10 Things to Know Before Buying Investment Property
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Property investment can be an exciting way to build your assets, grow wealth and increase cash flow.
Especially in the current market where our property markets have gone from strength to strength over the past couple of years.
But while many investors start out with the best intentions, only a few will ever make it to the top of the property investment ladder.
Why?
Some make some wrong decisions, others take bad turns.
To help avoid that happening, here is a list of the top 10 most important questions any investor should ask before buying their first, or even their 10th investment property.
1. Does this property fit into my long-term strategy?
Planning is bringing your future into the present so that you can do something about it now.
So do you have a plan in place? Because if not, you’re not ready to buy your next investment property.
You see, creating an investment strategy is the first essential step when you set out on your property investment journey.
At Metropole, we help our clients develop substantial retirement income, in other words, cash flow for their future years.
Our plan is not to beat the short-term averages, but to build a substantial asset base in the long term, which means we steer clear of “get-rich-quick schemes.”
In my experience winning strategies lend themselves more to the tortoise pace of slow and steady.
By way of example, 2 long term strategies you could consider for your next investment property are simply “buy and hold” or BRRR – buy, renovate, rent, refinance and repeat.
Buy and hold involves leveraging the complementary mechanics of equity and time which means you buy an asset and hold onto it long term to allow your capital gains to give you extra equity for the next purchase.
Once you’ve built a substantial asset base you can then transition into the cash flow stage of your investment journey.
Our BRRR strategy is similar but one where you have the opportunity to “manufacture” capital growth through renovations and speed up the growth of your portfolio.
For example, buying a ‘fixer-upper’ in a desirable location and then renovating with a view to increasing your property investment’s capital and rental value.
Of course, your strategic property plan will involve much more than that. Some of the many parts include:
An asset accumulation strategy
A manufacturing capital growth strategy
A rental growth strategy
An asset protection and takes minimisation strategy
A finance strategy including long-term debt reduction
A living off your portfolio strategy
It’s vital then that once you choose your strategy, you only look at investment properties which fit into your long-term strategy rather than getting distracted by the many perceived opportunities in the market.
Having a written Strategic Property Plan means that you won’t worry too much about market timing.
Rather you will concentrate on buying the best asset you can afford and staying in the market for the long term.
Because if you have a long term plan and if you believe that property will continue to increase in value in the long term, as it has done historically, then why would it matter what the price of your property is going to do in the next six weeks or even in the next six months.
2. Is this an investment grade property?
The once in a generation property boom we experienced during the Covid pandemic and which was fuelled by historically low interest rates at a time of strong pent up demand was a time which encouraged many investors to consider buying their first or their next property.
But the market is different today you can’t just run out and buy any property.
Because not all properties make good investments!
In fact, in my mind, less than 4% of the properties on the market currently are what I call “investment grade.”
You see…currently there are fewer properties on the market than there have been for a long time, and while there are still many properties on offer, there is now a real shortage of quality “investment grade” properties.
Of course, any property can become an investment property.
Just move the owner out, put in a tenant and it’s an investment, but that doesn’t make it “investment grade”.
An investment-grade property is one that offers strong and stable rates of capital appreciation, a steady cash flow, liquidity, easy management, a hedge against inflation and good tax benefits.
Having said that, I believe investors should invest for capital growth first.
It’s easier to build a substantial asset base that way and then you can eventually buy your cash flow down the road.
Think about the location
So before buying your next investment property, you need to ask yourself, would this property be considered investment grade?
For example, will the location outperform in the long term because of its demographics?
When considering the demographics of a location it’s not just about owner-occupiers but also the demographic of the tenants who are likely to rent your property.
You don’t really want a tenant who’s only a week or two away from broke do you?
I look at locations where the tenants that are aspirational, have good income and are likely to have increasing income over time so they can pay more rent in the long term.
Think about the neighbourhood
Is the property located in a 20-minute neighbourhood – in close proximity to shopping, amenities work?
Generally, a good neighbourhood is determined by the physical location, suburb character and its close proximity to amenities such as a shopping strip, park, coffee shops, education, and even some jobs.
It’s obvious then that in our new ‘Covid’ world, people will want to be in a location where everything they need is in short 20-minute proximity – whether that is on public transport, bike ride or walks – to their home.
