Buying a property whether a primary residence or an investment property is a massive undertaking and a daunting task. For most people it will likely be the biggest purchase by overall asset value and/or monthly repayments.
In order to aid my decision making I have formulated what I consider to be my “property investment principles”, these are a set of guidelines which I use whenever faced with acquiring a property. These principles have saved me from making massive mistakes and often avoid buying on an impulse or without truly considering the purchase.
Now down to it, what are the property investment principles:
- Purchase Price
One of the first things every buyer will consider is what they can afford either in cash purchase or monthly repayments. Also the purchase price is not what has been listed by the selling agent or what the seller demands. The purchase price is what you are ultimately able to agree, so do not be shy to negotiate until you are satisfied with the price or as deal makers say, a good deal easy when everyone is equally dissatisfied.
Difficult as it may be, do not be emotional when negotiating, this is the worst thing you can do and may end up buying on impulse or the FOMO and all you would have achieved is ‘overpaying’ on a property.
If you cannot agree a suitable price, do not be afraid to walk away, this may actually be the best the you can do, it will give both you and the seller time to reconsider and later, if possible, come back to the negotiation table. Always remember that there are many properties and opportunities in the market and purchasing a property whether as a primary residence or investment is a long term game – so don’t rush.
If you are making a purchaser with monthly repayments, take the time to do the necessary calculations, including:
- completing a list of income and expenses to assess whether you can afford the monthly repayments. I prefer doing these on a excel spread sheet, it’s easy to make calculations and to change scenarios as and when things change;
- calculate your interest obligations under the loan, apply various scenarios including drastic increases in interest;
- in respect of your expenses, be honest; and
- ensure you include all the property related expenses, like rates and taxes, electricity, security, if buying into a sectional tile or security estate, estate levies, special levies, repairs and general upkeep.
If you are purchasing an investment property you will need to consider the realistic and rental income you can expect to receive consistently in the area. Check various property sites for the median price. This will obviously impact the purchase price, so it is important to be honest and conservative as opposed to robust.
Pro tip: Always try to purchase under your maximum affordability. It will give you a bit of breathing space in the difficult times.
A lot will swing on the location, especially on an investment property as most tenants and want convenience and even on a primary residence to ensure that your future value is secure a more likely to increase and that you don’t struggle should you wish to sell in future.
It is therefore important to consider:
- where the property is located i.e is it in a neighbourhood in demand, what are the surrounding neighbourhood’s etc.;
- what amenities are close by, including schools, health facilities and shopping centres;
- what is the traffic like to areas of work and schools;
- accessibility to public transport; and
Like I said, people want convenience ultimately and security ultimately. Stay away from locations that don’t provide this.
Pro tip: Do a traffic dry run, drive from the house to the nearest school during morning drop off times (nobody wants a traffic heavy drop off) and a similar drive to your area of work (or the nearest area of work for potential tenants) during peak morning traffic and evening traffic.
Consider the risk and whether they can be mitigated, especially if you are purchasing an investment property, including tenant default, ability to sell quickly should the need arise and possible neighbourhood decline.
Should a tenant not pay rent for a month or an extended period, will you be able to cover the cost associated with the property? Try to keep a reserve of about three months to cover such occurrence. They do occur and money people who invest in property take this for granted.
Should you need to sell quickly, will you be able to sell quickly and will you achieve ‘top dollar’? Always try to pick a property that is in a long term demand area to avoid disappointment when you need to sell. Your property is not valued how you see it which is usually emotional, the market will set a price regardless of what you think.
Always ensure you are not buying into a neighbourhood that is ‘in decline’, what will you value of time be. Drive around the neighbourhood and see if the surrounding properties are of a similar value to the one you are looking to acquire. Also drive around surrounding neighbourhoods to see what is happening there. Ensure you are not close to places that can be considered a nuisance, like a club.
Pro tip: Always do a full background check on tenants and where possible obtain previous landlord feedback.
Always do research. This may seem tedious but it is absolutely necessary. Spend as much time as you can researching the area, surrounding areas, market trends, is it a family or youthful orientated neighbourhood.
Inspect the property and employ a professional if you don’t know how. Ensure that all the relevant approvals required for the property are in place i.e gas and electrical compliance certificates.
For an investment property, what type of client can you expect or are you targeting. Understand the tenant type and what the inherent risks are with the tenant type i.e students, young professionals, family and how much will people willing to spend as rent for that type of property.
Ultimately you need to know the property better than yourself. If you don’t I’d say do not proceed. And remember, no matter what, do not ‘overcapitalize’.
*Disclaimer: The contents of this article should not be considered as legal, professional, financial or any other form of advice. These are merely views based on the writer’s personal experience. Readers should obtain independent advice on any matter prior to making any decision.