SectorParticipant@sectorJoin Date: 2016Post Count: 1
I am looking to buy my first investment property and would like to know what I need to get started i.e. what approaches and best options for getting into the investment market.
looking for information around amount of equity (If needed), savings, bank or broker for the loan etc.
i would be looking at a 1-2 bedroom house or may consider a unit – positive cash flow
I currently pay a mortgage on my home and work full time.
thanksMichelleParticipant@michelle-mjgJoin Date: 2016Post Count: 2
I’m interested too. Not sure where to start or who to believe.Tony FlemingParticipant@the-dark-knightJoin Date: 2008Post Count: 396
The first point of contact should be to a broker. That way you will have an idea of what you can borrow. From there it’s important to work out your goals whether it will be retiring in 10 years or simply boosting your lifestyle. Put a plan in place to get there and start doing some research. I used to go to the local library and borrow as many investment books as I could. If they didn’t suit my goals I took them back. Plenty of information on the internet as well. Hope this helps :)JerryParticipant@jerry_oJoin Date: 2013Post Count: 46
as per Tony’s comment above and just to add to that.
1.) Work out your borrowing capacity at the moment with a broker. This will also add filters to your search in terms of location. No point researching in areas worth a million dollars if you can only afford $500k.
2.) Work out your end goal then work backwards. How are you going to achieve that end goal? i.e. 80k passive income in 10 years? you will need around $2m in asset base unencumbered giving you a 4% yield per year conservatively. possibly 4 houses worth 500k each then pay it down. how? that is what you need to figure out.
3.) talk to an accountant/lawyer to determine which buying structure is beneficial for you? own name? trust? etc.
4.) research. network with real estate agents, property managers during the research or simply employ a good buyer’s agent. they know their stuff and are a hell lot more specific and detailed in looking at properties than any other new investors.
5.) keep reading and asking questions.
JerryBennyModerator@bennyJoin Date: 2002Post Count: 1,325
Hi Sector and Michelle,
Welcome to both of you – there is a lot to take in, that’s for sure. I suggest you start off by doing a heap of reading – some of the “early stuff” can help you to quickly get up to speed with things. And yes, finance is one of the earlier requirements, and by speaking with a Broker who has runs on the board, you will learn so much more just by putting your situation in front of them.
Be prepared to invest time and some $$ into learning before DOING !! I took almost a year after deciding to embark on a property investing path before I bought my first IP. I learned so much in that time, and I am sure it saved me HEAPS as I started the journey KNOWING where I wanted to go, and how to do it. A favourite saying of mine is “If you think education is expensive, try ignorance!” Education will save you so much, and accelerate your path into investing. Go for it.
Here’s a link that you may find useful – the “big picture” thread that deals with a host of early learnings. Enjoy….
BennyJess PeletierParticipant@jaylouJoin Date: 2009Post Count: 12
I’m interested too. Not sure where to start or who to believe.
The who to believe bit is a tricky one.
I would speak to a few independent people rather than going to a one-stop shop – the people who are doing everything (ie, the property finding, the conveyancing, the lending etc) have too much incentive to get the deal across the line. It’s much better to have a few independent eyes on the deal – for eg, an independent broker will tell you if the costs are wildly inflated (many one-stop places charge high fees that are bundled into the cost – the buyer often never knows b/c they’re paid for using equity in other property and the true valuation of the property is not disclosed). An independent solicitor will let you know if there’s anything dodgy with the contract, where a one-stopper has no reason to.
Spend some time finding a good team to advise you, and go from there.
Richard TaylorParticipant@qlds007Join Date: 2003Post Count: 11,992
- This reply was modified 2 years, 9 months ago by Jess Peletier.
Hi Sector & Michelle
Firstly welcome both to the forum and I hope you enjoy your time with us.
Establishing your borrowing capacity is certainly the first port of call and then mapping out a plan to move forward.
There are a number of ways to make money in the property market depending on your comfort level and experience.
Feel free to shoot me an email and I can send you a copy of my API interview I did some years back on building a multi million property portfolio from scratch and the various strategies I look to implement.
Don’t forget to ask as many questions as you like and spend some time going over older posts for reference.
Yours in FinanceJason StaggersParticipant@jason_staggersJoin Date: 2006Post Count: 59
Having personally coached hundreds of investors, I’ve seen firsthand the importance of educating yourself before buying an investment property. Find someone who has done it themselves and who is not trying to steer you toward a deal through the learning. Investing a few thousand dollars in your education on the front end can save you tens of thousands in mistakes down the path. All the best.normbayParticipant@normbayJoin Date: 2010Post Count: 2
All good advice in this thread. The suggestion I have is market-related. Think very carefully of who will be your renter (and why they would want to rent your place – useful to ‘help’ any agent to ‘sell’ the rental proposition) and who will buy it when you decide to sell. These answers will help you to consider what improvements, if any, you need to make to the property after purchase, and what NOT to do in potential overcapitalisation.Patrick OwParticipant@pengowJoin Date: 2016Post Count: 7
Hi Sector and Michelle,
All good advice given thus far.
I would like to add my reflections so far based on my journey.
First off, as a real estate investor, you must know your WHY. (I am using ‘you’ are a generic representation of a person who is thinking about real estate investing)
The most common reason I hear people say is to be financially free or have passive income during retirement. Keep asking the ‘why’ question until you come to the real reason as to why you want to invest in real estate.
So, why do you want to be a real estate investor?