Think about the property
Once you’ve done the above, the next step is to think about the property itself.
Will this particular property outperform the averages in the long term?
Will it appeal to a wide range of owner-occupiers and tenants?
Because remember, you’re not looking for short-term profits, you want to outperform the long term averages.
You need to work out the land-to-asset ratio (the higher the better) and decide whether there is something special or unique about this property.
Is there potential to add value to this property – manufacture capital growth through renovations or development rather than just waiting for the market to do the heavy lifting?
Finally, in order to determine whether the property is investment grade you need to be confident you’ve done all your due diligence on the location and the property.
Are there any risks?
3. What is the property worth?
For products that are plentiful, transacted often, and largely the same as each other, determining market value is really easy.
But purchasing a home is typically not like buying tomatoes at the grocer.
Each property tends to have features that make it unique.
Even two houses, side by side in the same street could be valued differently because of their individual attributes.
To make things even trickier, the property is typically not transacted frequently, so it may be hard to find a recent sale of a home similar to the one you’re interested in buying.
There is no “right” price
Property is unlike most other things that you buy – there are no set prices.
Buyers and sellers must negotiate a price that is acceptable to both of them.
While the asking price is a guide of what the vendor would like to achieve or what the selling agent would like to get, for you the asking price is only a rough indication.
To determine how much a property is worth you need to check all the very recent comparable sales, the property’s intrinsic value and then also determined the following 3 figures:
What price do I want to pay for the property?
What do I consider the market value to be?
What price am I prepared to pay and when am I prepared to walk away?
By the way… don’t even consider buying cheap properties.
Your future financial freedom will depend upon the quality of your assets, so even though a property may look cheap at the moment, it will most likely restrict you from developing substantial wealth in the future.
You can’t really expect a first-rate return from a secondary property.
Fact is…you will never be able to replace your income with the type of cash flow you get from cheap properties.
For example, cheap properties in the outer newer suburbs or in regional locations may offer higher yields as, in general, capital growth will be lower, but in the long run this type of property is expensive because it won’t enable you to achieve your financial goals.
So look for locations where not only the local owner-occupiers are more affluent, but also where tenants can sustain rental payments and rental growth.
Your future income and prosperity will be tied to your tenants’ future income growth and their ability to keep paying you higher rent.
If you think about it, your rental increases will be your future income.
4. Where am I getting my data, information, facts and figures from?
It is very important to understand what has driven the data you’re using to make your decisions because not all data is reliable or meaningful.
Data might suggest that a particular suburb or geographical location is primed for future growth, but if the data is wrong or unreliable; or more likely if you have misinterpreted the data, you could make a very costly investment mistake.
Similarly, individual property growth data might suggest a property is a good or bad investment, but the reality might be different.
It’s important to understand the data before drawing any conclusions.
For example, just because the data shows a suburb has generated price growth of 9% per year over the past 5 or 10 years, it doesn’t necessarily suggest its future growth will be in line with this.
Similarly for property-specific data – it is important to ascertain whether past sales were representative of the true market value of the subject property.
So when it comes to getting hold of data, information, facts and figures to support your investment decision, make sure you question whether you’re being sold something that is right for you and your needs.
Are you listening to the right person or company for advice, or do they have a vested interest?
You’ll find many marketing companies and those representing vendors and developers will skew the data to look more attractive than it is.
Most importantly of all, you should never make important property decisions on data alone.
Because the data only gets you part of the way – you must complement that data with local area knowledge and expertise.
Having many years of experience in a geographical market allows you to understand a market better and appreciate any changes in value drivers.
This is where the “art of property” plays an important role.
It gives context to the data and allows you to decide on its relevance.
5. Do I have my finance pre-approved?
Finance is the leveraging tool to help you get into the property, and property will be the vehicle that will create your long term wealth.
So it is important to have a finance strategy part of which is a finance pre-approval.
This means that a lender has agreed, in principle and in writing, to lend you an amount of money towards the purchase of your property, but this will still be subject to certain conditions including the exact property that you will be planning to buy.
Obviously, it’s vital that you have your finance pre-approved before starting your property search so that you understand your budget and you are able to take prompt action if and when you find the right property.
