Before you buy your next investment property you must do an almost forensic-level analysis on the asset and its numbers - and these are the questions you need to ask.
Blogger: Julie Cumming, director, Hatch Property
Have you ever dropped into a display unit that is selling great looking apartments or homes off the plan? Have you been given loads of supporting documentation and financial cash flows, along with inclusion lists and all the lifestyle promotion that has left you dreaming of living there of thinking that this could be the one that provides the wealth in retirement you are looking for? The agent was very positive about it! And hey, wasn’t that a fabulous kitchen!!
After the initial excitement you look at the material and wonder if it is telling the story realistically. How can you be sure it will deliver all the promises? How do you know that this opportunity is really good… good enough to spend hundreds of thousands of dollars investing in, be it to live in or invest in.
When looking through a property presentation and particularly the financial cash flow projections, it is important to look at the assumptions that have been made. What interest rate is being used, what rental income is being forecast, what vacancy rate has been taken into account?
Has a cash deposit been applied or are the assumptions based on a fully geared investment and borrowing the associated costs like stamp duty, loan costs and solicitors fees. What are the weekly average out of pocket expenses to the purchaser, assuming the assumptions are correct? Are variations on the assumptions given to indicate what will happen if interest rates go up or if there is extended vacancy and the rental is not achieved??
What growth rates is being assumed, what rental expenses have been included- management costs, rates, body corporate expenses, maintenance and insurance costs? What depreciation allowances have been taken into account?
It is important to know what else in in the pipeline in the area and to assess if an oversupply of a product type is likely. Is there a lot of product to come to market in the same time frame and what is driving the underlying demand? Does this particular property have some scarcity factors or is it easily replicated with no great advantage over many others on the market?
Being fully aware of the actual dimensions of each room is also critical, and often overlooked as buyers focus on the “sexy artist’s impressions” that don’t always reveal the real story.
Another essential step before you start is to find out how much you can borrow. Surprisingly, many people proceed as far as to sign contracts and then seek finance advice.
It is possible to get advice on how to evaluate the real facts from the spin in the marketing proposals, and taking the time to do this can save costly mistakes and give you the confidence to proceed, better informed.
There is plenty of good property available and being able to discern which are the “gems from the gravel” pays dividends which will determine your success.