This is Pumped On Property’s 20 Steps To Buying An Investment Property…
Depending on what state you live in some of the steps could be varied.
The same general process occurs; from budgeting, to saving, inspecting properties to eventually settling on a property and becoming the owner.
- Work out what you can afford
The first and most important step when looking into buying an investment property is to ask yourself – how much can I afford to put into this investment?
You need to establish what you have saved currently for a deposit, what you earn on a weekly / yearly basis, how long will it take you to save the remainder of a deposit, what will the banks be willing to lend you, what are the associated expenses going to be?
Work out what the repayments are going to be on a property. Do this by taking the value of the loan, and then multiplying it by the interest rate.
For example – $500,000 x 4.5% (as a rough estimation of interest rates)
= $22,500 / year of interest only repayments
- Work out how you want to make money through property investing
You need to figure out how you want to position yourself as an investor…
- Do you want to get into the development game?
- Do you want to buy property that has the potential to be subdivided?
- Are you looking for dual income potential?
- Do you want positive cash flow or are you more interested in capital growth?
- Do you want to buy something that needs a renovation?
- Are you more of an armchair investor?
- Speak to a mortgage broker
Once you have an idea of what you think you can afford, it is important to go and speak to a mortgage broker.
It doesn’t just matter what you think you are able to save and how much you are able to repay, you need to know what the banks are willing to lend you.
Mortgage brokers have access to multiple lenders. They can give you comparative analysis of the different banks and lenders and get you the best deal and outcome for your home loan.
- Save your deposit
Once you know how much the banks are willing to lend you, you can now begin to save for your deposit.
Aim for 10-20% of whatever your loan is predicted to be, knowing that 5% is generally enough. Also factor into your savings all the associated costs involved with buying an investment property. Such as stamp duty, solicitor fees, property management fees, taxes, etc.
- Find a good area to invest in
This can often be the hardest part of your investment process. It’s all well and good that the bank will lend you money, and that you’ve saved your hard earned cash for your 5 or 10% deposit… But where do you even begin to look for a good investment.
Often the biggest mistake people make when investing in property is not doing their due diligence and researching enough to get the best outcome.
It is vital you put in the hours to choose the suburb that is going to be right for you and your investment goals.
- Get pre-approval
Ask you mortgage broker for pre-approval. This is a necessary step that will save you time later down the track.
If you have pre-approval for finance once you’ve found the perfect property the hassle of waiting for approval is dealt with, all you need to do is get the property valued.
- Choose a solicitor
The solicitor is going to help you a lot throughout your investment process with all the legalities associated with the process.
They will assist you with paperwork, go over the contract and ensure everything checks out before you sign anything.
They will also do the necessary searches required when you purchase a property. Including title search, encumbrances, etc. and let you know of your rights and obligations where required.
- Do a preliminary cash flow analysis
The primary reason why people purchase investment properties is for some sort of cash flow, ideally positive, that comes from the property.
Before you purchase, or even inspect, an investment property it is vital that you do a rough cash flow analysis of the property, taking into consideration taxes, expenses, repayments, rent return, and more.
You want to be sure that the numbers associated with the particular property or suburb that you are interested in are going to weigh up in your favour.
- Inspect the property
Once you have organised your finance, saved for your deposit, narrowed down to a good area, and roughly worked out how you want to make money through investing, you can begin inspecting the properties.
The inspection process is all about narrowing down your findings and choosing the right property that is going to match your investment needs.
Make sure you thoroughly inspect the exterior and interior of the house, inspecting with the eyes of an investor and withdrawing emotion during this process, whilst still focussing on quality and condition of the property.
Take into account any obvious structural issues, and focus on the quality of the street and the surrounds.
- Work out how you are going to make money
You’ve already done a rough cash flow analysis, now that you have a better understanding of the property that you are planning on submitting an offer on, you need to work out how that property is going to make you money.
Factor in all the expenses associated i.e. your loan repayments, how much deposit you plan on putting down, the necessary searches and solicitor costs, the property manager fees, agents’ commission.