Some of the advantages of a loan pre-approval for property investors are:
You’ll know exactly how much you can spend
You’ll be able to make a firm offer on a property
You know what your repayments will be and therefore your cash flow
Your final loan will be organised faster
There’s no cost to you
Be wary of any website that offers you a pre-approved home loan without taking the time to assess your financial situation.
It should go without saying that unless a lender has fully assessed and approved your financials, any ‘approval’ you get may not accurately reflect what you can actually borrow.
6. Do I have a solid finance strategy?
Smart property investors use other people’s money in three ways…
the bank’s money for leverage
the tenant’s money for income
the government’s money for tax incentives
And they have a finance strategist build them a finance plan which will include a financial buffer to handle rising interest rates and unexpected expenses.
This is especially important in today’s environment of rising inflation and interest rates.
Even a 1% rise could add hundreds of dollars a month in repayments on the average new mortgage.
7. Have I set up the right ownership structures?
Working out how to structure your investment property purchase is a critical consideration that must be determined you buy (it’s too expensive to change ownership structures later on).
Ownership structures are just part of the strategic property plan that all investors should have before they even start looking for a property.
The right ownership structure will help you to minimise your tax, build your wealth and manage your risk.
Some of the commonly used investment ownership structures include:
Private ownership: where you own the property in your own name, either as an individual or jointly with another person.
Trust ownership: Here a trust (controlled by a trustee) is the legal owner of the property and holding the property for the benefit of other people (the beneficiaries).
Company ownership: A company is a separate legal entity. While owning a property in a company structure does not suit everybody, for some lower tax rates of a company are an advantage.
SMSF ownership: For many Australians owning a property in their self-managed superannuation fund (SMSF) is a text effective way of building a nest egg for the future, but this requires specific financial planning advice.
Here are some questions you should ask yourself when deciding on what type of structure to use.
How change in the near future?
It is important to note that different ownership structures will suit different people and their different circumstances, so it’s important to get the right advice from an expert such as Ken Raiss and his team at Metropole Wealth Advisory, to help you make the best decision.
8. Will my cash flow service my finance requirements?
It’s a common question and one which is very important to answer before embarking on a new investment: Will the cash flow from this property be sufficient to service my financial requirements?
After all, understanding cash flow can be the difference between a solid long-term investment and a costly mistake.
To understand the cash flow on a potential investment property your accountant can work out the interest, estimate depreciation and give you an idea of the cash flow for the property.
You should have the property inspected and if possible check any Body Corporate records as this could help you find out about any big maintenance or structural repairs planned.
If buying that property will put a strain on your finances, then you need to move on and find a property with better cash flow.
While crunching the figures you can also work out if you’ve taken into account all the costs and outgoings and work out whether you have a financial buffer in place to manage any shortfall.
This is when you want to factor in possible interest rate rises and potential vacancies and again highlights the need to set up a cash flow buffer in the form of an offset account or line of credit.
9. Am I approaching this as an investor or am I emotionally involved?
Most investors make emotional mistakes buying close to where they live, close to where they want to eventually retire or where they want to holiday – these are emotional not investment or business decisions.
When buying a home, about 90% of your purchasing decision will be based on emotion and only 10% on logic, which is understandable, as your home is where you’ll raise a family.
But when it comes to investing, however, letting your heart rule your buying decision is a huge ‘no-no’.
Allowing your emotions to cloud your judgement means you are more likely to over-capitalise on your purchase, rather than negotiating the best possible price and outcome for your investment goals.
Property investors should always buy the property based on analytical research, and leave their emotions at the door.
What are the local demographics like? Will this lead to the capital gains and returns you require?
Is it the best location to attract quality tenants who can afford to pay you increasing rent over the years rather than tenants who are only a week away from being broke?
Will it appeal to the owner-occupier market that sustains property prices in the long term?
By answering questions like this, rather than buying a house because you loved the curtains or thought it would make a good holiday retreat, you’re thinking based on financial gain rather than personal feelings.
And at the end of the day, investing is all about economics, demographics and finance and not emotions.
10. What if my financial circumstances change?
Life is an unpredictable myriad of moments full of many highs, lows and all the mundane stuff in between.
