The Four Things You Have to Check Before Buying an Investment Property
Published 6:11 am 13 Mar 2020
Buying an investment property could lead you to riches or ruin. DG Institute CEO Dominique Grubisa offers some property investment tips for newcomers.
Are you thinking about buying your first investment property?
If so, it’s crucial that you don’t rush the process. The simple fact is that the vast majority of Australian investors never make it past their first property. That’s usually because they don’t know what they’re looking for when buying an investment property.
Don’t believe us? An article on Finder quotes property investment guru Michael Yardney, who says:
“In Australia, there’s 1.7 million property investors and more than 90% of them never get past their first property. 92% never get past their second property. Only 15,400 own six properties or more. In other words, most property investors fail.”
Don’t be one of them!
This investment property guide offers up some useful property investment advice. Follow these tips and you’re more likely to make that first house investment a success.
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Tip #1 – Make Sure You Don’t Have to Dip into Savings to Maintain the Property
This is one of the most important investment property guidelines for new investors.
You should not have to spend your own money to maintain your property. Everything you spend should come from the budget you created prior to the investment. That means every dollar is accounted for and dedicated to the property, rather than coming out of your livelihood.
If you’re dipping into your savings to maintain your property, you’re eliminating your safety net. And this is a problem that’s happening throughout Australia’s investment community. In an interview with Dominique Grubisa, Digital Finance Analytics’ Martin North described the scale of the issue:
“…[Investors are] dipping into their savings to make ends meet. If you look at the savings ratio, which is one of the ABS statistics, it’s going down. So effectively, compared with two or three years ago, people have less savings.”
You need to have a good handle on the financial side of things before you invest. And that means knowing more than how much to save for investment property deposits. You also have to consider the property’s holding costs and how you’ll pay them.
If you’re looking to sell for capital gain, you’ll need to account for these costs in your budget. If you hope to take on a tenant, you need to earn enough from that tenant to create positive cash flow.
Tip #2 – Conduct a Real Estate Investment Property Analysis
There are two parts to a property investment analysis.
First, you’re going to look at the numbers. You need to figure out how much it will cost to fix and flip the property. You also need to know how much profit you’re going to generate.
Your feasibility study will help you create projections for all of these numbers. We cover this in more detail in our Real Estate Rescue program.
Second, the property’s location and its physical aspects are just as important as the numbers.
Take the time to visit the property and drive around the neighbourhood. Find out where the local schools and amenities are. Calculate your travel time from the property and what the traffic looks like at different periods during the day and week.
These are things that a Google Maps search won’t show you.
If you have the chance, visit the property in different conditions. For example, turning up when it’s raining may show you that the property has poor drainage or a leak. Checking the property at night may highlight noise concerns that you wouldn’t spot during the day.
The point is that it takes more than a single visit to figure out if this is the right property for you. Take the time to research in the early stages and you’re more likely to profit from the investment.
Tip #3 – Figure Out What You Can Borrow
How much can I borrow for an investment property?
This is a key question to ask before you start your search. If you don’t know the answer, you’ll end up looking at properties that are outside your budget. This leads to a lot of wasted time and effort spent on research.
Again, putting in the time early on will help you here.
Speak to multiple lenders and find out about the best loans they can offer. Your goal is to achieve a low interest rate without any hidden issues that could bite you later on. It may be worth bringing in a mortgage broker at this point, as they can offer access to loans you can’t get on your own.
Most importantly, remember that the bank isn’t on your side. They’re going to give you the offer that works best for them. This isn’t always the offer that works best for you. If it sounds too good to be true, it’s best to speak to a professional to confirm that you can actually afford to service the loan.
Tip #4 – Check Median Prices in the Location
You’ll have a lot of opportunities come your way when buying an investment property. Unfortunately, not every opportunity will work out, especially when you have a fix-and-flip strategy.
You need a way to quickly check if a property is even worth the time you’d spend on researching it.
That’s where your chosen location’s median prices come into play.
Find out what these are for different property types and compare every opportunity against them. Any properties that are at or above the median aren’t likely to generate a profit. That’s especially the case with a fix-and-flip strategy.
Your goal is to find properties with prices that fall under the median. These are the ones that have great potential for value-adds. Plus you’ll spend less upfront, which helps with cash flow issues later on.
Avoid these House Investment Pitfalls
Buying your first investment property should be the start of your journey towards building your portfolio. This journey will see you invest in many properties while you build your wealth.
Unfortunately, more than 90% of investors stumble at either the first or second step.
With these tips, you reduce your chances of becoming one of the thousands of investors who never make a profit.
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