The 21 Steps To Buying An Investment Property (Ep267)
There are a lot of steps you need to take to buy an investment property. Here are the 21 major steps to buying a investment property laid out for you in an easy to follow format.
What are the steps to buying an investment property? If you can understand the steps that you need to take to buy an investment property, then you’re going to limit the overwhelm you feel and you’re going to increase your chances of actually taking those steps and achieving your goal of purchasing your investment property. So in this video, I’m going to cover 21 steps to buying an investment property and these steps come straight out of my book, The Essential Guide to Buying Your Frist Property In Australia. Which is available on Kindle at onproperty.com.au/buy that will take you there.
So, let’s get in to the 21 steps. This is going to take you all the way through. From not even being ready to starting to formulate a plan and saving your deposit all the way through the looking at a house, making an offer and exchanging contracts and finally, getting the keys and taking ownership of the property, which is what we want.
So, step number one is to firstly, work out what you can afford. There is no point going out and looking at properties if you can’t actually afford to buy those properties. So the first thing that is going to limit what you can afford is actually the deposit that you have. Almost every lender at the moment needs to see at least a minimum of a 5-percent deposit in order to give you a loan for a property. So depending on how much of a deposit you have, you’re going to need at least 5% of that in order to purchase a property. So if you’re looking at a $500,000 property, then you’re looking at 5% of that, which is $25,000 plus your expenses as well like stamp duty and so forth. So, first you need to work out your deposit ‘cause that’s going to affect what you can afford. And if you want to save the full 20% to avoid lender’s mortgage insurance, well, you’re going to need to save more money and that’s going to adjust what you can afford. You also need to consider your repayments and how much your repayments will be. Because, just because a bank might lend you the money or just because you have the deposit, doesn’t mean you can afford the ongoing repayments. So, work out what the repayments are going to be on a property. And you can do this by simply taking the value of the loan, and then timesing it by the interest rate. So, something like 5%. And that’s going to give you an annual interest repayments that you’re going to have to pay and then you’re going to have to add expenses on to that as well. So, just make sure that the property you’re looking at, you can afford it, you can have the deposit and you can afford the mortgage repayments and all the expenses that come with it.
Step number two is to work out how you want to make money through property. We are in this for a reason. We’re buying property for a reason. We are buying property to make money. But there are many, many different ways that you can make money from property. For example, you can make money through positive cash flow. You can make money through capital gains. You can make money through renovation or development or subdivision. There are many different ways that you can make money through property. They are all very profitable. But they do change the type of properties that you’re going to look at and the strategies that you’re going to use to invest in. So it’s worth sitting down and thinking, “Okay, well, what kind of strategy do I want to implement? Do I want to implement something simple, like positive cash flow property? Where I just buy it and hold it and make money over time. Or do I want to be more aggressive and go into high-risk development?” So, work out how you want to make money through property ‘cause that is going to affect what types of properties you look at and what you’re going to invest in.
Step number three is to speak to a mortgage broker. Now, I talked about in step number one, working out what you can afford from your own perspective. Step number three, speaking to a mortgage broker is working out, “Well, how much are the banks actually willing to lend me?” Just because you have the deposit, just because you can afford the property doesn’t mean the banks are going to give you the money. Depending on your situation, if you’re self-employed or if you got a casual job, then it can make it very difficult to get a loan with the bank. So, go ahead and speak to a mortgage broker because they have access to over 30 different lenders rather than just going to your own bank, which is just 1 lender. And find out, given your situation, how much can you actually afford to borrow. And that way, you can go into the market knowing that, “Okay, I can afford to buy this much” and you can work towards that.
Step number four is to actually go ahead and save your deposit. So we’ve already talked about the need to work out what you can afford based on your deposit but then you need to actually go ahead and save that deposit. And this is, from what feedback I get from my readers and my customers, this is the number one thing holding people back from investing in property. Saving your deposit is very, very difficult. I’ve got a free guide to help you on saving your deposit. Go to onproperty.com.au/deposit to get access to that. So you need to go ahead and save your deposit. And this may take you a significant amount of time, depending on how much money you earn and how good at saving you are.
Step number five is to then go out and find a good area to invest in. this is easier said than done, I understand that. And given the length of this video what I want to cover, I can’t go into this in more detail. But basically, you want to find an area that’s growing, growing in population and growing in income. That’s becoming more affluent over time. And that’s going to give you the best chance of that area going up. Both for capital grown and rental income as well. But depending on your strategy, a good area might not be an affluent area. You might want positive cash flow and so you might be happy to invest in lower social economic areas because you get the cash flow. You know, you need to find a good area based on your criteria and so you need to look at a variety of different things to do that.