While it can be confronting to face the prospect of life-altering directions that send you into a financial tailspin, we never know what’s around the corner.
So it’s imperative to ask yourself, what will happen if things change?
Because the more prepared you are and the more planning you have done, the more protected your investment will be if your financial circumstances take a turn for the worst.
About Michael Yardney Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He’s once again been voted Australia’s leading property investment adviser and one of Australia’s 50 most influential Thought Leaders. His opinions are regularly featured in the media. Visit Metropole.com.au
10 Things to Know Before Buying Investment Property
[ad_1]
Property investment can be an exciting way to build your assets, grow wealth and increase cash flow.
Especially in the current market where our property markets have gone from strength to strength over the past couple of years.
But while many investors start out with the best intentions, only a few will ever make it to the top of the property investment ladder.
Why?
Some make some wrong decisions, others take bad turns.
To help avoid that happening, here is a list of the top 10 most important questions any investor should ask before buying their first, or even their 10th investment property.
1. Does this property fit into my long-term strategy?
Planning is bringing your future into the present so that you can do something about it now.
So do you have a plan in place? Because if not, you’re not ready to buy your next investment property.
You see, creating an investment strategy is the first essential step when you set out on your property investment journey.
You need to document a proven property investment strategy that aligns with your risk profile, goals and time frame.
At Metropole, we help our clients develop substantial retirement income, in other words, cash flow for their future years.
Our plan is not to beat the short-term averages, but to build a substantial asset base in the long term, which means we steer clear of “get-rich-quick schemes.”
In my experience winning strategies lend themselves more to the tortoise pace of slow and steady.
By way of example, 2 long term strategies you could consider for your next investment property are simply “buy and hold” or BRRR – buy, renovate, rent, refinance and repeat.
Buy and hold involves leveraging the complementary mechanics of equity and time which means you buy an asset and hold onto it long term to allow your capital gains to give you extra equity for the next purchase.
Once you’ve built a substantial asset base you can then transition into the cash flow stage of your investment journey.
Our BRRR strategy is similar but one where you have the opportunity to “manufacture” capital growth through renovations and speed up the growth of your portfolio.
For example, buying a ‘fixer-upper’ in a desirable location and then renovating with a view to increasing your property investment’s capital and rental value.
Of course, your strategic property plan will involve much more than that. Some of the many parts include:
It’s vital then that once you choose your strategy, you only look at investment properties which fit into your long-term strategy rather than getting distracted by the many perceived opportunities in the market.
Having a written Strategic Property Plan means that you won’t worry too much about market timing.
Rather you will concentrate on buying the best asset you can afford and staying in the market for the long term.
Because if you have a long term plan and if you believe that property will continue to increase in value in the long term, as it has done historically, then why would it matter what the price of your property is going to do in the next six weeks or even in the next six months.
2. Is this an investment grade property?
The once in a generation property boom we experienced during the Covid pandemic and which was fuelled by historically low interest rates at a time of strong pent up demand was a time which encouraged many investors to consider buying their first or their next property.
But the market is different today you can’t just run out and buy any property.
Because not all properties make good investments!
In fact, in my mind, less than 4% of the properties on the market currently are what I call “investment grade.”
You see…currently there are fewer properties on the market than there have been for a long time, and while there are still many properties on offer, there is now a real shortage of quality “investment grade” properties.
Of course, any property can become an investment property.
Just move the owner out, put in a tenant and it’s an investment, but that doesn’t make it “investment grade”.
An investment-grade property is one that offers strong and stable rates of capital appreciation, a steady cash flow, liquidity, easy management, a hedge against inflation and good tax benefits.
Having said that, I believe investors should invest for capital growth first.
It’s easier to build a substantial asset base that way and then you can eventually buy your cash flow down the road.
Think about the location
So before buying your next investment property, you need to ask yourself, would this property be considered investment grade?
For example, will the location outperform in the long term because of its demographics?
When considering the demographics of a location it’s not just about owner-occupiers but also the demographic of the tenants who are likely to rent your property.
You don’t really want a tenant who’s only a week or two away from broke do you?
I look at locations where the tenants that are aspirational, have good income and are likely to have increasing income over time so they can pay more rent in the long term.
