (if you own existing investments, these are excluded, so you won’t be impacted). As such, I sensitised the impact of negative gearing on an investment. I compared no negative gearing versus maximal benefit at tax rate of 47%. The midpoint was 39%.What I did is held all factors that same (i.e. at the midpoint/base case) and changed one variable from high to low to measure the impact on after tax cash (assuming you hold the investment property for 20 years and then sell it). This included the cash flow cost plus the after-tax sale proceeds.And the winner is…As the chart below illustrates, buying under fair market value has very little impact on the success of your investment. A property’s capital growth rate is by far the most important factor. A distant second is capital gains tax, then interest rate and finally rental income.Download chart here: https://www.prosolution.com.au/wp-content/uploads/2019/02/market-timing.pngWhat steps should you take as a result of this?If you are investing iOur most popular free guides:Over the years we've written hundreds of articles. These three bring our best thinking together on the topics that matter most right now: choosing a super fund, debt recycling, and navigating the new tax changes.Download them hereMy new book, Wealth by Design, is out now:Buy online or in bookstores. The ebook is available now, audiobook coming soon.Got a question for the podcast?Email us at [email protected] in working with our team?Discover how we can work togetherSubscribe to my weekly blog:Stay connected hereImportantThis podcast provides general information about finance, tax and credit. It doesn't take into account your specific objectives, financial situation or needs, so you need to assess whether it's relevant to your circumstances before acting on it. If you're not sure, speak to a licensed, trustworthy professional.