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How to buy an Investment property – Part 1 The foundation of a good investment

10 February 2014

Firstly – congratulations on making the decision to by an investment property! You are about to depart on a journey that has been the cornerstone of the investment strategy for thousands of Australians over the last 200 years. Without trying to overstate the importance of this momentous decision, this one action has the potential to shape not only your financial future but also your quality of life, comfort in retirement and most importantly, providing you with options you may otherwise not have had.

Part 1 of this blog series is aimed to set you on a course that can greatly improve your chances of not only purchasing a property for the right price but purchasing the ‘right property’ for you. The fact is, many people purchase the ‘wrong property’, and this simple decision can more often than not be costly both monetarily and to our greatest asset – time.

Step 1.           

The Foundation of a Good Investment

I won’t use this opportunity to rabbit on about the ‘physiology of investing’, as I will assume you have not come to this decision without considerable thought and with the aim to set yourself up for a ‘future with options’.

Any good investment strategy is built on a strong foundation which includes the following considerations:

How much can I afford to spend?

Costs: Even before heading out to visit ‘open for inspections’ and trawling through the real estate portals, I believe it is most important to assess what you can afford. Costs to factor in include: how much cash do I have available to contribute; how much will be required for stamp duty, conveyancing fees, pest and building inspections; how much should I keep as a ‘buffer’ in case of a surprise. 

Repayments: The next step is to look at the ‘cost of money’. I recommend you look at one of the bank or mortgage broker websites and have a play with their ‘home loan calculators’. Try out the calculators using differing loan amounts, terms and interest rates, and consider what the repayments are actually going to be per week. Naturally, always allow for an increase in interest rates in your calculations. Rates won’t stay low for ever. This action is usually quite sobering, though is very important in working out not only initially the amount you can afford, but also what you are comfortable with. Keep in mind that the banks level of comfort is often more generous than your own.

Purchase Price & Rental Income: Once you have ascertained what you can afford to contribute by way of cash and repayments (the cost of money), you can now start factoring in hypothetical purchase prices and rental incomes. You will see that changing any one of the three variables (deposit, loan amount and purchase price – assuming term of loan is constant, say 30 years), has a large effect on the repayments. If you are unsure as to what rental income to base your calculation on and also, how much you can afford to contribute yourself each fortnight, work on a return of 4%. Note: Always elect to pay your loan off fortnightly – this is essential and I’ll discuss the effects of compound interest another time. E.g. Purchase price equals $450,000 with a gross rental return of 4%. 4 divided by 100 equals 0.04. 0.04 times 450,000 equals 18,000. That’s a gross rental income of $18,000 per annum. $18,000 divided by 52 weeks equals $346 rental return per week.  Don’t worry if this sounds low, this conservative figure coupled with capital growth will provide the best ‘safe’ return available.

In what name should I purchase the property?

The ‘entity’ to which the property is purchased in can have huge ramifications down the track, and I mean literally tens of thousands of dollars! Please seek a good accountant to provide advice on this prior to even thinking about signing a contract to purchase a property. Also, this will affect the loan documentation, so please speak to your financer also in relation to this. Options include your spouse, your children, a new or existing trust or company etc. Tax and asset protection implications both presently and in the future are considered when deciding this.

Make contact with ‘truly independent property professionals’

A word of caution – over the last decade and a half of investing, I have seen countless dozens of ‘smart people’, take the advice, tips and professional guidance of people and companies who: A. Do not know what they’re talking about; B. Are not successful property investors themselves and 3. Are providing biased advice, which provides to them undisclosed remuneration, kickback or favour. Be very careful of these purportedly independent property professionals.

To purchase and hold an investment property, you may need the guidance of people like a financier, buyer’s agent, solicitor, insurance adviser, valuer, quantity surveyor, accountant, various trades people, building and pest inspector, property manager and the list goes on. Seek out successful property investors and seek their council on who to use and discuss with them how they found them. Also ask around and weigh up each opinion on their own merit. Having a team of trusted advisors to assist you is invaluable.  Keep in mind that often, good advice is not the cheapest available, however in the medium term, their advice and guidance will in fact help you make you money and avoid the traps.    

Summary

I could easily write a series of booked called ‘How to buy an investment property’ and a single one alone on ‘The foundation of a good investment’. Although it is natural to head out to look at what properties are available and what your money will purchase, it is very important to consider early on in the purchasing process, the fundamental principles that create a strong foundation for investing in property. And remember, you are purchasing this property as an investment, therefore the criteria should be different than that of a purchase of a home.

At Templeton Property, our team of Buyer’s Agents assist our clients to build a strong foundation that sets them up for success both now and into the future. If you have a question in relation to this or would like to speak either myself or one of our professional Buyer’s Agents in Brisbane, call our office on (07) 3368 1988.