The 9 Simple Steps to Buying an Investment Property (for Beginners)
1) Save a deposit
First things first, you need money for a deposit. Usually it is in the range of 5% - 20% of the purchase price, depending on your individual circumstances. The most straightforward way to achieve this is spend less than you earn, have a budget and track your savings over time.
Alternative ways are to pool money with a partner/friends/family or borrow money from your parents. In addition to the deposit, there are a number of other fees during the purchase process you will have to take into account – solicitors fees, stamp duty, property transfer fees, building and pest inspections, insurances etc.
2) Arrange your finances
You will require the remainder of your property purchase to be funded by a mortgage lender and you will pay the lender interest for the money borrowed. The most common ways to arrange this are either through a mortgage broker (who can shop around different lenders for the best deals and provide general advice) or to go directly to the lender (e.g. a bank).
You will need to provide documentation which gives proof of your employment status, place of residence, credit history, current savings, cash flow, assets, liabilities and so on. Based on this the lender will provide pre-approval for you to borrow up to a certain amount and this will dictate your budget.
3) Devise a strategy and do your research
This is probably the most important step in the process. As there are such a wide range of options, you need to have a good idea about what type of property you would like to buy and where. Good tools include real estate magazines, free or paid data websites, Google Maps and realestate.com.au. Alternatively you can employ a Buyer’s Agent to do the hard work for you and provide guidance based on their professional experience.
4) Attend property inspections
You can only get so far from the relative comfort of your computer screen, the next step is to get out and “pound the pavement” in the areas you are looking to buy. Spend time driving and walking around the suburb, catching public transport and attending local shopping centres and parks. This will give great insight into the area. Get to know where everything is and you will naturally get a feel for the “good” and “bad” areas within a suburb.
At the house itself, take a good look around - don’t worry so much about minor damage/wear and tear, but keep an eye out for obvious major issues e.g. cracks in the brickwork, structural damage, dodgy retaining walls, uneven flooring, poor water drainage, improper renovations, additions/alterations that are not council approved – basically anything that could potentially cost a lot of money to fix! While you will pay a building inspector to check this all for you, if you can pick up on these issues yourself it will save a lot of time and hassle!
5) Make an offer
After some time, you will get a good feel for the types of properties that you would want to buy, and the types you want to avoid! Remember that no property is perfect and there are always compromises to be made. When you find a property that ticks the right boxes, it is time to make an offer! This is when you need to revert to step 3 again and do your research!
The most powerful weapon in a property negotiation is knowledge. Look at comparable sales in the area – look at the relative location, land size, floor plan/layout, condition and features of other sold properties compared to your one. The “Sold” section on realestate.com.au is a great free resource, or you can use other data websites (free or paid). This will help you narrow down a fair price range. You will usually make an offer subject to certain conditions (e.g. having 7 days to conduct a building and pest inspection and 14 days to secure formal finance approval from your lender).
You are not committed to the purchase until you have satisfied these conditions, and if you withdraw during the conditional period you will get a full refund of your initial deposit. Before signing, ensure you get a solicitor (or property conveyancer) to review the contract to check everything is in order.
5b) Bid at Auction
Some properties will be listed for auction which means that there is no cooling-off period and you will usually need to bid on an unconditional basis. Therefore you need to have everything arranged in advance - complete the building and pest inspection, have finance pre-arranged with your broker/lender and have a copy of the contract in order to obtain legal advice on the terms and conditions of the sale. You will also need to conduct any other due diligence in advance (e.g. checks for easements, building approvals, pool safety certificates, rates search, title search) – your conveyancer can assist with this.
6) Enter the Contract Phase
Once the ink has dried on the contract it is time to arrange all the important next steps and due diligence – the real estate agent and your solicitor will help you with the details based on the conditions you have set out in your offer. The tasks required generally include sending the contract to your solicitor, noting the key dates, paying the initial deposit, arranging insurance for the house, conducting a building and pest inspection, obtaining formal finance approval from your lender and conducting any further due diligence on the property (e.g. checks for easements, building approvals, pool safety certificates, rates search, title search).
Once the contract is unconditional, your broker/lender will arrange for you to sign the official loan documents prior to settlement.
7) Settlement
This is the day the property ownership is transferred from the seller to the buyer, and you pay the balance of the purchase price. Your solicitor will book this in advance and conduct settlement on your behalf. You do not need to attend and you will receive a notification when it is completed. Your property manager can pick up the keys on your behalf.
Prior to settlement it is your right to conduct a pre-settlement inspection of the property to ensure it is vacant with no rubbish or mess, all furniture removed and in the same condition as at purchase. If the property is already tenanted with an existing lease, the tenants will remain in place.
8) Perform renovations
If you have purchased a property that requires a renovation, arrange this as soon as possible after settlement (in order to limit the vacancy period). This might be only cosmetic touch ups (e.g. new carpets, paint, blinds, adding a dishwasher/fan/AC unit) or a more major renovation (e.g. new kitchens, bathrooms, extensions). At this stage it is also a good idea to get a quantity surveyor to write a depreciation report for the property as this will allow you to make property depreciation claims at tax time.
9) Rent the property out
Once the property is ready for rental you will need to engage a property manager. They will arrange for professional photography and devise the marketing strategy. Together you will need to decide on the appropriate rental amount to begin advertising – this may require adjustment based on market conditions/prospective tenant feedback. Once you have secured tenants, the property manager will deal with the day to day management but will contact you when necessary.
Congratulations! You now own an investment property and have made an important first step towards financial freedom.