Think about the neighbourhood
Is the property located in a 20-minute neighbourhood – in close proximity to shopping, amenities work?
Generally, a good neighbourhood is determined by the physical location, suburb character and its close proximity to amenities such as a shopping strip, park, coffee shops, education, and even some jobs.
It’s obvious then that in our new ‘Covid’ world, people will want to be in a location where everything they need is in short 20-minute proximity – whether that is on public transport, bike ride or walks – to their home.
Think about the property
Once you’ve done the above, the next step is to think about the property itself.
Will this particular property outperform the averages in the long term?
Will it appeal to a wide range of owner-occupiers and tenants?
Because remember, you’re not looking for short-term profits, you want to outperform the long term averages.
You need to work out the land-to-asset ratio (the higher the better) and decide whether there is something special or unique about this property.
Is there potential to add value to this property – manufacture capital growth through renovations or development rather than just waiting for the market to do the heavy lifting?
Finally, in order to determine whether the property is investment grade you need to be confident you’ve done all your due diligence on the location and the property.
Are there any risks?
3. What is the property worth?
For products that are plentiful, transacted often, and largely the same as each other, determining market value is really easy.
But purchasing a home is typically not like buying tomatoes at the grocer.
Each property tends to have features that make it unique.
Even two houses, side by side in the same street could be valued differently because of their individual attributes.
To make things even trickier, the property is typically not transacted frequently, so it may be hard to find a recent sale of a home similar to the one you’re interested in buying.
There is no “right” price
Property is unlike most other things that you buy – there are no set prices.
Buyers and sellers must negotiate a price that is acceptable to both of them.
While the asking price is a guide of what the vendor would like to achieve or what the selling agent would like to get, for you the asking price is only a rough indication.
To determine how much a property is worth you need to check all the very recent comparable sales, the property’s intrinsic value and then also determined the following 3 figures:
By the way… don’t even consider buying cheap properties.
Your future financial freedom will depend upon the quality of your assets, so even though a property may look cheap at the moment, it will most likely restrict you from developing substantial wealth in the future.
You can’t really expect a first-rate return from a secondary property.
Fact is…you will never be able to replace your income with the type of cash flow you get from cheap properties.
For example, cheap properties in the outer newer suburbs or in regional locations may offer higher yields as, in general, capital growth will be lower, but in the long run this type of property is expensive because it won’t enable you to achieve your financial goals.
So look for locations where not only the local owner-occupiers are more affluent, but also where tenants can sustain rental payments and rental growth.
Your future income and prosperity will be tied to your tenants’ future income growth and their ability to keep paying you higher rent.
If you think about it, your rental increases will be your future income.
4. Where am I getting my data, information, facts and figures from?
It is very important to understand what has driven the data you’re using to make your decisions because not all data is reliable or meaningful.
Data might suggest that a particular suburb or geographical location is primed for future growth, but if the data is wrong or unreliable; or more likely if you have misinterpreted the data, you could make a very costly investment mistake.
Similarly, individual property growth data might suggest a property is a good or bad investment, but the reality might be different.
It’s important to understand the data before drawing any conclusions.
For example, just because the data shows a suburb has generated price growth of 9% per year over the past 5 or 10 years, it doesn’t necessarily suggest its future growth will be in line with this.
Similarly for property-specific data – it is important to ascertain whether past sales were representative of the true market value of the subject property.
So when it comes to getting hold of data, information, facts and figures to support your investment decision, make sure you question whether you’re being sold something that is right for you and your needs.
Are you listening to the right person or company for advice, or do they have a vested interest?
You’ll find many marketing companies and those representing vendors and developers will skew the data to look more attractive than it is.
Most importantly of all, you should never make important property decisions on data alone.
Because the data only gets you part of the way – you must complement that data with local area knowledge and expertise.
Having many years of experience in a geographical market allows you to understand a market better and appreciate any changes in value drivers.
This is where the “art of property” plays an important role.
It gives context to the data and allows you to decide on its relevance.
5. Do I have my finance pre-approved?
Finance is the leveraging tool to help you get into the property, and property will be the vehicle that will create your long term wealth.
So it is important to have a finance strategy part of which is a finance pre-approval.
