20 Things To Consider When Buying An Investment Property (Ep197)
There are many things to consider when buying an investment property. I recently did an interview for a future episode with someone that you are going to absolutely love. We talked about researching an area and how people seem to be scattered all over the country. They don’t know where to look and just try to find a get-rich-quick property without doing the proper research.
If you want to learn more about how to research an area and you want tools to help you analyze property then you should look at a membership to my premium membership website On Property Plus. Memberships start at $9.95 per month.
To ensure you make a good decision here are 20 helpful tips.
#1: What do you want to achieve financially?
The biggest mistake that I see people make when they talk about investment property is that they don’t actually have an idea of what they want to achieve financially. People have a general goal of earning enough money to be rich or financially free but they don’t quantitatively know what that means. In other words they don’t have a monetary goal of how much passive income they would need to generate in order to quit their day job and still live comfortably while growing their investments.
Alright so what do you want to achieve financially? Sit down and write out what you want to achieve without making it too complicated. I’ve found that the easiest way to do this is to consider what you earn and whether or not you can live off of that income right now. If so then you can make that your financial goal and adjust it accordingly.
#2: How much will a bank lend you?
Or will the banks lend to you at all? In October of last year I was able to step out of my job and go into business for myself. I’m an internet marketer and I work on my computer. I love what I do but because I’m a new business getting a loan from the bank right now would be nearly impossible.
It’s important to work out how much are banks actually going to lend you. Most of you are going to be in a position where you do have a job that you have been working for a few years so it’s likely the banks will lend you some money. But you also need to look at how much they’re going to lend you before you start looking at properties.
The easiest way to work what finances you have access to is to speak with a mortgage broker. If you want to speak to my mortgage broker then go to onproperty.com.au/mortgage. Fill in your name and your phone number and he’ll get in touch with you for a free consultation.
#3: What percentage deposit will you save?
I’ve gone into more detail about this in other episodes so if you want to work out how much you need go to onproperty.com.au/9. And if you want to work out how you can save money for deposit go to onproperty.com.au/94.
Many people like to save the full 20% deposit but it’s possible to save as little as a 5% deposit plus the costs associated with the property. And if you are going to get a family pledge loan or guarantor loan then you might not need a deposit at all.
#4: What investment strategy will you use?
There are many different ways that you can invest:
- Positive cash flow property (which I talk about a lot)
- Negative gearing for capital growth
- Do renovations to increase value
- Subdivide a property
- Do larger developments
- Do a buy and hold
- Buy units
Like I said there are many different things you can do when you invest in property so you need to work out what investment strategy you think suits you.
If you have no idea where to start then I suggest you read Steve McKnight’s book 0 to 130 Properties in 3.5 Years which you can get at onproperty.com.au/130. This link will take you to fishpond.com which is an Australian book seller like Amazon. It’s a great book that talks about positive cash flow investing as well as other strategies and I highly recommend reading it.
#5: How many properties will you buy?
You may think of buying one property that is worth your full borrowing capacity. But maybe a different strategy could be to buy properties that are much cheaper and get two or maybe even three of them with the deposit you saved and the borrowing capacity you have. This way you aren’t putting all of your eggs in one basket.
Your choice of how many properties you are going to buy will depend on your investment strategy and how active you will be as an investor. Just be sure to consider that to achieve financial freedom you will most likely need multiple properties. Perhaps you won’t buy multiple properties all at once but you should consider doing it in the future.
#6: What type of property are you going to buy?
First we need to look at purchasing units. With a unit you’re going to have extra costs called strata fees or body corporate fees. These fees can be a pain because it strips your cash flow and you have very little control over what is done. While you are an investor there will be people who live in and own the other units. Since these people actually live there they will have different ideas for the money versus an investor who just owns the unit.
You could lose a lot of control over your expenses when investing in a unit. But there are also issues to consider when buying a house. Just make sure you do your research and make a wise decision on what kind of property you should invest in.
#7: Rural or city investments?
A lot of people love investing in the city because there is a strong demand for property with over four million people that live in Sydney.
With rural areas however there aren’t as many people. But rural areas have their benefits as well. You can get properties that are cheaper, get higher rental yields and increase the value of the property.
Some people say cities out perform rural areas but it’s not black and white. Cities give you capital growth while rural areas give you positive cash flow so just make sure you do your research.
If you want help on how to do research and find out the population of an area, what the economy is like, what type of houses people live in, etc. . .then you need to consider becoming an On Property Plus member.
#8: What area will you buy?
You can’t just look at a bunch of properties all over the country and expect to stumble upon something that’s a great investment. I get a lot of emails from people who say a property is discounted for one reason or another and they think it’s a great opportunity. But they don’t do any research into the area that they’re buying into. Just because a property says it’s discounted doesn’t necessarily mean it’s a good area to invest in. Also the property may not even be discounted. It’s possible the sellers were asking too much and you’re actually getting it at market value.
You really need to research what area you want to buy in to find out if it will be a good investment. One way you could do this is by purchasing a Residex report. Another method is to use census to find out about the population and economy.
You could also just find an area you want to invest in. It doesn’t have to be where you live because even though you want to live in an area that doesn’t mean that it’s a good area to invest in. Always look outside and choose an area based on the growth potential and what you’re going to achieve financially.
#9: Will you see a mortgage broker?
I always recommend seeing a mortgage broker because they have access to different types of loans and can point you in the right direction.
They’re generally a free service and get payed commission by the banks. The only time that you probably wouldn’t use a mortgage broker is when you don’t have an easy case and it would be difficult to find a lender for you. Like I mentioned mortgage brokers only get payed when you sign a loan so there are a lot of mortgage brokers out there who aren’t interested in dealing with people that would have complicated loan applications.
