If you want to know how to buy a unit, whether it be your first home or investment or your 50th investment then this post has some extremely helpful tips for you.
Find out the 7 things you should be looking for before buying a unit and find out the steps you need to take to be prepared to secure the unit once your offer is accepted.
You may also be interested in our previous post Should I Buy A Unit As My First Investment
1. Research The Area
This goes with any property purchase. Research the area that you are buying in and find out anything you can about it.
Find out what type of people live in the area, what do they do for work? What are crime levels in the area and is the area close to schools, public transport and employment?
Find out previous housing prices in the area and find out what properties are selling for and what the growth has been over the last 12 months and the last 3-5 years. You probably want to be buying in an area that is going to provide you with solid growth over the years.
The biggest rookie mistake I see investors or home owners making when they buy their first unit is that they buy a unit because they can’t believe how cheap it is. After settlement they find out it is situated next to a housing commission building.
ALWAYS do your research before purchasing!
2. Check The Quarterly Strata Fees
Another mistake I see investors make. They calculate what they can afford based on current interest rates and council rates only.
They don’t take into account quarterly strata fees (which can often be close to or more than $1,000/year (or per quarter).
Take into account all your expenses before buying. That includes strata fees, utilities, council rates and even take into account potential interest rate rises.
Better to be a bit cautious than to fail to do your figures and find you have to sell the property for a loss because you cannot service the loan and ongoing costs.
3. Check For A Sinking Fund
Many body corporates have what is called a sinking fund. This is a big pool of money that is saved for major renovations needed in the future. It may be the rendering of the outside of the building, the fixing of a roof or public space or maybe even to fix the old elevator.
If a block of units has a large sinking fund then if something expensive needs doing there is likely to be no extra out of pocket expense for you. (This is a good thing!)
If there is no sinking fund and say something needs to be done (like a new driveway) then it is going to have to come directly from your pocket and the pocket of the other owners. You may not be able to afford this unexpected expense.
It shouldn’t be too hard to discover what the sinking fund is on your potential property. Speak to the real estate agent and speak directly with the body corporate for accurate figures.
4. Get A Building Inspection
Most people avoid getting building and pest inspections when it comes to a block of units and I understand why. They assume that the body corporate is taking care of those things (which they should be).
I would suggest that if the body corporate lacks a sinking fund, or if the sinking fund is small, then you may wish to get a building inspection done. If the building needs a $200,000 renovation it doesn’t matter if you have owned the unit for 1 day or 10 years, everyone needs to put in their even share to pay for the renovations.
Without a sinking fund or a building inspection you could be running the risk of a large, unexpected cash outlay that you may not be able to afford.
5. Check What Other Units In The Block Have Sold For
Often you will find that multiple units in the block have exactly the same layout. They may just be directly above or below you.
By getting relevant data as to the previous sale prices of the other units in your block you can find out if you are getting a good deal or are being taken for a ride.
There are multiple tools online that can show you the previous purchase prices of your specific unit, and other units in your block.
6. Save Your Deposit
It is very difficult to purchase a property without a deposit and most lenders will require that you have at least a 3-5% deposit before they will even consider your loan application.
If you can show that you can save your own deposit then that gives banks confidence that you will be disciplined enough to pay off your loan.
It is a good idea to have a deposit ready so that as soon as you find the perfect unit you can jump on it and purchase it before someone buys it out from underneath you.
7. Get Loan Pre-Approval
It is also a good idea to speak to either a bank or mortgage broker to get loan pre approval. This usually means that you have a loan approved that is conditional upon the banks valuation of this property.
This means that all you need to get done is a bank valuation before you can get your loan. This can really speed things up when you want to buy your property, as the majority of the work is already done for you.
Again this will help prevent someone from buying your dream property out from underneath you once you get an offer accepted.
You will find that on CashFlow Investor we always like to under promise and over deliver. That is why I have created an extra 4 tips for those readers who want to sink their teeth into more information.
A. Look For Units That Need A Facelift
A lot of units can be increased in value (or in rental income) by a simple and cost effective face lift.
If you are willing to do some hard work then you can find an old run down unit and begin giving it a facelift. It may need new carpet, a paint job and some cosmetic improvements to the kitchen and bathroom. If you can improve these things then you can increase the value of your unit, which in turn means you can borrow more from the bank, or sell your property for more.
B. Get A Depreciation Schedule Done
Many units (especially newer units) will have parts are fixtures that you can depreciate over time. Things such as light fittings and other renovations can be depreciated over time. This can offer you increased tax breaks each year, so you can pay less tax or get a tax refund.
There are only certain things you can claim and if you claim the wrong items then you could be at fault of tax fraud. A depreciation schedule will give you an accurate report for what you can and can’t claim. You can then use this to get the right tax breaks or refunds.
C. Do All The Figures To Make Sure You Can Afford It
Before you jump ahead and decide to buy a unit because interest rates are low take a step back and do all the figures.
Take into account the following things
– Mortgage payments
– Strata payments
– Council Rates
– Electricty, water and gas bills
– Ongoing maintenance
– Property insurance
If you are going to be renting out your property you also need to consider
– Lenders Mortgage Insurance
– Rental management fees
– Possible damages caused by tenants
You should also take into account changes that may occur such as rising interest rates or expensive strata bills (when major renovations are done). Take everything into account and be careful not to over extend yourself.
D. Remember That Just Because You Wouldn’t Live In It Doesn’t Make It A Bad Investment
If you are purchasing your unit as an investment property it is important to remember that just because you wouldn’t live in the property doesn’t mean that it is a bad investment. You have your own personal taste and just because you don’t like a look or layout or colour doesn’t mean that it isn’t a good investment.
There is a saying that says “invest with your head, not your heart”. People who invest with their head make wise financial decisions, they then make money and can live their lives to their hearts content. People who invest with their heart make emotional decisions that aren’t always helpful to the bank balance.
I hoped that this list has helped you. For more information on purchasing property and investing in positively geared property join our e-newsletter or read my review of the Top 10 Positive Cash Flow Property Books of All Time.