You should know, after doing the necessary research, what similar properties in the area are renting for, so factor into your analysis the rental appraisal.
Once you know all the costs and cash flow associated, you can now begin to work out what other ways you can make money on each of the properties that you’ve inspected.
- Can a simple renovation make you an extra $20 per week in rent?
- Does the house need a lot of work?
- Can you look at adding a secondary dwelling in the backyard, or converting the underneath for dual income potential?
- Can you add an extra bathroom or bedroom quite easily to add to the re-sale value of the house?
Based on your analysis you can now look into getting the contract and making an offer on whatever property adds up most profitably from an investment perspective.
- Obtain a contract of sale
Once you are confident in a particular property based on the findings during the inspection process. Ask the agent for a copy of the contract.
Ensure your solicitor looks over the contract and checks all terms and conditions of sale.
Never sign anything without first having a professional over look it to ensure you know exactly what it is you are signing for.
You want to know about all the inclusions and exclusions of the property, as well as submitting an offer that matches the conditions of the contract. It is always a good idea to have the solicitor help you fill out the contract properly.
- Make your offer
Once you ensure the property matches your investment needs, and a solicitor has proof read the contract, you can now submit your offer in writing.
In NSW and QLD this process works a little differently.
In QLD it is submitted on a completed contract and if the price is negotiated the priced is changed and initialled on the contract.
In NSW the offer is submitted in writing to the agent, and once the price has been accepted or negotiated by the vendor, the solicitors from each party take over and complete the legalities.
- Sign the contract
Once both parties accept the price and conditions of the contract, the contract is then signed by the vendor, the buyers, the agent, and finally the principle of the agency signs and dates the contract.
This date becomes the official contract date and dictates any conditions (e.g. Building and Pest, Finance, pool Safety, etc) and Settlement.
- Get your finance approved
Once you’ve signed the contract and you’re waiting for the conditions of sale to go unconditional, you must get your finance approved.
This is usually when the bank will arrange a valuation and ensure the property is worth the amount you have submitted and, if so, they will approve your finance.
- Pay the deposit
Once the property has gone unconditional, you must then pay the deposit. The deposit is anywhere from 5-20% of the sale amount. Most people like somewhere around 10% but you can usually negotiate down to 5%.
You can ask your solicitor to negotiate with the vendor for a refundable deposit in case anything goes wrong. However, usually by the time you’re ready to pay deposit you have been approved for finance, and you’ve done any necessary searches (flood searches, title search, B&P, pool safety, etc).
- Keep tabs on the progress
It is important to make sure you know where you’re at during the process. Ensure you’re in contact with your solicitor and mortgage broker weekly between the property going unconditional and the settlement date. This ensures that you are aware of when anything needs to be paid, or when money needs to be transferred into the trust, or when important milestones during the process are due to happen.
- Arrange insurance on your property
Before settlement it is imperative you have insurances arranged on the new property. You don’t want to risk anything happening after settlement that you are not covered for.
If you are planning on leasing the property for rent, which is usually the plan with an investment, make sure you arrange landlords insurance too.
- Arrange property management
Arranging property management and beginning the hunt for a new tenant is a very important step of the investing process.
Not always will the sellers allow their house to be advertised before settlement occurs, but it is important that you have sought out a property manager in the area and negotiated on price with them.
If you’re lucky you may already have tenants in place, if not you may be able to begin advertising for tenants so there is no vacant time after settlement. If not at least you have organised the property manager so that when settlement occurs they can begin advertising and you don’t lose too much money with a vacant property.
- Cheques get exchanged by your team
Your solicitor and the seller’s solicitor can usually arrange everything at this point of the process. They will keep you updated, but at this point you just need to be aware that the payment is going down and that everything has gone according to plan.
- Pick up the keys
The most exciting part of the process is picking up the keys for your new investment.
If you’re not in the area or you are investing interstate, this can be done by the property manager.
Hopefully you can take some insight from this and begin the steps to investing in property.
For more information on property investing, go check out On Property’s guide…
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