If you aren't specific with your investment goals and requirements, you could be in over your head.
Blogger: Amy Mylius, buyer's advocate, Cate Bakos Property
I recently met with a young couple searching for an investment property, and they showed me their ‘saved searches’ tab on their property app. There were so many saved properties on their map, spread out over a range of 15 kilometres, that I could barely see the map of Melbourne underneath all of the icons. Their only search constraint so far was a budget of $700,000, which meant that they had been looking at townhouses in the west, units in the north and apartments in the south – and it had become overwhelming for both of them.
The first thing we do when starting a new assignment with a client is to sit down with them and establish their ‘brief’. A brief is the basis for our strategy and defines the type of properties and locations we’ll be conducting our searches in. It helps to compare apples with apples, and narrows down the number of potential properties to a manageable amount. There are essentially four ‘pieces of the puzzle’ that will need to fit into place in order to construct a realistic brief.
This is usually the most rigid piece of the puzzle and the hardest to change. Your budget will be shaped by your borrowing capacity, desired repayments, savings and cash flow, and unless one of these factors changes, your budget won’t be the piece you can change. However, there’s an important difference between your ‘desired’ budget and your ‘maximum’ budget. If you can come to terms with your real upper limit at the beginning of your brief, you’ll open yourself to more opportunities and be less likely to have to compromise on another piece of the puzzle. Investors are more likely to have a fixed budget they’re working towards, in which case they’ll also need to determine what their desired rental yield and outgoings need to be to meet their cash flow requirements.
For home buyers, location is often the most sentimental piece of the puzzle. Home buyers might desire to be close to family, a particular school or in the area they grew up in. Having an emotional tie to an area can create a big mental barrier when it comes to potentially compromising on location, and even moving to another suburb further out can be tough for some people to get their heads around. Our advice to clients is to list their dream suburbs, the suburbs they’d be comfortable living in and then the suburbs that they’d be OK with (if it meant living in their dream home), and to include all of them in the search parameters.
The suburb choices for an investment property are more likely to cover a broad range of areas, depending on the desired budget and yield. Establishing your figures and investigating the suburbs that can meet these parameters is an important step in the research process, and should be conducted at the very beginning of your property search.
Land size/type of property
This puzzle piece can be fairly straightforward to determine or compromise on, unless there are personal reasons for needing a certain size property (such as three bedrooms for a family or a yard for a big dog). Being able to concede on living space, a smaller yard or one less bedroom can be a worthwhile compromise if it means being able to buy in your dream suburb within budget. Looking at a double storey townhouse on a tight block can also be a solution, as the smaller land footprint will typically mean a lower price bracket compared to a similar size property with a single storey.
Condition of the property
For some people, renovating can be an exciting prospect. For others, it’s their worst nightmare. Figuring out where you sit on the renovation-appetite scale, whether it’s simply laying down new carpets right through to a full structural extension, will not only depend on your availability of funds (borrowed or savings) but also the extent of your motivation. If you’re living in the property, you might be able to tolerate a daggy or dated interior until you’re able to renovate. For an investment property a cost benefit analysis will be useful in chosing whether to renovate now, later or if at all.
To know if your four puzzle pieces of your brief are realistic, simply take a look in the “sold” section of the realestate websites. If there are no properties sold in the last six months that fit your brief, then this kind of property probably doesn’t exist or is so limited that your search could be fruitless. If you can find one to two sales per month, it will be tough but possible (bearing in mind the price target might be moving). Anything more than three sales a month that fit your brief means you’re on the right track, and it’s time to move onto Part 2 of defining your brief.