Once you have your finance approved, the next crucial question is how to buy an outstanding investment property. When buying your first investment property, start with residential investment property because it is less risky and easy to understand.
The first property you buy is the most crucial—you cannot afford to make a mistake with your first buy. Once you have cash flow from several investment properties then a mistake in purchasing a wrong investment can be covered up. If something goes wrong with your first investment, it will set you back by several years before you can recover. It may also dent your confidence.
Some of the important criterion for selecting the right investment property are:
Area to Buy
Your first step involves buying an existing property in an area you understand (in your neighborhood) at or below market value. Buying below value will require some education and experience – this should not deter you because you have to start somewhere. So, this is the right time to start.
The property should be close to the area you live in. There is no point in buying properties that are 6 to 7 hours’ drive away. You will waste your energy in commuting rather than renovating your property and increasing its value.
Try and buy property in a high capital growth area if possible. As investors, we make money through capital gain. However, cash flow is the key. Cash flow from property should support your investment purchases so that you can pay for all the outgoings without any stress. Also keep in mind interest rates as they may change in the future – check how they will impact your investment.
If you look around, you will find great investment opportunities in your neighborhood. The numbers have to stack up. Take all expenses into account. Armatures at times over look certain expenses when carrying out calculations due to their optimism and excitement.
Once you start viewing and analyzing large number of deals, your mind will open to some of the finer points of investing.
Buying and Renovating
Buy a property that is structurally sound but in need of minor cosmetic repairs. You will be amazed how much value you can add to a property by doing some simple and inexpensive cosmetic changes. These can involve trimming the over grown garden, mowing the lawn, replace some light fittings, polishing the floorboards or changing the carpets, painting the walls or by simply removing the rubbish you can increase the value of the property by thousands of dollars.
Adding Value to a Property
You can add value to any property by making improvements but it should make financial sense. Each dollar you spend on improvements must add value by two to five times otherwise your effort is a waste of your resources.
Be very cautious of over capitalizing. If houses in a street are selling for, let us say, $500,000 then even if you spend an exorbitant amount of money in renovations, you will never be able to increase its value over half a million.
On the contrary, it makes sense to buy over capitalized properties even at market price especially when you wish to reside in them. Most people forget how much money they have sent over long periods in improving their properties.
You necessarily do not have to spend huge amounts of money in improvements to add value to a property – never ever buy a property that has structural problems! You can spend tens of thousands of dollars in corrections but they will not add a cent to value of your property. The only time you buy a property with structural issues is if it is being sold for a massive discount and you have the exact numbers on what it will cost you to get the repairs done. Once you open the Pandora’s Box, you will be astonished by what you will find.
Some other strategies include:
- Change of Zoning –Purchasing property in an area where zoning is likely to change can enhance its value without spending a dime: change in number of units permitted on size of land, improving height restrictions, and conversion of land usage from farm to residential or residential to commercial all play a part.
- Change of Use – You can apply to Council for change of use of property. One such example is conversion of residential property to a boarding house. Recently, one of my clients purchased an old Church and converted it into a childcare center and soon after the conversion, he sold the property at thrice the purchase price.
- Sub-Division – You can buy a large piece of land then sub-divide it into small parcels and sell them at a huge profit.
- Unit Titles – You can buy multiple flats or units on a single certificate of title and then apply to council for individually unit titling them will greatly enhance the value.
- Development in the area – Buying properties in area with knowledge of future developments can greatly add value to your purchases. These can include roads, trains, schools, new factories that will generate employment, shopping malls, golf courses, clubs etc.
- Buying a vacant commercial building and leasing it will increase its value
- Renegotiating lease terms and increasing rents – You can buy under rented properties and then negotiate with tenants to increase rents to market will greatly improve your cash flow and increase value of the property.
Adding value means having knowledge that not many people have garnered. Most real estate agents – who are basically sales people – will not be able to guide you. This is something you, as an investor, must develop through reading, investigation and awareness in the market place.
Someone right said: “The best property you have to invest in is that What Is In Between your two ears.”
It is specialized knowledge that separates winners from losers or men from boys. Once you attain sensitivity towards property, you will be able to visualize value that an untrained mind cannot see.
“Landlords grow rich in their sleep” John Stewart Mill
The basic principle of investing is that your tenants must pay your mortgage. You must get your numbers right when buying an investment property; the rent must cover not only your mortgage but also the out goings such as rates, body corporate, insurance and maintenance. In some high capital growth areas rents may not cover the expenses. In such cases you will need to cover the short fall from your salary or cash flow from business.
You must check the rents and vacancy rates in the area before buying a property. The property must be in an area close to schools, markets, communication centers, job centers, where there is large demand by tenants. There is no point in buying a property showing a very high return on investment but in an isolated area that is difficult to rent.
Repeat the Process
The quickest process to grow your portfolio quickly is to learn the art of buying property below value. Then add value to the property by carrying out cosmetic renovations. For every dollar you spend on the property the value must go up by at least three to five times. You must then get your property revalued. The extra equity that you create can be used as deposit for your next purchase.
The faster you repeat this process; faster will your net worth grow: this is called the ‘Deposit Recycling Time’. Do not get into projects that will take very long time to complete or are risky in nature and do not get lured by huge profits. Keep it simple and quick.
A word of caution: you must always keep a tab on your cash flow. Most people do not comprehend the importance of cash flow and get into trouble. Most mortgagee sales and foreclosure take place because people under estimate the importance of cash flow.
When you’re starting out, buy only cash flow positive properties – do not buy negatively geared properties (that take money out of your pocket.) Banks will lend you if you have both cash flow and equity; you will need to balance both these aspects if you are to become a successful property investor.