Failing to adequately assess your buying capabilities can set your investment journey back months, even years, as this cautionary tale demonstrates.
Blogger: Cam McLellan, director, OpenCorp
When it comes to property investing what comes first, the chicken (your borrowing capacity) or the egg (the property)?
Most people would say it’s the property, but today I’m going to tell you why the chicken should always come first.
Last year a friend of mine signed a contract for a house without talking to the bank. When he went to sort out a loan, he discovered his borrowing capacity was nothing near what he thought it was.
That meant he had wasted six months of his life looking for a property that he actually could not afford. It was bad luck, but he could have simply spoken with the bank or his broker first and saved himself the heartache.
The other reason it’s important to know your borrowing capacity is it will help you negotiate as you will know what your absolute maximum is on your new purchase. Remember there is a difference between knowing what your place of residence is worth in the current market, and what a bank panel valuation will be. So this will affect how much you can borrow.
Once you’ve had your own place assessed and know how much equity you have available, you will understand how much you have to play with for your next property. I would also suggest that any contract you draw up for a new purchase includes a subject to finance clause.
A final point on having a valuation done on your own property – before you have the valuer out, get some local agents to give you some sales dividends on what’s happening in your area. Then when the valuer actually comes out to your house, sit down with him, let him know about the sales and how your house relates to these (land size, number of bedrooms, etc).
This way the valuer has a picture painted for them as the more information you can give them to help them and show them you understand what’s going on means that you’re more likely get an accurate valuation, rather than being shocked by a low one.
Just remember: knowledge is king, so do your homework!