You’re cashed up with a deposit on hand, your finance is approved and you’re itching to invest – but you have no idea where to start! If this sounds familiar, our five-step guide full of expert tips and advice will help you on your journey as you locate and buy your next investment property. Sarah Megginson reports.
Step 1: Develop your strategy
Developing an investment strategy is the key first step that many people – including experienced investors who own several properties – fail to take.
“You need to begin with the end in mind,” says Rich Harvey, CEO of propertybuyer.com.au. “Strategy is crucial, because it’s important for investors to take a step back and look at what they want to achieve. There is no ‘one size fits all’ solution, and the right investment strategy for you is going to depend on your age, risk profile and financial situation.”
There are several strategies you can employ, including buy and hold, renovate and sell, renovate and hold, or buy and flip:
Buy and hold is when you invest in a property asset that you intend to hold for the medium (5–10 years) or long term (10-plus years).
Renovate and hold/sell is when you buy a property with renovation potential, and embark on renovations to add value. You may then decide to hold on to the property for the short, medium or long term, or sell it to realise a quick profit.
Buy and flip is when you buy an undervalued property and immediately list it back on the market at a higher price. Often, investors using this strategy may perform low-cost cosmetic renovations such as painting the walls, replacing the carpet, etc.
If you plan to hold your investment property for longer than 12 months, you’ll also need to consider your finances so you can work out whether a positive, neutral or negatively-geared investment best suits your situation.
At this stage it’s a good idea to fine-tune your personal budget and work out exactly how much you can afford to allocate towards your new property each week, or whether you’ll need a positively geared investment.
“You’ve got to calculate the level of cash flow you’re going to need to support your investment, and what sort of growth factor you’re looking to achieve,” Harvey advises. “The other thing to consider is your timeframe – are you 10 years from retirement, 20 years away, or just five years?”
Once you’ve given careful thought to your cash flow needs, profit and growth goals, and short and long-term investment plans, you can then set your search parameters, such as budget and property type. “Your strategy may need to change over time,” Harvey adds. “For instance, we may go through a flat period of no growth in property values, and during that time you might choose to add value through renovation. Whatever you decide, it’s important that you keep an eye on the length of time you have before you need to access the funds or profits generated by your property investment.”
Step 1 case study
Jennifer is 35 and would like to buy an investment property. She has a long-term investment strategy and would like to hold the property for at least 10 years, as her goal is to eventually live off the rental income of her property portfolio.
Jennifer has $100,000 available, which needs to cover her deposit ($80,000) and acquisition costs such as stamp duty and legal fees ($20,000).
A visit with her mortgage broker reveals that she has been pre-approved for a loan worth up to $340,000. Therefore, with her $80,000 deposit, Jennifer can shop for a property priced up to $420,000.
After reviewing her budget, Jennifer has also worked out that she can afford to outlay up to $60 per week on her investment property.
Therefore, Jennifer’s investment strategy looks like this:
- budget of up to $420,000
- focus on high capital growth rather than high rental return
- plans to hold the property for at least 10 years
- can afford to add up to $60 per week of her own money
- seeking high-growth capital city investment
- house or apartment is fine, but due to budget, a unit purchase is more likely
Step 2: Research
Now that you’ve locked down your investment strategy, you should have a clear idea of:
- the type of investment property you can afford (house, apartment)
- your overall buying budget (including purchase price and acquisition costs)
- the weekly rental return you’ll need in order to maintain your investment
- the general location that you’d like to search for your investment property (such as regional, metropolitan, mining town, etc)
If cash flow is the name of the game and you’re seeking high yields for positive gearing, you may need to search for regional opportunities, or new properties that offer high depreciation benefits. If you’re looking for strong long-term capital growth and yields aren’t as important, then you could turn your attention to capital cities.
“The next step is choosing which state you want to invest in. A lot of people default to their own home state, but that’s not always going to be the best choice,” explains Helen Collier-Kogtevs, director of Real Wealth Australia. “Different states experience property price growth rates at different levels, depending on a range of factors, not least of which is supply and demand.”
Some states simply don’t have enough housing to cope with the level of new residents arriving each month, which means the housing that is available is highly sought-after. “If an area is experiencing high population growth and at the same time, not enough new houses are being built to accommodate them, then that’s going to translate into high property prices and higher yields,” she says.
Your first round of searching will generally be on the internet. If you’ve decided on a capital city investment, you could begin by researching each capital city online.
“RP Data, Residex and APM are great sources of data,” advises property expert Chris Gray, CEO of Empire. “For the sake of a few hundred dollars, you’re so much better off buying the information from these experts so that you’re making informed decisions.”
