For those who are keen to build wealth through property investment, how exactly can they get through that first property purchase which will serve as the foundation of their portfolio?
Prior to purchasing a property, experts strongly advised investors to determine their goals, understand their capabilities and limitations and do thorough research on finances, strategies and the property market.
Searching for the first investment property starts with researching property investment.
This step in an investment journey could be a lot of things, but it will never be simply logging on to a computer and searching for a list of properties for sale within a specific area.
In fact, property research rarely starts with looking for a house to buy. Understanding property investment entails encompassing research – from the economic drivers of the market, its movements and level of supply and demand to the right location, the perfect type of property and the different ways that they can access funding for your growing portfolio.
For many experts, setting short- and long-term goals is the most important stepping stone to the property ladder. Knowing the end goal allows the investor to identify the options available to them and ultimately determine the right steps to take.
According to property accountant Munzurul Khan, every investor’s goals must be SMART goals – specific, measurable, achievable, realistic and timely.
“I hear from clients say, ‘I would like to go on two holidays once in every year and would like to retire in the next two years,’ to which I say, ‘All those are good. Let’s try to quantify what does that mean,’” he said.
“What is the net passive income that you need to reach to afford that lifestyle that you wish for? What’s the overall gross asset and ongoing cash flow you need to achieve and reach that net income? What’s your ideal time frame? Is it really realistic?.”
Once the goal is clear, it’s time to get to know the property market of Australia.
Location will play an important role in the success of your investment. Even before purchasing a property, it could be a great indicator of the level of growth that your future assets can achieve over time.
Among the primary considerations when identifying a prime location are proximity to significant infrastructure such as public transport, schools, hospitals, shopping malls and other important establishments, neighbourhood, size of land and property, condition of the property, number of bedrooms, amenities, vacancy rates, sales history and comparable sales.
After doing research and understanding the property market, picking a good investment suburb, setting a budget and sorting out finances, investors may proceed to getting an approval for a home loan and finding the right property with the help of a trustworthy team of professionals.
To finalise the property purchase, experts laid out these simple steps:
Whether buying through private treaties or via auctions, experts advise investors to take the time to inspect the property for any faults so they can factor in repairs and maintenance costs into their budget and avoid any untoward incidents in the future. Both structural faults and cosmetic damages must be accounted for to save yourself from any nasty surprises.
Some of the most common inspections are building inspections, pest inspections, electrical inspections, strata inspections and land or property surveys. These inspections may cost around $200 to $600.
When buying through private treaties, making an offer will entail varying levels of negotiations. Make sure to study comparable sales in the area and find out the property’s fair market value to make a reasonable offer. Experts often advise making an initial offer within 5 per cent of the asking price to set yourself up for negotiation. Be flexible, within your own limits, in order to avoid losing the property over a few hundred dollars.
The offer can be made official and legally binding by having a sales summary or contract of sale prepared by a solicitor. This will indicate the date of offer, address of the property, offered purchase price, deposit amount, balance to be paid, financial details, special conditions and proposed settlement date. With the contract of sale, the agent will be legally obliged to present the offer to the vendor.
In auctions, negotiations are limited because if the investor come out as the highest bidder, the sale will be final. Make sure to have a pre-approval finance and a deposit ready to avoid any problems.
If the offer is accepted, the investor will receive the sales contract and be asked to pay for the deposit. Contracts between the potential buyer and the seller will be formally exchanged when the deposit is paid. Conveyancers or solicitors from both parties will oversee or facilitate the exchange.
The contract of sale must include names, property description, inclusions and exclusions, purchase price, property taxes, special conditions, strata by-laws (for apartments/units), environmental regulations, settlement details and building certificate. It may also include a zoning certificate, a copy of property certificate and plan for the land and details of easements. Have a solicitor check the contracts before signing.
Once the contracts are signed, there will be a five-day cooling off period, meaning the buyer can still cancel the transaction. From here, buyers are legally bound to proceed with the purchase unless a special condition is indicated in the terms and conditions of the contracts and agreed upon.
In order to avoid conflicts, do legal legwork before signing contracts. Check the contracts carefully with a lawyer to ensure that you agree on every term and condition indicated.
Take time to arrange conveyancing as well, or the legal transfer of property title from the vendor to the buyer. The process will be overseen by a conveyancing specialist or a solicitor and will include survey, building and pest reports. Conveyancing fees will cover all the costs of the transfer of the property except stamp duty. As the buyer will be legally accountable for any mistakes made throughout the process, engaging professionals is strongly recommended over DIY kits.
For the next few weeks, usually around six weeks, the pace will slow a little as the investor’s legal team make enquiries about the property, including examining survey and drainage diagrams, writing to government departments, inspecting heritage orders and council checks.
If things don’t run according to schedule, the buyer will need to negotiate an extension of deadline with the vendor.
The investor can prepare for settlement by securing funds for property-related expenses such as stamp duty and the balance of the purchase price, organise building insurance for the property and engage utility providers to avoid being “disconnected” on the first few days of ownership.
Settlement day – finally. The buyer and their representatives can now meet with the vendors to swap the cheque with the title of ownership and the keys to the property. Once settlement takes place, the deposit will be released to the lender and the sale is finalised.
However, the buyer may not be holding on to the property title for long. Unless they have purchased the property in cash, the title of ownership will be kept by the lender until they have paid down the mortgage.
Finally, with the help of a solicitor, make sure to notify the government of the change in ownership. The buyer may also start reassessing and finalising their investment plan with their team so they can jump start they wealth-creation journey as soon as possible.
It is important that the process remains on schedule up to settlement day because being unable to settle on the agreed upon date will have the buyer charged with interest.
When purchasing a property, investors can minimise risks by minimising delays. Be financially ready from the beginning of the process – from deposit to cash buffers – and have professionals within reach so they can give the right advice and proper assistance as soon as they are needed.
✖ Procrastinating: Don’t fall into “analysis paralysis”. If you’re ready mentally and financially, don’t hesitate to grab the opportunity to make a purchase.
✖ Failing to do research: Without understanding what you’re getting into, how can you possibly succeed in it?
✖ Putting all eggs in one basket: The “fear of loss” instilled into an agent can be a powerful bargaining chip. Having another property as backup will give you leverage when dealing with agents.
✖ Being emotional: Also known as the biggest mistake when buying an investment property. Always be objective and remember that you’re looking for a wealth-creation vehicle, not a home to live in.
✖ Submitting an offer that’s too high or too low: The former will have you wasting money and the latter will have you wasting your time and the agent’s time.
✖ Failing to make the offer legally binding: Believe it or not, a lot of buyers stop at verbal offers then get surprised when they don’t get a call back from agents. Do not make the same mistake.
✖ Presenting a conditional offer: Too many conditions can weaken your offer. Between a $500,000 offer conditional to a building and pest inspection and a $490,000 unconditional offer, agents are likely to choose the latter to close the deal quickly.
✖ Failing to engage conveyancers or solicitors and buyer’s agents: These people are invaluable to the process of purchasing a property. Picking an investment property and signing contracts must be guided by trustworthy professionals, or you could lose more than you can gain.