This means that a lender has agreed, in principle and in writing, to lend you an amount of money towards the purchase of your property, but this will still be subject to certain conditions including the exact property that you will be planning to buy.
Obviously, it’s vital that you have your finance pre-approved before starting your property search so that you understand your budget and you are able to take prompt action if and when you find the right property.
Some of the advantages of a loan pre-approval for property investors are:
Be wary of any website that offers you a pre-approved home loan without taking the time to assess your financial situation.
It should go without saying that unless a lender has fully assessed and approved your financials, any ‘approval’ you get may not accurately reflect what you can actually borrow.
6. Do I have a solid finance strategy?
Smart property investors use other people’s money in three ways…
And they have a finance strategist build them a finance plan which will include a financial buffer to handle rising interest rates and unexpected expenses.
This is especially important in today’s environment of rising inflation and interest rates.
Even a 1% rise could add hundreds of dollars a month in repayments on the average new mortgage.
7. Have I set up the right ownership structures?
Working out how to structure your investment property purchase is a critical consideration that must be determined you buy (it’s too expensive to change ownership structures later on).
Ownership structures are just part of the strategic property plan that all investors should have before they even start looking for a property.
The right ownership structure will help you to minimise your tax, build your wealth and manage your risk.
Some of the commonly used investment ownership structures include:
Here are some questions you should ask yourself when deciding on what type of structure to use.
How change in the near future?
It is important to note that different ownership structures will suit different people and their different circumstances, so it’s important to get the right advice from an expert such as Ken Raiss and his team at Metropole Wealth Advisory, to help you make the best decision.
8. Will my cash flow service my finance requirements?
It’s a common question and one which is very important to answer before embarking on a new investment: Will the cash flow from this property be sufficient to service my financial requirements?
After all, understanding cash flow can be the difference between a solid long-term investment and a costly mistake.
To understand the cash flow on a potential investment property your accountant can work out the interest, estimate depreciation and give you an idea of the cash flow for the property.
You should have the property inspected and if possible check any Body Corporate records as this could help you find out about any big maintenance or structural repairs planned.
If buying that property will put a strain on your finances, then you need to move on and find a property with better cash flow.
While crunching the figures you can also work out if you’ve taken into account all the costs and outgoings and work out whether you have a financial buffer in place to manage any shortfall.
This is when you want to factor in possible interest rate rises and potential vacancies and again highlights the need to set up a cash flow buffer in the form of an offset account or line of credit.
9. Am I approaching this as an investor or am I emotionally involved?
Most investors make emotional mistakes buying close to where they live, close to where they want to eventually retire or where they want to holiday – these are emotional not investment or business decisions.
When buying a home, about 90% of your purchasing decision will be based on emotion and only 10% on logic, which is understandable, as your home is where you’ll raise a family.
But when it comes to investing, however, letting your heart rule your buying decision is a huge ‘no-no’.
Allowing your emotions to cloud your judgement means you are more likely to over-capitalise on your purchase, rather than negotiating the best possible price and outcome for your investment goals.
Property investors should always buy the property based on analytical research, and leave their emotions at the door.
What are the local demographics like? Will this lead to the capital gains and returns you require?
Is it the best location to attract quality tenants who can afford to pay you increasing rent over the years rather than tenants who are only a week away from being broke?
Will it appeal to the owner-occupier market that sustains property prices in the long term?
By answering questions like this, rather than buying a house because you loved the curtains or thought it would make a good holiday retreat, you’re thinking based on financial gain rather than personal feelings.
And at the end of the day, investing is all about economics, demographics and finance and not emotions.
10. What if my financial circumstances change?
Life is an unpredictable myriad of moments full of many highs, lows and all the mundane stuff in between.
While it can be confronting to face the prospect of life-altering directions that send you into a financial tailspin, we never know what’s around the corner.
So it’s imperative to ask yourself, what will happen if things change?
Because the more prepared you are and the more planning you have done, the more protected your investment will be if your financial circumstances take a turn for the worst.
Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He’s once again been voted Australia’s leading property investment adviser and one of Australia’s 50 most influential Thought Leaders. His opinions are regularly featured in the media. Visit Metropole.com.au
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