7 Steps to Buying an Investment Property
Buying an investment property can be a challenging process. The following checklist is a great place to start when you are planning your investment purchase
- Review your personal cash flow position and budgets to determine affordability:
You must be able to afford the cash flow impact of owning an investment property. Work out how much disposable income you have after each pay packet, taking into consideration your daily living expenses and don’t over commit. Work out how much you will need for your deposit. Also allow for 5% of the purchase price to cover costs like stamp duty and legal fees.
- Contact a lender or broker to determine how much you can borrow:
Once you have worked out Step 1 you should contact a lender or broker to find out based on your income, commitments and deposit), how much you can borrow and at what interest rate. Get pre-approval for an amount so you can go searching for a property with certainty based on how much you can spend. You should also consider how you structure your loan. Should you go for interest only or principle and interest? Should you lock the rates in on fixed term or leave it variable? Always seek professional advice before making any commitment.
- Contact your accountant to assist with advice:
You accountant can advise on how your purchase could impact on your personal tax situation and you will need to understand your responsibilities in regards to land tax, asset protection and stamp duties. Your accountant can explain how negative gearing works as well as depreciation, especially with newer buildings. This may impact your decision on what you buy and how much you can afford to spend on the property.
- Contact your lawyer in advance to assist with conveyancing, searches and settlement:
Form a relationship with a lawyer that specialises in property, and make sure that you touch base with them early and get a quote. Once you have found the right property you need to instruct them to review the contact and act on your behalf going forward.
- Commence your search:
This is a critical step and if you get this wrong it could cost you a lot of money, so if necessary seek help from a professional buyers agent. Do your own research within your chosen area/s to identify those enclaves with a proven track record in capital growth. Look at the demographics of the suburb and things like proximity to public transport, schools, roads and shops. It is important you understand the sales process and the making of offers or bidding at auction – don’t be afraid to seek advice. Don’t become emotionally attached to the property – it’s an investment, a business and you are only interested in maximising your return.
With the advice of your accountant and based on your budget, you will have determined whether you should look at a newer property or older ones. You need to educate yourself on the rental market and returns gained from the property, also what are the vacancy rates within the area; this will determine how long it will take to find tenants.
- Engage a property portfolio manager to find the right tenants:
Once you have located the property, negotiated the agreed price and exchanged contracts, you should approach a local agency to assist with the ongoing management. Meet with your preferred agencies and talk to them about their services. Ask for testimonials from other landlords and call them to determine the agencies abilities.
Once you have found the right agency agree on a management strategy. Your managing agent will take their fee as a percentage of the rent received, as agreed with you. You will also need to agree what they can disburse in maintenance without referring to you. They will issue monthly (or bi-monthly if you prefer) statements reconciling rent and expenses and will deposit money directly into your nominated bank account.
- Manage yearly compliance requirements with the help of your accountant:
Now you own your investment property and have it professional managed, you will need to speak to your accountant about lodging a PAYG variation. You will now know the rent you will receive after costs and also interest paid to the bank and the impact on depreciation (if applicable). You accountant will help you lodge this PAYG application with the ATO and within a few weeks you will see a little extra in your pay packet.
This checklist is a starting point, but it is very important that you always seek professional advice at every stage of the investment process as your personal circumstances will impact on each decision you make throughout the process.
One final tip:
What is very important and often overlooked, is that you must be able to handle the emotional side of property ownership. Yes you will have times when the market has dropped or stagnated so there will be no capital growth, and yes you will have problems with tenants or vacancy periods, but be prepared for this EMOTIONALLY and accept that this is part and parcel of property investing, and remember this is a long term investment.