Step number six is to then go ahead and get pre-approval. So once you’ve saved your deposit, and once you’ve found a good area, go ahead and get pre-approval from your mortgage broker. So to get pre-approval is just simply go to your mortgage broker and you say, “I want to get pre-approval.” And what this is, is this is approval for finance based on a valuation on your property and based on the fact that your situation isn’t going to change between now and when you actually purchase the property. This makes things so much quicker when you’ve found a property that you like. If you make an offer on the property, you’ve already got pre-approval there, so all you need to do is to get an adequate valuation in order for you to get financed for that property. So, definitely get pre-approval before you start looking at particular properties and before you start making offers.
Step number seven is to choose a conveyancor or solicitor. These are the people who are going to help you with the legalities of everything. So they’re going to help you with the contract of sale, they’re going to help you with your terms and conditions, all of that sort of stuff. So you’re going to need to choose on of them. I suggest that you talk to people or friends that have had experiences in the past. The good thing about conveyancors or solicitors is that they can work as generally statewide. There are some that do across the country. But basically they can do the whole state so they don’t have to live where you live or know the area you’re investing in. They just need to know the contracts for that state. So, find a friend, find someone you know and respect that has used a conveyancor or solicitor and had a good experience in the past and then go with them, is basically the “what I recommend”. If you can’t do that then get on Google, start searching for conveyancors or solicitors. Conveyancors are cheaper, solicitors are… have more advanced knowledge. So if things go pear-shaped, they can help you out a bit more. But that is a topic for another episode.
Step number eight is to do a preliminary cash flow analysis on your property. So, whether you’re buying to invest, which is what we’re talking about today, or even if you’re buying to own your own home, you need to do a cash flow analysis on the property to understand what is this actually going to cost you or how much is this going to make you. I like to use a tool that I created called the “Advanced Property Calculator”, which is available inside OnProperty Plus. And basically, what you for this property… for this calculator, is you input things like the purchase price and then you can input the rental income and you can put in interest rates, like, maybe 5% and you can also go through and change your deposit and… basically, it has defaults for all of the expenses but your can go through and change them. And what’s going to happen is that’s actually going to show you your weekly cash flow before tax and your yearly cash flow before tax. And so, basically, that’s going to give you an idea of how this property is going to make you or how much this property is going to cost you. And so by doing that cash flow analysis, you can see, “Well, does this property fit in with my goals and what I’m trying to achieve with this property?”
Step number nine is to then go ahead and inspect the property. And the reason we do a preliminary cash flow analysis before we inspect the property is ‘cause we don’t want to waste time inspecting a property if it’s not going to match up. Investing in property is a numbers game and so if it’s not going to be a good investment, we can know that from the numbers. Cancel our properties just saves us time and saves us properties to inspect. So step number nine is to go through and inspect the property. There’s lots of things that you should look out for. Inside the The Essential Guide To Buying Your First Property In Australia, I do have a full checklist on doing an inspection but I’m not going to cover that in today’s video ‘cause that would just take too long. But go through, inspect the property, look for issues and just make sure that everything looks great.
Step number 10 is to work out how you are going to make money. This should say, “Work out how you are going to make money” on your property. So just because we decided upfront how we want to make money and what we want to do, that doesn’t necessarily mean the property that we found is going to make money in that same way. So you need to work out how is this property going to make money? And do your calculations. If this is a renovation, how’s it going to make money? What’s it going to cost? What’s the renovation going to cost? What’s it going to sell for? And how exactly we’re going to make our money? So we’re going into more granular detail, doing the finances here, making sure this property is going to be a good investment for us.
Step number 11 is to do a cash flow analysis based on all the figures. When we did the preliminary cash flow analysis, we just used the defaults inside the Advanced Property Calculator. Property Manager fee: 6%; expected vacancy: 5%; repairs and maintenance: $1000; etcetera, etcetera. When we’re doing our final cash flow analysis, we want to get serious about these figures. And we want to find out, “Well, what exactly are the council rates per year?” “What’s insurance going to cost us per year?” Do a final cash flow analysis so you can get an accurate estimate of what this property is going to deliver you.
Step number 12 is to obtain a contract of sale. And this is basically the contract of the property. This is really easy to get on realestate.com.au, in their contact form; you can literally tick a box that says you want a contract of sale. And you can just shoot off an email saying, “Can I please have a contract of sale?” And the real estate agent should send one through to you. You can then look over that with your conveyancor or solicitor.