First things first, you need money for a deposit. Usually it is in the range of 5% - 20% of the purchase price, depending on your individual circumstances. The most straightforward way to achieve this is spend less than you earn, have a budget and track your savings over time.
Alternative ways are to pool money with a partner/friends/family or borrow money from your parents. In addition to the deposit, there are a number of other fees during the purchase process you will have to take into account – solicitors fees, stamp duty, property transfer fees, building and pest inspections, insurances etc.
2) Arrange your finances
You will require the remainder of your property purchase to be funded by a mortgage lender and you will pay the lender interest for the money borrowed. The most common ways to arrange this are either through a mortgage broker (who can shop around different lenders for the best deals and provide general advice) or to go directly to the lender (e.g. a bank).
You will need to provide documentation which gives proof of your employment status, place of residence, credit history, current savings, cash flow, assets, liabilities and so on. Based on this the lender will provide pre-approval for you to borrow up to a certain amount and this will dictate your budget.
3) Devise a strategy and do your research
This is probably the most important step in the process. As there are such a wide range of options, you need to have a good idea about what type of property you would like to buy and where. Good tools include real estate magazines, free or paid data websites, Google Maps and realestate.com.au. Alternatively you can employ a Buyer’s Agent to do the hard work for you and provide guidance based on their professional experience.
4) Attend property inspections
You can only get so far from the relative comfort of your computer screen, the next step is to get out and “pound the pavement” in the areas you are looking to buy. Spend time driving and walking around the suburb, catching public transport and attending local shopping centres and parks. This will give great insight into the area. Get to know where everything is and you will naturally get a feel for the “good” and “bad” areas within a suburb.
At the house itself, take a good look around - don’t worry so much about minor damage/wear and tear, but keep an eye out for obvious major issues e.g. cracks in the brickwork, structural damage, dodgy retaining walls, uneven flooring, poor water drainage, improper renovations, additions/alterations that are not council approved – basically anything that could potentially cost a lot of money to fix! While you will pay a building inspector to check this all for you, if you can pick up on these issues yourself it will save a lot of time and hassle!
5) Make an offer
After some time, you will get a good feel for the types of properties that you would want to buy, and the types you want to avoid! Remember that no property is perfect and there are always compromises to be made. When you find a property that ticks the right boxes, it is time to make an offer! This is when you need to revert to step 3 again and do your research!
The most powerful weapon in a property negotiation is knowledge. Look at comparable sales in the area – look at the relative location, land size, floor plan/layout, condition and features of other sold properties compared to your one. The “Sold” section on realestate.com.au is a great free resource, or you can use other data websites (free or paid). This will help you narrow down a fair price range. You will usually make an offer subject to certain conditions (e.g. having 7 days to conduct a building and pest inspection and 14 days to secure formal finance approval from your lender).
You are not committed to the purchase until you have satisfied these conditions, and if you withdraw during the conditional period you will get a full refund of your initial deposit. Before signing, ensure you get a solicitor (or property conveyancer) to review the contract to check everything is in order.
5b) Bid at Auction
Some properties will be listed for auction which means that there is no cooling-off period and you will usually need to bid on an unconditional basis. Therefore you need to have everything arranged in advance - complete the building and pest inspection, have finance pre-arranged with your broker/lender and have a copy of the contract in order to obtain legal advice on the terms and conditions of the sale. You will also need to conduct any other due diligence in advance (e.g. checks for easements, building approvals, pool safety certificates, rates search, title search) – your conveyancer can assist with this.
6) Enter the Contract Phase
Once the ink has dried on the contract it is time to arrange all the important next steps and due diligence – the real estate agent and your solicitor will help you with the details based on the conditions you have set out in your offer. The tasks required generally include sending the contract to your solicitor, noting the key dates, paying the initial deposit, arranging insurance for the house, conducting a building and pest inspection, obtaining formal finance approval from your lender and conducting any further due diligence on the property (e.g. checks for easements, building approvals, pool safety certificates, rates search, title search).
Once the contract is unconditional, your broker/lender will arrange for you to sign the official loan documents prior to settlement.
7) Settlement
This is the day the property ownership is transferred from the seller to the buyer, and you pay the balance of the purchase price. Your solicitor will book this in advance and conduct settlement on your behalf. You do not need to attend and you will receive a notification when it is completed. Your property manager can pick up the keys on your behalf.
Prior to settlement it is your right to conduct a pre-settlement inspection of the property to ensure it is vacant with no rubbish or mess, all furniture removed and in the same condition as at purchase. If the property is already tenanted with an existing lease, the tenants will remain in place.
8) Perform renovations
If you have purchased a property that requires a renovation, arrange this as soon as possible after settlement (in order to limit the vacancy period). This might be only cosmetic touch ups (e.g. new carpets, paint, blinds, adding a dishwasher/fan/AC unit) or a more major renovation (e.g. new kitchens, bathrooms, extensions). At this stage it is also a good idea to get a quantity surveyor to write a depreciation report for the property as this will allow you to make property depreciation claims at tax time.
9) Rent the property out
Once the property is ready for rental you will need to engage a property manager. They will arrange for professional photography and devise the marketing strategy. Together you will need to decide on the appropriate rental amount to begin advertising – this may require adjustment based on market conditions/prospective tenant feedback. Once you have secured tenants, the property manager will deal with the day to day management but will contact you when necessary.
Congratulations! You now own an investment property and have made an important first step towards financial freedom.
If you want to get in touch, please send me an email:
micahkg@gmail.com
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