Property investing can be really overwhelming when you’re just coming into the fold. Terms like “gross yield”, “depreciation” and “gentrification” get thrown around like nobody’s business, and trying to figure out what all those statistics are trying to tell you will give any self-starter a migraine.
Take heart - even seasoned investors struggle to find investment properties that will suit both their budget and their investment plan. With just a bit of knowledge - coupled with time and practice - you’ll soon own another investment property and be well on your way to building a solid portfolio.
You just have to avoid the traps beginner investors fall into. One of the most common and seductive traps for beginners is that they are so impatient they jump right in and buy a property without any education or advice.
They usually pay way too much, have a negatively geared portfolio that they sell for a loss five years later – or worst case scenario – can’t sell at all. It just sits there, vacant, sucking money from this poor investors bank account each and every month. That person swears off property for life – even though it was a completely avoidable mistake.
We have had countless investors come to Positive Real Estate after experiencing investment failures like the one above – and we have to put them back on track years behind their successful peers. So believe me when I say, when you’re looking for an investment property, these are the steps you need to take!
1. Determine the kind of returns you need. This will determine the areas you need to focus on.
Why are you purchasing a property? Which do you need more - positive cash flow or high capital growth? Your strategy will depend greatly upon your individual financial situation, which includes your appetite for risk.
2. Put a short list together of areas that promise to deliver the right results.
Study and learn about the market you’re focusing on - the Data Watch section in Your Investment Property magazine is a great place to start.
What is driving that market? Is it population growth as a result of strong economics in the region? If so, dig down a bit deeper and find out what is causing the region to grow (is there new infrastructure investment in the area?) and how long the growth should be expected to continue (how many new jobs is that infrastructure creating?).
Key factors you’ll be looking for include:
- A strong and diversified economy - no “one industry towns” should be on your radar - ever.
- Solid infrastructure spending geared to meet the needs of both the current and future demographic of the area.
- Areas where a majority of the demographic enjoys high incomes.
- Higher yields coupled with a limited supply of available properties.
3. Study the locations on your short list, digging down deep to see what makes them tick.
Data all on it’s on means nothing. You need to use that data to tell you a story. Ask the following questions when looking at your data:
- What are the industries in the region? Is the entire demographic dependent upon one or two major employers or are there a large number of businesses in a variety of industries?
- What are the market values and the rental returns in each suburb for houses? For units? Study each suburb until you know them inside and out.
- Where are the “good” streets? The “bad” ones? Note why each street is considered good or bad and study what happens to each over time.
- What is the vacancy rate of each suburb?
- What kinds of properties is the area demographic searching for? What are they willing and/or able to pay?
- Who will your contacts be in the area? Begin building a relationship with quality valuers, real estate agents, mentors, etc. who can be part of your team when you begin investing in the area.
4. Search for deals within your target areas
Opportunities may lie within the “Six D’s” of property ownership events:
- Dummies (uneducated vendors)
- D’Bank (bank owned properties)
- Desperate vendors
Words to look for which may indicate a possible deal include:
- Urgent Sale
- Moving Overseas
- Vendor highly motivated
- Mortgagee Sale
- Trustee sale (inheritance, etc)
- Private sale
Where to look and what to look for:
- Newspapers, including suburban ones
- Private sales (no agent)
- Divorce and bankruptcy courts
- Run an ad in the paper
- Look for properties which appear to be old and which are owned by older individuals
- Real estate agents who are interested in establishing a business relationship with you
5. Begin putting together offers and negotiating deals
As a buyer, you want the best deal possible. A good discount is a fantastic way to create equity going into the deal. Remember that even if the vendor is in a tight place, he or she (and their agent) will be doing their best to ensure they get a great deal as well.
Negotiation is as much an art as is it is a science. Thoroughly researching the property markets and tossing a bit of science (psychology) into the mix will deliver the leverage you need to get the best deal possible, while still taking the high road and not taking advantage of the vendor’s vulnerable state.
This is just the beginning of your property search! Make sure you review twenty properties before deciding on the right one. Eventually, all of the above won’t seem overwhelming and you’ll be able to tell a great deal in a single glance.
Sam Saggers is CEO of Positive Real Estate and Head of the buyers agency which annually negotiates $250 million-plus in property. Sam's advice is sought-after by thousands of investors including many on BRW’s Rich 200 list. Additionally Sam is a published author and has completed over 2000 property deals in the past 15 years plus helped mentor over 2200 Australian investors to real estate success!
Read more expert advice articles by Sam
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.