It’s also a good idea to visit the state government and city council websites for each location, so you can gain an understanding of each city’s local economy, infrastructure projects and growth plans. The idea is to get educated and gain enough knowledge to get to the point where you can take a step forward. In order to avoid the dreaded ‘analysis paralysis’ – where you absorb so much information that you become overloaded and confused, and can’t make a decision – Gray advises you to set yourself a research goal.
“Tell yourself that you’re going to spend a certain amount of time on research, and then move on,” he says. “You’ll always want to be able to learn more, but there comes a point when you need to act.”
Step 2 case study
This step requires a decent commitment of time, but once you get going, it’s easy to spot trends and opportunities. For instance, a quick browse of the cityofsydney.nsw.gov.au website reveals that a brand new City Plan is currently under development. Future initiatives include the renewal of Green Square in Alexandria – billed as “the largest urban renewal project in Australia”, it aims to breathe new life into Sydney’s oldest industrial area – and redevelopment of the Ashmore precinct in Erskineville.
Both Alexandria and Erskineville are located within 5km of Sydney’s CBD and are on the train line. For an investor like Jennifer, who is seeking a capital city investment, these two suburbs may have the right qualities to land themselves on the shortlist.
Step 3: Isolate
The research process can take weeks or even months, and it’s easy to get carried away. That’s why it’s a good idea to restrict your search to three key areas or suburbs, so you can begin heavily researching these regions.
“It’s all about becoming the expert in the area that you want to buy,” says Collier-Kogtevs. “There’s no point in going out and looking at a few open homes for two weekends in a row, and then making a decision based on what you’ve seen – you really need to get to know the market extensively.”
With your three key areas short-listed, your next step is to learn everything you can about each location so you can build an overall picture. Local councils provide valuable information about planned upgrades, new infrastructure, population growth and demographic changes.
“My experience has been that when a council supports an area and has a plan for the future, and they’re pro-development and spending money on infrastructure, then the town or the area thrives,” says Collier-Kogtevs.
Throughout your research process, she suggests that you take detailed file notes so you can accurately keep track of each short-listed suburb’s features and benefits.
Also, the Australian Bureau of Statistics (ABS) can provide a range of information regarding family types, household size, average incomes and home ownership levels, which can be helpful in giving you an overview of your potential future tenant’s needs. It’s also a good idea to look at vacancy rates, as lower vacancy rates indicate a robust rental population. Regularly updated vacancy rates can be sourced via the real estate institute in each state.
“Ideally, you want an area with a strong, robust rental population so that tenants are always in plentiful supply but, at the same time, you don’t want so many renters that properties are always available, and you’re therefore constantly competing for tenants with other landlords,” Collier-Kogtevs says.
“I always look for suburbs where 30–40% of residents rent, as this seems to support a balanced supply and demand system that keeps my properties tenanted year-round.”
Step 3 case study
Block out some time in your weekly calendar and find a comfortable seat – this step involves spending plenty of time on the internet. You’ll also need to keep your phone handy, as you may need to make some calls to clarify the information you find.
The ABS offers a fantastic online resource, ‘Quick Stats’, which allows you to plug in a suburb or postcode. A list of relevant statistics relating to that area will then be presented, including things such as demographics, income, employment, family type and dwelling type.
Jennifer’s research led her to believe that Erskineville could be the right investment location, so she looked up the suburb on ABS’ Quick Stats to gain a better understanding of the local area. She discovered that:
- the suburb is mainly comprised of apartments and terrace houses, with just 5% of dwellings being freestanding houses
- around 54% of people living in Erskineville rent
- just 10% of local residents own their home outright
- roughly 900 local residents live alone
Step 4: Pinpoint
With so much research behind you, you’ve now reached the point where you need to really focus your property search and select just one area that offers the best investment potential for your specific situation.
The best way to do this is to create a list of strict buying criteria outlining the features that the property must possess in order to be considered, Gray advises.
“Start by listing the things that are essential; for instance, you may want a two-bedroom apartment with off-street parking, in a quiet street, with at least one balcony,” he explains. “Next, list those points that are negotiable. Your ‘wants list’ might include an internal laundry, a nice aspect or a specific building size. These are things that you’d like to find, but are not so essential that they’d make or break the deal.”
In order to create your ‘essential features’ and ‘negotiable features’ lists, Collier-Kogtevs suggests that you talk to local property managers to find out which inclusions are most important to local tenants. “You might be thinking that an off-street car park is vital, but to tenants in the area, an internal laundry or a second bathroom might be far more appealing, particularly if there’s good public transport in the area,” Collier-Kogtevs advises.
