10 Steps To Buying An Investment Property

June 1, 2022

Buying an investment property is a great way to build wealth and secure your financial future. It can it help improve your cash flow, offer some substantial tax benefit, and can be more stable than other investments.

On the other hand, benefits aside,  the whole process can seem pretty overwhelming. So today SM Property is here to help you navigate the process. 

We’ve put together 10 steps that can help make buying your first investment property go as smoothly as possible.

Step 1:  Start chatting to a broker

There are a lot of questions you should ask yourself before buying an investment property. How much cash do you have to invest? Do you have enough equity in your home for a deposit? Can you afford it? Start by chatting with a broker. They’re a great first port of call to answer any questions, weigh out the risks involved and figure out where you stand in terms of financing. 

They can tell you whether your debts are too high, or if you have enough equity in your current home for a deposit. And if you don’t have enough for a deposit, they can let you know how soon before you’ll be ready to buy and how much more you’ll need to save for what you’re looking for.

Step 2: What are you in it for?

So you’ve decided you want an investment property, but what are you in it for? Think about why you want to invest in a property. Is it to save for retirement, pay for your child’s education, increase your weekly cash flow or leave a legacy for your children?  Your goal’s timeline will determine what type of investment is right for you.

Whether it’s cash flow or capital gains, it’s important to establish what you’re in it for from the outset as your investment goal will go on to govern your investment strategy. 

If you’re unsure, don’t forget to talk to experts such as your accountant and financial advisor. They’ll help you clarify what you need to achieve through your investments.

Step 3: What’s your investment strategy?

Now you’ve got your investment goals set in stone, it’s time to decide on your investment strategy. There are a few different types of property investment options you can consider. Are you buying for the long-term and renting the property to tenants, or is this a short-term investment that you want to liquidate quickly? Let’s chat through the options:

Speculative Investment Strategy
When quick cash gains are made from buying and selling a property quickly – this is called flipping, trading or speculation.

Yield Focused Strategy
If you’re looking to purchase property that will give you a high rental income, relative to the original purchase price. Mostly called Cashflow investing

Growth Strategy
Where rental income isn’t as much of a factor and the goal is  to achieve the maximum amount of capital gains over a long period of time. 

Balanced Strategy
This option gives you some balance between how your weekly cash flow is affected but still with the overarching goal of making capital gains long term.

It’s important to look at each of these strategies with your goal in mind and decide what works best for what you want to achieve. 

Step 4:  Figure out your deposit

For investors, the deposit requirements are a little stricter. Most investors need a 20% deposit for a new build property or a 40% deposit to secure a existing property. A good place to start is your savings, then see what other means you can use to get to the magic number.

If you already own a home, you might be able to use the equity on that home as a deposit on the investment property as cross security. Equity is the difference between the current market value of your house and how much you still have owing on it. 

For example, if your home is worth $600,000 and you owe $300,000, you have $300,000 in equity. Your equity can rise if you are paying your mortgage and your house rises in value, but banks will also look at other factors like your income and the projected rental income of the property. 

Second Tier Lenders

The bank isn’t your only option. You can use Second Tier Lenders or commonly known as “Non Bank Lenders”  to get where you want to go too. They can help you out if your income isn’t where the banks want it to be, you’re self employed, you have a bad personal financial history (being made bankrupt or a business in liquidation counts), or you just want to jump through less hoops! 

Before you think “Loan Shark”, relax. Second-tier lenders are reputable trusts, credit unions and other lenders that have years of experience behind them. They work specifically with home applications that don’t fit with main banks.

Cash Reserves

Do you have enough reserves to cover expected or unexpected expenses like insurance or reserves? Even if you have a pre-approval, you may still need to have money saved for reserves. This is money you have set aside to cover unexpected expenses or to cover the bills should you lose your tenants. We recommend having 3-6 months of bare minimum living expenses saved up.

Step 5: Get Pre-Approved

Now you’ve covered all your expenses and know you have enough equity to work with, you need to make sure you’ve met any other requirements the bank might have. This is when you should talk to your mortgage broker again to see what your options are. Some banks are more interested in investment properties than others so while one may turn you down while another might welcome you with open arms.

If you’re just in the planning stages of buying a rental property, get pre-approved for a mortgage. While it’s not an official approval, it will tell you where you stand for financing so you know what to look for.

Step 6: Location, location, location

Where do you want to buy? Buying an investment property is a little different to looking for a home. You need to think with your head, not your heart. Location is a big factor, but it depends on what kind of investment strategy you have.

Some people want an investment close to home, while others want to spread their bets. Do you want to buy in the same city or a different one? What suburbs are you looking at? It’s a good idea to consider the rental value of certain cities and suburbs if that’s important to you. Briefly break down the benefits of different cities and suburbs and decide what works best for your investment goals.

Different cities normally are at different stages of their property cycles, so buying in a different city and “hedge your bets” if you already have a home in another city.

Step 7: Decide what type of property you’re after

Townhouses, apartments. New build or older property? Your chosen strategy will inform your choice of property. 

Apartments tend to be better for cashflow, however lower capital growth. Townhouses can be the best of both worlds without over capitalising on a bigger home. Standalone homes tend to have lower cashflow however can see larger capital gains. 

Most clients we work with a limited by budget and cashflow, so we do find most end up in the townhouse market or a standalone home in a smaller or more affordable city.

To new build or not to new build? 

With recent tax rule changes, we are seeing more people turning towards new builds. New builds have less on going maintenance for the first years while old properties may be cheaper they may cost more in maintenance or have lower rents. 

If you were to quantify higher maintenance and vacancy costs, you might even discover that a new property is actually cheaper.

Step 8: Assemble a team

You’ll need the help of a few professionals throughout the investment process. Some are essential, while others are just nice to have. It’s important to get the right specialists on board to help you along the way.

Real Estate Agent – You’d be surprised at how many properties are sold without ever being advertised. At SM Property, we can help you find the right property. We can do the running around for you, let you in on the best deals and help you through the whole process.

Solicitor – They can check over relevant documents during your due diligence process.

Accountant – They offer advice on ownership structures and tax optimisation.

Mortgage Broker – They know banks inside out. They’ll make sure you get the best possible deal from the bank or non bank lender – and they also know which bank is most likely to give you the finance you need.

Property Manager – One of the most headache-inducing parts of investing in property is managing a property. You’ll normally end up paying around 9-12% of your rental income plus the occasional letting fee depending on the company and region.

Step 9: Make an offer

Found a property you love? Now it’s time to make an offer! There are a few things to consider in a written offer – getting your deposit ready, a settlement date, the purchase price and the chattels included in the sale.

Most investors make a conditional offer first, meaning the offer is subject to a few conditions. Once the seller accepts your offer, you’ll be given a period of time to secure your finances, and get a building report. This gives you a period of time to complete a due diligence period where you both physically and ‘on paper’ check that everything is in order with the property.

With an unconditional offer, you’re not subject to any checks or due diligence. You’re happy with the property and you can’t pull out. And when you’re bidding at an auction? You’re bidding on an unconditional basis!

Step 10: Confirm the purchase

If the seller agrees, you’ll be able to go through the purchase at the agreed price, but if you’re not happy after doing all your checks, you won’t need to follow through with the purchase.

If you decide to confirm, you’ll have to instruct your solicitor to complete the purchase. Your solicitor will liaise with your lender to set a settlement date.

Got any more questions? Scottie has nearly 10 years of experience in property investment and sales. If you need some help navigating the home-buying process, just contact us today.

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