Purchasing a property is like any other investment, you need to do your research and assess the suitability of the investment to your individual position, including your risk appetite. It also behoves purchasers to obtain solid legal, accounting and tax advice to ensure optimal structuring is achieved.
Over the decades and through numerous cycles we have assisted hundreds of our clients in purchasing real estate. The following ‘buying tips’ are what we label the fantastic five.
Develop a plan –
Three key areas to cover:
• The starting point is getting an accurate picture of your current financial situation. Work out what you own, what you owe and your income and expenditure. This will assist you in determining the amount of deposit you have together with the level of mortgage you can afford to service.
• What is your goal with your property purchase and when do you want to achieve it? For example, I want a 2 bedroom unit in Bronte in two years’ time.
• Setting a timeframe for each goal helps you stay on track. You may have several goals, each with a different timeframe. Applying a timetable to each investment goal will enable you to think about how much you can afford to invest and how long it will realistically
take you to reach your goal.
• Weigh up the risk of the investment. Write down potential risks. For example location of the asset, the amount of debt you have incurred, the current position in the market cycle, adjoining properties, building quality.
As a general rule the lower the risk the lower the return of the investment. Your aim is to meet your goals, protect your capital and maximise returns, without exposing yourself to too much danger. This means balancing your individual position with your goals and your finances. Real estate is considered an illiquid asset that is you simply cannot convert the investment to cash immediately. Coupled to this are additional risks such as leverage and market demand. Prior to investing it is important you educate yourself and we recommend you obtaining independent advice in regard to your investment into property.
Research, research and research some more –
With technology nowadays there is no excuse from you understanding a local market regarding current pricing and dynamics. Find out what houses, units, townhouses, land and whatever else you can find is selling for in the area in which you are interested. Real estate is difficult to price, and this provides you with the opportunity to acquire an asset below market value if you are patient and knowledgeable. An inside word, look at the auction clearance rates. As a rough guide if clearance levels are over 80% we consider the market ‘hot’. Your best chance to grab a property is when the clearance rates are down. Over the years we have learnt that also targeting to purchase a property in the colder months of the year can give you a great advantage! The key, do your research, work out what everything is selling for in and around the area and then you’ll discover that soon you’ll become excellent at working out what a property is worth – you’ll know a bargain when you see it.
Set a budget and stick to it –
Set yourself a property budget. How much deposit do you have? What size mortgage can you afford? What hidden costs are in the purchase? What is the ongoing cost of maintaining the property per year? Does the property need any work at the outset? Once you have considered these items it is only then can you set your budget for purchase. Once set DO NOT lose sight of your goal. By setting a budget a sticking to it you will find it easier assess opportunities and drive toward your goal.
Get a building inspection report –
Often viewed as ‘not necessary’ by a few investors, the benefits of obtaining a building condition report are considerable. Replacement of items can quickly damage cash flows and out a hole in profits quite easily. It is advisable to engage a professional building inspector before you purchase (and then once a year) to conduct a thorough inspection to find any potential problems. It is also wise to use a qualified tradesperson who is licensed to carry out the work and who has adequate insurance to protect you against poor workmanship.
Note it’s not always a bad thing to buy a property that is not in peak condition because you get the opportunity to improve the value of the property by fixing the place up and this can increase your returns for both capital growth and rental income.
With all of the above show the vendor you know what the property is worth. Be open if you are interested in the property however always find out why the vendor is selling. Is it because they have purchased elsewhere? Do they have a deadline for which they have to sell? Or are they testing the market. Ideally you are after a motivated vendor who needs to sell. Aim to place your first offer at a level of 10% below the estimated market value of the property. Test to see how desperate the vendor is. Always start lower so that you have room to negotiate upwards. This also enables the vendor to feel they are getting a win. Your first offer should not be your last, as you may be able to buy the property at an even lower purchase price. Negotiating is a bit like playing a game of cards. Don’t play your best cards too early – leave something up your sleeve. Importantly NEVER go above your budget. Also realise that price is not your only card. By having finance approved ready to go, building report complete you can close a deal by manoeuvring the terms of your offer. This includes trying to move on price, settlement terms, deposit and conditions.