Buying an investment property may seem daunting if you haven’t gone through the process before. You’ll find yourself asking – What do I do? Where do I start? Who do I speak to? What is the sequence of events?
In order to assist you through this important process, I have put together 7 steps for you to use as a checklist when purchasing a property.
1. Determine what you can afford
You have to be able to afford the cash flow impact on owning an investment property, so reviewing your finances and budget is a good place to start. Work out how much disposable income you have after each pay packet, taking into consideration your daily living costs, and make sure you do not over commit. Work out how much you have saved that can go towards your deposit, or how much extra savings you will need for this. Generally, to avoid additional costs such as lenders mortgage insurance, a 20% deposit is required. Also allow for 5% of the purchase price to cover costs like stamp duty and legal fees.
A very important thing that is often overlooked is being able to handle the emotional side of property ownership. Yes, there may be times when the market drops or is stagnate so you might get little or no capital growth, and yes you may have problems with tenants and vacancy periods, but this is part and parcel of what property investing is, so make sure you are emotionally prepared for what might come your way – after all, it is generally a long term investment!
2. Find out how much you can borrow
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 vs variable.
Once you have worked through step 1, you should contact a lender or broker to find out how much you can borrow based on your income, financial commitments and deposit, and at what interest rate you can take out a loan. . Get pre-approval for the loan and understand your monthly payments and interest rates, both fixed vs variable, then you can begin searching for property with certainty based on how much you can spend. Knowing what you can afford and what your budget is will dictate where you can purchase and what type of property you can buy – for example, a house or apartment, new or old.
You should also consider how you will structure your loan – does interest only or principle and interest work best for you? Should you lock in rates for a fixed term, leave it at the 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!
3. Get advice from an accountant
You should seek advice from an accountant on what the best name to purchase the property in is, as this could significantly impact on tax benefits. Having the correct name also takes into account potential asset protection issues, land tax issues and stamp duties. An accountant can also explain how negative gearing works, as well as depreciation, especially with newer buildings. This is advice the banks won’t give you, and this may impact your decision on what you buy and how much you can afford to spend on a property.
An accountant will give you a second opinion on how much you can afford each week and the tax impact on this amount. Once armed with this information and your loan pre-approval, you are now ready to take the next step of purchasing a property.
4. Contact a lawyer
Contact a lawyer that specialises in property in advance to assist with conveyancing, searches and settlement. Ensure they know what name is to go on the contract after confirming with your accountant. Once you have found the right property and have instructed them to review the contract, also inform them whose name should appear on the contract. This is very important – so make sure you seek advice from your accountant before deciding the name that will go on the contract of sale. While undertaking the review of your contract, you may also want to make sure that your Will is current and reflects the latest changes and commitments, or, if you don’t have a Will, arrange for one to be drawn up.
5. Conduct thorough property research
This is a critical step. If you don’t do thorough research, you could end up paying too much for a property or investing in a location that doesn’t meet your investment goals, which could end up costing you a lot of money. Do your own research for areas with good growth potential, good rental yields and good rental demand. Look at the demographic of the suburb and things like proximity to public transport, schools, roads and shops. Remember, other than your own home (if you are an owner-occupier), this will be your largest investment decision so do your homework and seek professional help if required.
Also ensure you understand the sales processes of making an offer on a property or what happens at an auction. Don’t become emotionally attached to a property – it’s an investment, a business decision – you are only interested in maximising capital growth and rental returns.
After discussions with your accountant you would have determined whether you should look at a newer property vs older ones. Understand the rental market and returns gained
6. Find a good property manager
Once you have located a property, negotiated a sale price and exchanged contracts, begin researching local real estate agents to find a property manager with a good track record. Take the time to visit a few local agents, talk to them (interview them) and ask questions seeking testimonials from other landlords to determine their ability.
Once you have found the right agent for you, ask them to assist with the ongoing management of your property and future tenants, and agree on a management strategy. You can expect most agents to look for a commission of around 5% to 7% of the gross rent.
Set expectations on what they are to do. For example – all bills to go to the agent for payment and they only contact you for approval if the amount exceeds a certain number. If minor repairs are needed, go ahead with them, however major repairs require your approval.
Your property manager will issue you with monthly statements reconciling rent and expenses, and will deposit money directly into your nominated bank account. They are being paid to manage your property, so don’t do it for them – just manage your relationship with them.
7. Manage your yearly compliance requirements
Now that you have settled the property, you’ve found a property manager and you have a tenant in place, you should contact your accountant to discuss how you can assist your cash flow by lodging a PAYG variation.
You now know the income (rent) you are receiving after costs, the payments you are paying the bank and the impact on depreciation if applicable. Your accountant can now help you lodge a PAYG application with the ATO, and within a few weeks you should see a little extra cash in your pay packet. Also ask your accountant what information they require (and by when) to lodge your yearly tax returns, and how much this is this going to cost you each year so there are no surprises.
Remember, always seek professional advice where necessary to determine whether investing in property is appropriate for your individual circumstances.
Author: David Naylor Source: Chan & Naylor