#10: Should you choose a solicitor or a conveyancer?
From my personal dealings with conveyancers I’ve heard that they are cheaper because they’re only focused on property law. So if something strange were to happen and the situation escalates then they can’t really take part in it and you would need to hire a solicitor in order to help you.
A solicitor has a broader depth of knowledge so if a situation gets messy they can help you more. But if things are going smoothly then a conveyancer is going to do the job for you. You need to work out whether you want to spend $2,000-$3,000 for a solicitor or $1,000 for a conveyancer who won’t have a wide range of knowledge if a situation escalated.
#11: Who are you going to take advice from?
Some of the most expensive advice is free and will either come from friends, family or a property marketing company that is pitching themselves as financial advisers in order to sell you their newly built properties (which are often over priced and come with large commissions that you may or may not know about).
I advise that you get around people who are on the same journey as you and want to achieve similar goals. Don’t be dismayed by people who aren’t investing in property and who don’t have plans to achieve financial freedom. Just because someone tells you not to invest in a property because they think an area is dodgy doesn’t mean that it’s a bad area to invest in. Just be wary of the advice you listen to.
#13: What are the vacancy rates like?
I’ve done full episodes on how to measure vacancy rates and you can do it yourself with a ten dollar property magazine. All On Property Plus members have an icon where you just click and find out vacancy rates that are up to date.
Also remember that just because a property has a high rental yield doesn’t mean that it’s going to be tenanted for the entire year. This is really important to remember with student rentals. If you rent somewhere that’s just for a university keep in mind that universities aren’t really open in December, January or February and students only come in March.
Not having the property rented for the entire year can cause serious cash flow issues and over the course of the year it’s going to bring your yield down significantly.
#14: Will you buy old or buy new?
There are benefits to both. In some states there are concessions or grants you can get to help you into the market if you are buying a new property as a first time buyer. They may even void stamp duty or give you a certain amount of money towards it. Buying new also means that you can design a house particularly for that market and get a great deal of depreciation because it’s a brand new property.
However speak to your accountant about your options because I can’t advise on that.
New properties can be great but be careful when purchasing a new property from a property marketing company because they do add commissions on top. Find out what the commissions are and work out what the value of the property is actually going to be after it’s built. Talk to real estate agents in the area as well before you continue.
Personally I like old properties. They also have great opportunities because you can add value but then the downside is that there would be more maintenance.
#15: Are you willing to get your hands dirty?
Are you willing to be an active investor or do you want to be a passive investor who owns real estate and doesn’t really have to do anything. If you want to get your hands dirty and be actively involved in your portfolio then you should buy something where you can add value in some way.
Getting your hands dirty doesn’t mean doing the renovation personally. It could mean purchasing a property that you’re going to subdivide and dealing with town planners to work out the subdivision and have everything passed through council.
So when I say “are you willing to get your hands dirty” I mean do you want to be an active or passive investor? You buy different properties depending on what kind of investor you want to be. For instance a passive investor isn’t going to buy a property that needs a renovation because they would need to be actively involved whereas an active investor would because they can/want to do it.
#16: Can you afford to lose money?
Let’s be honest not every property is going to be a home run. You are going to buy some properties that are duds. And when you’re a new investor and haven’t purchased any investment property before the chances of you making a mistake and losing money is much higher.
If you can’t afford to lose money then you need to consider whether or not you should be investing in the first place. If things go wrong it could mean you’re going to become bankrupt or lose your house. Weigh the pros and the cons and consider what the worst case scenario is and how you would handle it.
#17: Can you afford the repayments?
Regardless of whether your property is going to be negatively or positively geared what would happen if the property was not rented for a long period of time? Could you afford the repayments on it if things don’t go 100% to plan?
#18: Have you done a cash flow analysis?
This is something that’s really important because sometimes people don’t consider the different costs that you need to take into
- Rental manager fees
- Insurances to pay
- Council rates
- Possibly body corporate fees
- Maintenance fees if you own a unit or townhouse
There are many different things that you need to pay so you really do need to do an analysis. Work out all of your income versus all of your expenses and how much it’s likely to cost you per week, per month or per year.
If you need help doing that cash flow analysis then check out On Property Plus because I have the Advanced Property Calculator. All you have to do is enter the purchase price, rental income and interest rate and it gives you a rough estimate of how much it’s going to cost you per week. Then you can go into more detail at the bottom of the calculator and put in factors like cancel rates and insurance and get a more accurate estimate. It’s a tool that does the work for you if you don’t exactly know what you’re doing.
#19: What growth indicators does the area have?
Is the population growing? Is the economy in the area stable? Are there new jobs in the area? Are people moving to the area?
These are all things that could indicate potential growth in the area. If you’re investing and want to see capital growth then you’re going to want to see growth indicators in the area. If people are leaving and there are fewer jobs every year then it’s likely that you’re not going to get the growth that you want.
#20: Do you have an exit strategy?
When it’s all said and done what are you going to do? Having an exit strategy means you can get out of a property while still making a profit and continue to invest.
Because you don’t need to purchase a property and own it for life you may decide to sell after a certain point in order to access your money. Working out what your exit strategy is going to be before you even purchase an investment property can really help you down the line.
As you can see there many factors to consider but this is just the tip of the iceberg. I hope that if you are new to investing and considering investing in property you will take the time to go through this. Or maybe you just need to refresh your memory and go through this again. Either way you need to be clear about what you want to achieve so that you end up making a great investment.
Thank you and until tomorrow remember that your long term success is only achieved one day at a time.