Step number 13 is to go ahead and make your offer. Offers are generally need to be made in writing, but it does vary from state to state. So, check with your local state laws, how to make an offer. But basically, talk to the real estate agent, you make offers over email, you can make offers in paper, you can do something formal if you want. Uhmm, but yeah, you need to work out what works for your state. So, go ahead, and make an offer on your property.
Step number 14 is once your offer is accepted, sign the contract and you enter the cooling off period. In most states, when you enter the cooling off period, you need to pay a certain amount of the deposit. Like in New South Wales, I think it’s 0.25% deposit in order to enter that cooling off period. So, it’s not massive amounts of money but if you decide after the cooling off period that you don’t want that property, you do lose that money.
Step number 15 is when you’re in the cooling off period or potentially before that, do your due diligence and get your finance approved. So, this is getting your building and pest inspections done on the property and this is getting your valuation done on the property so that you have what’s called “unconditional finance”. Which means that you’ve got your finance fully approved and you can move ahead.
Step number 16 is to end the cooling off period and pay the deposit. Now, a lot of people ask for a 10% deposit on their property. However, this can be negotiated down to 5% or can be negotiated higher if you want. You can negotiate on the deposit and you can make the deposit refundable as well. So that’s something to explore with your conveyancor or solicitor, is that once you’ve ended the cooling off period and paid your deposit, there is the opportunity to get your deposit back if something goes wrong. But, hopefully, by this point you’ve got finance, you’ve got all your checks done and so you are moving ahead.
Step number 17 is just to keep tabs on the progress. Settlements generally take time. You know, they can take as little as 3 or 4 weeks, I’ve seen them done, or they can take as long as 3 months or I’ve even seen ones that are longer than that. But generally, it’s around the 6-week sort of mark. So, throughout that time, just keep tabs on the progress. Keep in contact with your conveyancor/solicitor; keep in contact with the agent. Just make sure that everything is going according to plan.
Step number 18 is to arrange insurance on your property. So now that you have entered into a contract to purchase this property, it’s probably going to be a good idea some homeowner’s insurance or landlord’s insurance on this property. That way, when you’re going through contract, the house burns down or if something terrible happens, you got insurance on the property. Look, the current owner of the property sure already have this insurance on there. But if they don’t have that insurance on there, you want to make sure that you do.
Step number 19 is to sign any remaining documents. Look, chances of you having many documents left to sign is probably slim but you might have to sign final documents like your mortgage documents and things like that. So, keep in contact with your conveyancor or solicitor; keep in contact with your mortgage broker. Make sure that you’ve signed everything because unsigned documents can hold up a sale.
Step number 20 is when the cheques get exchanged by your team, the seller’s team and the agent. It’s interesting to know that on the day when everything is exchanged, all the contracts, everything like that, you don’t actually need to be in the room. You don’t actually need to be there to exchange the contracts can be all be done by your team and then basically, you get the phone call that says, “Hey, everything’s good. We’ve exchanged contracts, we’re good to go.”
And that leads us to step 21, which is to go ahead and pick up the keys for the property. Take over ownership of the property and start paying your mortgage repayments.
So there you have the 21 steps to buying an investment property. You know, I’ve tried to cover as many steps as I could think of. Maybe I’ve missed out a step or two. Leave comments below if you can think of anything else because I’d love to know any extra steps that I have missed out. But that should give you a good idea of exactly what it takes to buy an investment property and should help to limit your overwhelm ‘cause you now know, “Well, what are the steps? What step am I at? And what’s the next thing I need to do?” Look, let’s say you’ve spoken to a mortgage broker and you now your next step is to save a deposit. Well, you don’t need to freak out about getting a conveyancor or solicitor or pre-approval or cash flow analysis or any of that sort of stuff. You can focus on saving your deposit and once you do that, then you focus on finding a good area to invest in and you can basically take it onestep at a time. Which is why I love this system and why I love understanding the 21 steps to buying an investment property.
You can get these steps in more detail along with worksheets and checklists for each individual step to help you take action and achieve your goal of buying an investment property. That’s in my Essential Guide to Buying Your First Property in Australia eBook, which you can get at onproperty.com.au/buy. That’s available on Kindle at the moment and/or it’ll be available in pdf format.
And if you’re up to that stage where you’re looking for properties to invest in, looking for areas to invest in, then I do list high rental yield properties with a high probability of generating a positive cash flow. And you can check out 10 free positive cash flow properties or the listings for those properties at onproperty.com.au/free. So, head over there to check out those listings if you’re interested in positive cash flow property.
So, until next time, guys, stay positive.