16 critical steps to buying an investment property - part 1 



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

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1.  Build a team of experts to support you

You can’t be an expert at everything and when buying property you are dealing in big dollars, therefore finding the right expert(s) to support you in making your decisions is extremely important. Examples of the type of expert that you will need to have on your team are, solicitor/s, accountant/s, finance broker/s, property coach/mentor, property manager/s, valuer/s, quantity surveyor/s and insurance broker/s.

Make sure that the expert(s) you choose are active property investors themselves and if not, seek out expert(s) who are. If you choose an expert who is not a property investor, then expect to make mistakes and/or minimising instead of maximising the  return on your investment.  

2.  Establish your borrowing position

Contact your bank or finance broker and ask them for an assessment of your borrowing position.  In other words, find out what your borrowing risk profile is with the bank, how much you can borrow, what your available equity is, what your serviceability profile is and what you can do to improve all of the above. Remember you want to maximise your borrowing potential, every borrowed dollar at 7.5% interest that returns 15% or more puts money into your pocket.

Don’t stop at one bank, every bank has different borrowing rules for lenders. You will get a different story at each bank. Try both traditional and non traditional banks you may be surprised at the difference.  

Knowing your borrowing position and what you can do to improve it helps you to plan and work out the type, number and profile of the properties that you can afford to buy.

3.  Establish the right entity to buy your property in

Now that you have established your borrowing position, the question you will next face is what entity you should purchase the investment property in. Should it be in your own name, your spouses, child’s or partners name. Or should it be in a trust (Hybrid, Discretionary or Unit Trust), a company or a combination of the above? Also how many properties should you purchase in the one entity and why? How should you structure the purchase to provide maximum asset protection while at the same time providing you with maximum leverage, minimum tax and the best return on your investment?

Choosing the wrong entity could have significant adverse tax implications for you, so make sure you discuss this with your accountant and solicitor.

It is important that you work out the right buying entity before you purchase a property, as you won’t be able to change it later on without attracting significant additional costs including the dreaded stamp duty. 

4.  Establish the right buying strategy for you

Now that you know your financial buying position, have found the appropriate experts to support you, and the right entity to purchase the property in, then the next big question is what kind of property should you buy?  Should it be a capital growth (negatively geared), cash flow neutral, positively geared or a cash flow positive property? What kind of return do you need to get from the property in order to sustain it and/or your lifestyle?  Can you afford to be funding the balance of a negatively geared property out of your own pocket if there is a shortfall between the rent and expenses, if so how much and for how long?

It is extremely important that you consider your lifestyle when creating your buying strategy because if buying properties results in you not being able to afford to go out to dinner or the movies, how long do you think you will put up with it? Experience suggests about two years at the most, you’ll then sell up, lose money and label property investing a mugs game. 

Looking for a balanced buying strategy that does not adversely impact on your lifestyle is what long term property investors strive for.  Spend some serious time up front with your property mentor/coach developing your buying strategy, you won’t regret it.

5.  Establish your buying rules

Having established your financial position, built your team of experts, established your buying entity and developed a buying strategy that will suit your lifestyle, it is now time to develop buying rules that support your buying strategy.

Buying rules will help you focus your search on properties that fit your buying strategy and stop you from diverting your property search to all ends of the globe. Typical questions that you should ask yourself when establishing your buying rules are:

• What kind of properties should you purchase - houses, units, townhouses or apartments?
•   How many bedrooms should it have - 1, 2, 3, 4 or more?
•   Should it have a rumpus room, and/or an alfresco entertainment area?
•   Should it have a single or double garage or none at all?
•   Should it have 1, 2 or 3 bathrooms?
•   Should it be single level or multiple levels?
•  If apartments are the focus of your search, what should the maximum number of apartments be in the development?
•   Where should you focus your property search – locally, interstate or overseas?
•   What yield should the property provide? How much are you prepared to spend on the property?
•   Should you buy old or new properties?
•   Should the properties be in a capital city or in the country?
•   Should the property have a pool or not?
•   Should the property have air-conditioning or not?
•   Do you want to add value to the property later on and if so how?
•   Should it be near schools, public transport and major roads?  If so, how far should you have to travel to get to them?
•   How far (driving/flying time) should it be from the nearest major or capital city?
•   Should there be an airport/train station nearby?  If so, how far should it be from the property?
•   Should it be near major shopping centres, cafes, restaurants etc?
•   What should the percentage of renters be in the area?
•   What should the target vacancy rate be in the focus area?
•   If the focus is on capital growth what should the capital growth be?
•   Should you buy by private treaty or at auction?

Your buying rules may change from property purchase to property purchase because your borrowing capacity may have changed. Your property coach/mentor can assist you in developing these rules.

Once your buying rules have been established stick to them for the purchase at hand.

6.  Finding the property

Having established your financial borrowing capacity, team of experts, buying entity, buying strategy and rules, it is now time to purchase the property. The first step is to select 3 areas of buying interest that relate to your strategy (ie cashflow or capital growth). This will need to involve assistance from reputable property research analysts which your property coach/mentor can assist you in finding.

Use the many internet property websites available as a means of finding properties in your search areas and then use the buying rules that you have established to hone in on the right property. Again your property coach/mentor can assist you in identifying and gaining best use of these websites.

Contact three property managers in your search area and ask them what tenants are looking for when looking for a rental property. This will help with selecting a property that tenants want to live in. Use the same property managers to assist you to assess the vacancy rate in the area.
You could also contact three real estate agents in your nominated search area, give them an outline of your buying rules and then ask them to contact you with any properties that fit the property profile that you are looking for. This can save you heaps of search time, but make sure you convince them that you are serious about buying a property as this will really get their attention.

Look for distressed sellers for potential discount opportunities.

7.  Crunch the numbers

Remember the property investors golden rule…”Fall in love with the deal then the property”. In order to do this you will need to analyse the property financials to ensure that the property fits your buying strategy.

This can be done quickly by using reputable property analysis software. The software will allow you to put in all the purchasing costs and property expenses and come up with a net weekly after or pretax loss or income from the property. If the property doesn’t quite fit your buying rules at the price being asked by the vendor, you can then manipulate the purchase price figure in the software until you get a scenario that has the deal stacking up to your required buying rule. This then becomes your upper price for negotiating the deal.    

Your property coach/mentor will be able to advise you on software and assist you in crunching the numbers.

Beware that some property analysis software, especially if offered by vested interest developers, can be misleading.

8.  Make an offer

When you have found the investment property that you are interested in buying and the numbers work for you, put in an offer in writing. This must be done quickly.
Add “subject to” clauses in the Contract/Agreement Special Conditions and put in your offer quickly to make sure that you are not gazumped by another buyer. This should be done even if you haven’t quite completed your “Due Diligence” checks on the property.

The purpose of the “subject to” clauses is to conditionally purchase the property so that you have the time to complete your “Due Diligence” without feeling that you are under pressure from other buyers. Make sure that you allow plenty of time in the Contract/Agreement “subject to” clauses to allow you to complete your “Due Diligence” investigations.  If the vendor accepts your conditional Offer, then the property is withdrawn from the market until such time as the “subject to” clause timeframe expires or the buyer decides to purchase the property unconditionally. 


Next month we will bring you the remaining eight critical steps to buying investment property....so stay tuned.

Source: Real Wealth Australia