Top 7 Tips for Buying Investment Property When Starting Out
Buying investment property is easy, right?
If you have finance arranged, you can just go out and pick a property that is for sale up to your agreed amount and just buy it.
Wrong. Do that and you can expect to lose money, never make money, have terrible tenants or endless maintenance jobs that will make you want to sell the property and tell everyone property investing doesn’t work.
The Kiwi love affair of buying investment property is a strong and staple diet for anyone looking to invest their hard earn money to put towards their retirement. Plus the benefit of owning property as an investment option is familiar to kiwis. We know how it works i.e. you borrow from the bank, purchase a property, and get tenants who pay you an income to cover most or all the costs.
The problem is that new investors put themselves into a false sense of security thinking they know everything they should about purchasing an investment property. Understanding how to invest in property can be very difficult. That’s why Greg Keenan the managing director of Wealth ladder has come up with his 7 top tips on what to look out for when purchasing your first investment property. Follow these tips and you can feel comfortable that you’re on the right track to purchasing a property that will help you towards your retirement and future goals.
1. Have a strategy
When looking to purchase an investment property you need to understand your strategy. It’s common for many new investors to go for deals that are not good options. A common example is cheap properties that have a high income but also high risk. You can’t have a high growth, high income and low-risk property. But this is exactly what many new investors try to achieve.
Focus your strategy around either growth properties which will generally have lower income or higher income properties which will generally have lower growth. Then you must factor in the risk as mention above. Just don’t expect to get all three, high growth, high income, low risk. Be wary of anyone who says they have this type of deal.
2. Find your secret sauce
Your secret sauce is the second part of your property investment strategy. Do you want to invest in a large section to develop? What about a rent by the room strategy? How about renovating properties cosmetically or on a larger scale? Or finding properties in areas that are expected to grow because of new malls or other infrastructure going into the area?
Your secret sauce is your ability to make your own property market by giving the property a higher chance for growth in value and rental demand. You must become proficient in your secret sauce and perfect it. Having your secret sauce helps with tip number 5.
3. Buy under market value
This is a common tip that everyone who is an investor knows, but many still underestimate how important this is when buying an investment property. In a heated market it is difficult but not impossible to purchase under market value. By doing so you reap the instant gains within months because the market is raising. When the market is flat or declining it is more paramount that you purchase under market value. By buying under market value you are not only locking in instant equity but reducing your risk if the market was to drop further and or crash. After all, there is nothing worse than being in a position where you have little or no equity in your property and you must sell.
Plus, why pay retail? You wouldn’t walk into Noel Leeming and pay full retail for a TV. Most would ask for a discount or find the same TV. elsewhere that is cheaper or price match. When investing in property you can save tens of thousands not only on the purchase price but on interest payments as well.
4. Buy for true value
Greg talks about this a lot in his online course “Property Investment College” and free webinar. True value is market value plus or minus an adjustment for potential and for risk. Market Value would be the expected sale price between a willing seller and a willing buyer. The True Value, however, factors in a discount or a premium, caused by the imperfections of the property market.
These factors can sometimes be obvious, like a property that has been neglected or one with bad tenants refusing access. But they can also be hidden for example planned infrastructure in an area, ability to subdivide, high vendor motivation and economic market cycles. If the True Value is higher than the Market Value then the property is likely a good investment. However, if the True Value is lower than the Market Value then it is likely not a good investment.
5. Pick an area and stick with it
Before you even start to look at any property you need to pick your area where you want to purchase the property. If it’s a large city you need to narrow it down to 1 or 2 suburbs (preferably close together so you don’t have to drive around a lot). You don’t want to be in a situation where you go from one town or city to another.
You must become an expert in your chosen area otherwise you will not understand the property market for that area and you end up buying at retail or worse a bad property. It doesn’t matter if after a month of looking in your chosen area you decide that it’s not for you. It could be the prices are higher than you thought, or it just doesn’t feel right for whatever reason. Pick another area and start to do your research again in the new area.
6. Research and take your time
Buying a property is the largest investment you will make, so it’s important to take your time and do your research. The better you get at it the faster you will find deals and opportunities that will come up. For new or small existing property investors depending on the market it should take at least 2-3 months of research plus another potentially 3-4 months of putting in offers, getting rejected and then finally getting an offer accepted. Getting rejected on your offers is an important part to help you find that perfect deal and keep you hungry to keep going and to succeed.
As mentioned above in tip number 6, “Take Your Time” you may be thinking 5-7 months to purchase a property is too long. This is not a race, there are plenty of deals to be had and you’ll be more than pleased that you did your research, decided on your strategy, purchased under market value and with true value in your chosen area. As it will then give you a fantastic property that will become a great investment for 10+ years to come.
Purchasing a property is hard work and perseverance is only one attribute you need to have on your side to make sure you purchase a property that makes you money. Don’t be crazy and think all property goes up in value and that it doesn’t matter what I buy. There are plenty of properties that rise in value 10x faster than others, so it’s important to pick the right one. Imagine if you can retire 10 years earlier because you persevered for 6 months to find the right deal!
So, there you have it – 7 tips for buying an investment property that you can use when you are looking to purchase your first or next property. Learn to use these tips and master the art of property investing and you will reap the rewards to help you accomplish your goals and dreams.
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