Buying an investment property is a challenging process.
What do I do, where do I start, who do I speak to and what are the sequence of events?
In order to assist you through this important process, I have provided my ‘seven steps to buying an investment property.’ This is the checklist I use when purchasing a property.
Review your personal cash flow position and budgets to determine affordability
You must be able to afford the cash flow impact on owning an investment property. Work out how much disposable income you have after each pay packet taking into consideration your daily living costs and do not over commit.
Work out how much in savings you have already or will need to go towards a deposit. Generally a bank will require 20% cash down and they will then lend you the balance. Also allow for 5% of the purchase price to cover costs like stamp duty and legal fees.
What is very important, but 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. Be prepared for this emotionally and accept that this is part and parcel with property investing and remember that this is a long term investment.
Contact a Lender or Broker to determine how much you can borrow. Get pre-approval for the loan and understand your monthly payments and interest rates, both fixed versus variable
Once you have worked out step one, you should contact a Lender or Broker to find out (based on your income, commitments and deposit) how much you could 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. This will also dictate where you can purchase and what type of property you can purchase, e.g. a house or apartment, new or old. You should also consider how you will structure your loan. Should you go for interest only or principle and interest? Should you lock the rates in on a fixed term, leave it variable or go half/half?
The answers to these questions may depend on the economic environment at the time and as always, seek counsel from the professionals before making a commitment.
Contact your Accountant to assist with advice
You need to get advice on what is the best name to purchase the property in, as this could impact significantly on tax benefits. Having the correct name also takes into account potential asset protection issues, land tax issues and stamp duties.
You will also need your Accountant to explain to you 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. The banks will not tell you this.
Your Accountant can give you a second opinion on how much you can afford each week and the tax impact on this amount. Armed with this information and the banks pre-approval, you are now ready to take the next step and make your purchase.
Contact a 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 to get a quote.
Once you have found the right property and have instructed them to review the contract, also instruct them whose name should appear on the contract. This is very important and you should seek advice from your Accountant before deciding on the name on the contract of sale.
While undertaking the review of your contract, as part of this process you may also want to make sure that your will is current and reflects the latest changes and commitments, or if you do not yet have a will, arrange for one to be drawn up.
Commence your search for the right property in which state/city/suburb/street. If required, seek assistance from a Buyers Agent to ensure correct research is done to purchase the right property for you
This is the critical step and if you get this wrong could cost you a lot of money so if necessary, seek professional help.
Remember the Real Estate Agent is working for the seller not you and they are trying to achieve a sale at the best price possible for their client whereas a Buyers Agent is working for you.
Do your own research on the areas within a state, city, suburb and street that have a proven track record of capital growth. Look at the demographics of the suburb and things like proximity to public transport, schools, roads and shops.
There are a number of online providers that can assist with information on recent sales and history of the property in the street and area which you are looking, to ensure you don’t over pay. Remember that other than your home, this will be your largest investment decision, so do your homework and seek professional help if required.
Understand the process of making offers during the sale or auction of the property. Don’t become emotionally attached to the property, it’s an investment, a business and you are only interested in maximising capital and rental returns.
After discussions with your Accountant, you would have determined whether you should look at a new property versus an older one. Understand the rental market and returns gained from the property. Also be aware of the vacancy rates within the area. This will determine how long it may take to find a new tenant if your tenant leaves.
Engage an Agent to assist with sourcing an appropriate tenant and for the ongoing management of the property
Once you have located the property, negotiated the agreed price and exchanged contracts, you should approach a local agent to assist with the ongoing management.
Take time to visit a few local agents, talk to them (interview them) and ask questions seeking testimonials from other landlords and call them to determine the Agents ability.
Once you have found the right Agent agree on a management strategy. Expect them to look for a commission of around 5-7% of the gross rent. Set the expectations on what they are to do e.g. all bills to go to them for payment and only contact you for approval if the amount exceeds a certain number, however if there is a minor repair just go ahead but if a major repair, it needs your approval.
They will issue monthly statements reconciling rent and expenses and will deposit money directly into your nominated bank account each month. They get paid to manage your property so don’t do it for them, just manage them to do it for you.
Manage yearly compliance requirements with the help of your Accountant. Lodge a Pay as You Go (PAYG) withholding variation to ensure tax benefits are paid each pay week and you are not having to wait till year end
Now that you have settled the property, have a tenant in place and an Agent managing it for you, you need to speak to your Accountant about how you can assist your cash flow by lodging a PAYG variation.
You will now know the rent you will receive after costs, the interest you will be paying the bank and the impact on depreciation if applicable. Your Accountant will help you lodge a PAYG application with the Australian Taxation Office and within a few weeks you will see a little extra in your pay packet.
Also ask your Accountant about what information they require to assist them in lodging your annual tax return. Remember to confirm how much is this going to cost you each year so there are no surprises.
These are my seven steps to purchasing an investment property, but always seek professional advice where necessary to determine whether investing in property is appropriate for your individual circumstances.
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Non Executive Director and Co Founder of Chan & Naylor