In part 2 of the report we review the remaining 8 critical steps to buying property and why they are so important.

Lets recap on the first eight critical steps and they are:

1. Build a team of experts to support you
2. Establish your borrowing position
3. Establish the right entity to buy your property in
4. Establish the right buying strategy for you
5. Establish your buying rules
6. Finding the property
7. Crunch the numbers
8. Make an offer
_________________________________________________________________________

Now we look at the final eight critical steps to buying property and they are:

9.  Obtain a market rental appraisal
10.  Negotiate the price
11.  Organise inspections
12.  Apply for finance 
13.  Arrange insurance 
14.  Settlement period
15.  Depreciation Schedule 
16.  Celebrate 

___________________________________________________________________________

9.  Obtain a market rental appraisal

It’s important that while you have the property off the market you ask the property manager to put their rental appraisal in writing.  You want to find out as part of your ‘due diligence’ how much your chosen property will rent for.  This allows you, when crunching the numbers, to work out how much it will either cost you per week (if negatively geared) or how much it will add to your pocket per week (if cashflow positive). 

Having the appraisal in writing gives you confidence that the expected rental income is accurate enough to assist you in making your financial decision as to whether the investment property will work for you.  Obtaining a market rental appraisal from three different property managers will give you an excellent idea of the market for your selected property purchase.
 
10.  Negotiate the price

You don’t always have to pay a vendor’s asking price to purchase an investment property.  Experience says that many vendors are prepared to accept less than what they are asking for so as a way of saving yourself thousands of dollars always offer less.  The money you save as a result of your negotiations is money in your pocket rather than the vendors.

As a guide, in a booming market seek to achieve a 5-10% discount, in a flat market aim for a 10-15% discount and in a bust market aim to achieve 20% plus as a discount off the sale price.
If you can’t achieve these amounts, at least aim to obtain a discount as every dollar you save goes into your pocket.  Continue to negotiate until the Contract is accepted or rejected.

11.  Organise inspections
 
Inspections are an important part of your ‘due diligence’ as it allows you to ascertain the true condition of the property.  Sometimes a physical inspection of a property may not alert you to what hides underneath.  Pest and building inspections where required allow you to bring in the experts to review the property in detail.  This is especially important when dealing with older existing properties.

A building inspection will check the roof cavity, under the house (if on stumps) and areas that you may not consider inspecting.  Should the report come back with defects, this now gives you the opportunity to go back to the vendor to either seek compensation for the cost of repairs or you are well within your rights to ask them to rectify areas of concern.

Same can be done with the pest inspection.  If termites are found on the property (whether in the house or outside), you can ask the vendor to compensate you by reducing the price further or have them rectify the matter to your satisfaction. 

Including clauses in your Contract that allow you access to the property to conduct your inspections can save you thousands in future costs and more importantly, future headaches.

12.  Apply for finance 

Although you would have sorted out your borrowing capacity as part of the initial process, it is now time to make a formal application for finance.  One of your clauses should be a ‘subject to finance’ clause which gives you time to obtain the finance from your bank or broker. 

Try to allow as much time for finance as experience shows that there are usually delays of one kind or another.  Allowing yourself as much time as possible for finance makes the process smoother and gives you greater peace of mind.

Again from experience, there is nothing worse than being charged interest by the vendor because you failed to meet the finance deadline.  Failing to met the deadline can occur for many reasons including, documents not being received by either party, solicitors forgetting to contact your bank, bank valuers are too busy and are therefore delayed in viewing the property, parts of your finance application are incomplete, bank solicitors require more information or it could be a combination of the above.  It’s not about blaming the bank.  By being proactive you can buy yourself time to sort things out.  Once finance and other conditions are met, go unconditional.

13.  Arrange insurance 

As part of your finance approval, your bank will require that you obtain building insurance.  This is an opportune time to arrange for house, contents and landlords insurance before the tenant moves in. Remember to include contents insurance as it covers carpets and curtains, the tenant should also have contents insurance to cover their furniture. 

About 60% of landlords do not have landlords insurance.  The cheapest way to lower your risk as an investor is through landlords insurance.  A good Landlords Insurance Policy (you must read the inclusions in the policy) will cover you for loss of rent for a set number of weeks/months if the tenant cannot pay or leaves without paying rent, damage to the property and rent while the damage is being fixed, failure to pay rent during eviction and any court costs should you need to take your tenant to court. The policy will generally require that losses are extracted from bond monies before the insurance company commences paying.

Of course you have the bond at your disposal should monies be owed to you by the tenant however what if the damage costs more than the bond?

Make sure you check what the inclusions are in the policy.  As a rule of thumb when it comes to insurance, if you pay peanuts you will get monkeys.  Also check what the excesses are on each item.

14. Settlement period 

Once the Contract has gone unconditional, your finance is sorted and you are waiting to take possession of the property, use this time during the settlement period, to interview the three property managers to find a good property manager and get them to advertise your property to find you a tenant. Check with your accountant that the tax deductibility of the interest commences when you commence advertising the property for rent.

Your settlement period could be a few weeks or a few months (depending on conditions or state of purchase) so use the time to find yourself a tenant.  Any savvy investor will always seek to have a tenant moving into their property shortly after settlement.

You can either revisit the property managers that gave you a rental appraisal or seek out others.  Experience has showed that property managers who manage more than two hundred properties at a time will be ineffective in looking after your investment. Your property mentor/coach should be able to provide you with questions to ask property managers when you interview them. Inexperienced or over worked property managers will result in lack of attention to your property which in turn will lead to the property being allowed to “run down”.

At the beginning of the tenancy have your property manager conduct a complete and thorough inspection of the property taking lots of photos inside and out for their records.

15.  Depreciation Schedule 

Many investors do not realise that a Quantity Surveyor is the only person that the ATO recognise as being qualified to provide you with a tax depreciation schedule.  Accountants are not qualified to provide the cost of installation of depreciable items; hence many investors miss out on valuable tax deductible depreciation benefits. 

Once you have possession of the property, organise for a Quantity Surveyor to assess your property and provide you with a depreciation schedule. This is then given to your accountant who will include the depreciable amounts in your tax return calculations.  The Quantity Surveyors fees are also a tax deductible.

16.  Celebrate 

It is always important to celebrate your achievements; it becomes all the more worthwhile.  Reward yourself with a dinner at a fancy restaurant or that ipod you have been wanting.  Keep your rewards manageable so that you don’t break the bank yet allow you to enjoy the fruits of your efforts.

Source: Real Wealth Australia