“It’s really important to leave your own wish list at the door so you can tailor your purchase to what the local market wants. The ideal way to get that information is by speaking directly with local property managers, as they’re the ones that place tenants in rental properties on a day-to-day basis.”
Collier-Kogtevs believes that you should interview a minimum of three property managers so you can gain a broad understanding of local tenant wants and needs. “It’s also important that you speak to independent property managers, not just the property management arm of the real estate agency that is trying to sell you a property,” she adds.
With your buying wish list in hand, it’s time to start pounding the pavement.
“Once you know what sort of property you’re after, you need to see at least 50–100 properties in order to properly compare them,” Gray explains. “Make sure you ask the listing price versus the sale price. It’s also a good idea to attend auctions in the area to see what the market is doing.”
If you’re buying a property located interstate this step could involve some travel or, if that’s not an option and you plan to buy sight unseen, you may need to have a friend or buyer’s agent view properties on your behalf.
Step 4 case study
You’ve spent weeks or possibly months building your portfolio of statistics, data and research. Now that you’re armed with all of this information, you need to begin actively looking for the right property that matches your investment strategy, and your list of buying criteria.
Jennifer has decided that Erskineville has all of the qualities she is looking for in a suburb, and her research has confirmed that the area has the right mix of amenities, access to public transport and housing types that will attract a broad range of tenants.
She approaches several property managers in the area to find out which exact property types, and in which particular streets and locations, tenants are most interested in.
Her weekends are also filled with open house inspections as she begins the process of attending auctions and viewing properties currently listed on the market. In an effort to really get to know the local property market, Jennifer also attends a few rental open homes. In the space of four weeks, Jennifer has viewed 37 properties, and counting.
Step 5: Strike
Now you’ve reached the truly fun part: this is where you negotiate on price, put in offers and work towards buying your next investment property.
The negotiating process can be intimidating, but there are things you can do to gain the upper hand, according to Harvey.
“Negotiating is an art, and it’s really where the deal is won or lost,” he explains. “To begin with, it’s vitally important to understand the reason behind why the vendor is selling – what’s their motivation?”
For example, if the vendor has already bought elsewhere and they’re financially committed to two mortgages, they may have extra incentive to offload the property as quickly as possible. Or, they might be building their next home and they’re looking for a long settlement as a result, so they can remain in the house while their new home is being built. By asking the selling agent a few pertinent questions, you may be able to glean information that helps you to tailor your offer to their needs.
“Ask about what kind of interest there has been from other buyers, and always stick to your limit,” Harvey adds.
But before you sign on the dotted line, make sure you undertake all of the relevant building inspections so you can ensure you’re not actually buying someone else’s problem.
Gray has bought and sold dozens of investment properties over the years, and he says he invests in a building and pest inspection, valuation and strata inspection (if buying an apartment) on every single purchase. “Before I consider buying, I get these inspections and valuations done. Even though it costs around $1,300, it’s a worthwhile investment as it virtually guarantees that I’m not going to make a costly mistake,” he explains.
“It’s a small percentage of the money you could lose by making the wrong decision, and when you’re paying hundreds of thousands of dollars for something, it’s just not worth the risk.”
If you’re buying at auction, you will need to carry out all inspections prior to bidding, as the sales contract becomes binding and unconditional immediately upon signing. However, in all other standard residential sales, you would generally negotiate on price and sign a sales contract prior to having these inspections carried out. It’s vital that the sales contract includes clauses that allow you to walk away from the deal if the inspections turn up anything you don’t like, so make sure your solicitor reviews the contract prior to signing. You can then organise the inspections to take place within the next two weeks, and if the inspections are all clear, proceed with the deal.
The final step in the process? “Celebrate!” Gray suggests. “I think you should celebrate absolutely everything, otherwise you’ll only think about all the Saturdays you’ve spent searching and all of the money you’ve just spent.”
Step 5 case study
After four months of researching and viewing properties throughout Erskineville, Jennifer is finally ready to strike.
She has found an over-sized 80m2, one-bedroom, one-bathroom apartment on the market going for $435,000. It boasts an open plan living and dining area, modern gourmet kitchen, separate study alcove and an internal laundry. Best of all, it has a secure car space on the title.
The real estate agent has revealed to Jennifer that the vendor is selling the apartment in order to move overseas and is keen for a quick sale. Jennifer’s first offer of $410,000 and a 30-day settlement is knocked back. However, after back-and-forth negotiations, they settle on a final price of $418,000 and a 30-day settlement.
Jennifer is thrilled! Within weeks she secures a tenant on a 12-month lease paying $480 per week, which makes the property negatively geared. However, after tax and depreciation, it costs Jennifer just $42 per week to own her new investment property – so it fits well within her budget, and is in line with her investment strategy.