(You may want to read this article to balance the debate about real estate investing: http://observer.com/2016/05/lies-cover-ups-and-half-truths-about-investing-in-real-estate/)
What are the other options available, given your current situation and commitment?
Some people jump into real estate investing because their friends have invested in real estate and they have not. Some were told by their accountants that they need a negative geared property to offset their tax liabilities.
Without a WHY, the property you buy is just an asset (or technically a liability on your personal balance sheet because it is an asset on the bank’s balance sheet) rather than an outcome you expect to support the achievement of your goals and to be financially free.
Whatever your real reasons are, your why of real estate investing will determine the WHAT and WHEN.
What does financial freedom looks like to you, in 10 years or 20 years time? What strategy and actions do you need to get there?
What goals do you want to achieve? By when your goals need to be achieved?
The reality is that you must treat real estate investing as a business. Like anything else, it is a lot of hard work, commitment and perseverance over many years. It is not for the faint-hearted and you must treat it with respect.
Develop an abundance and business mindset. There are no emotions attached (especially when you need to increase the rent); just hard facts and detailed research and due diligence.
A question that must be constantly asked: Is this property deal or purchase going to make money in the long term and bring me closer to my goals?
Yes, make money! No one goes into a business with a view of making a financial loss.
Here is an interesting article for your consideration: http://www.macrobusiness.com.au/2016/10/victorian-property-investors-making-losses/. It reports that the average GROSS rental return in Australia is 3.9%, the NET rental return (after interest costs, management and repair costs etc., but before tax) is 0.4%.
At the basic level, you need to be able to start and manage a business, manage a team of professionals who are real estate investors themselves, and be able to research and analyse property deals.
Using a business analogy, you have customers (i.e., tenants) to attract by offering a product (i.e., your property) that they will ‘buy’ at the highest price (i.e., rental income) served by your staff (i.e., property agents). I just had to make a business decision with respect to my tenant recently.
Apart from having a business plan, aspiring business owners will have to draw up their personal balance sheet and indicative profit and loss statement for banks to evaluate their business and if all goes well, banks will loan them money to start a business.
It is no different for real estate investors. They must know their personal balance sheet containing all assets and liabilities, and what they expect to profit by owing a real estate property. When they submit the required documentation to the bank for evaluation, the banks are essentially evaluating their financial position. This is why financially literacy is so important for the real estate investor.
Real estate investing is just one of many vehicles available for generating passive income. You can own an online business, be part of a network marketing company or invest in shares, just to name a few.
The key is to look for something that does not trade time for money. If you need to work to earn money, then you are trading time for money. If you are investing or building a business system, then money works for you, hopefully.
The main point is to look for something that suits who you really are, your strengths and interest, and what you can be excellent in. You must be able to start and manage a business and promote yourself regardless of which path you take. Not many will treat real estate investing as a hobby or interest.
If real estate investing is something you really want to do, then you need to be excellent in it where your strengths equal business profits. Like what Jason and Benny said, education is so important. Education enhances your strengths. Do be prepared to spend money on your education.
You must assemble and manage the right team of professionals who will get you closer to your goals. Your real estate investment strategy will communicate your goals and strategies to your team members. Imagine a football team without a strategy and game plan! Real estate investing is no different.
Here is the kicker. When we fail to plan, we plan to fail!
The Australian Taxation Statistics 2010-11 shows that of those who stay in the game: 73% of investors only own one investment property, 18% of investors own two investment properties, 5% of investors owned three investment properties, 2% of investors own four investment properties and 2% of investors own five or more investment properties.
You cannot invest in real estate without a business plan or strategy.
Your strategy will be shaped by your financial buying power and serviceability (borrowing power). They are two crucial sides of the equation that will give you the ability to buy investment properties. Financing is the lifeblood of your real estate investing business.
Buying power simply tells us how far your available equity will go towards deposits and costs whereas serviceability is about how much banks will lend you or how much debt you can take on based on your current expenses and liabilities and your current circumstances. Having a regular and stable job or income goes a long way to enhance your serviceability.
Apart from the money set aside for real estate investments, you also need to consider setting aside a personal buffer or the ‘sleep at night’ factor to cover any family emergencies or contingencies like health issues, job losses, etc.
Your strategy should include the following information:
• Buying power and serviceability (seek assistance from a mortgage broker) – The first thing my mortgage broker will ask me when I am searching for a potential deal is where the property is located, property type, size and price. Armed with a deal profile and strategy, I am able to convey to him the required information and for him to give me an accurate financing information.
• Long term goals and timelines based your why, strengths, risk profile and financial position.
• Legal structure (e.g., trust, company, SMSF or individual) and related asset protection strategies (seek assistance from an accountant and lawyer). Changing ownership can be costly.
• Whether you are investing for capital growth or cashflow (seek assistance from an experienced mentor). (Please read this interesting article: http://www.theaustralian.com.au/business/property/home-owners-reliant-on-capital-appreciation/news-story/a9edec5d34dc44019c8434fc06f5f4a4 (you may need to subscribe to read)- Home owners are becoming more reliant on capital price appreciation as the cost of renting falls faster than the cost of owning a property)
• Property investment strategies (e.g., long term hold approach to value creation).
• Planned actions or tactics to support the chosen investment strategies (e.g., benchmarking and buying well below a suburb median with strong depreciation upon completion and rental income sufficient to cover the bulk of holding costs during asset growth).
• Deal profiles (or buying rules) for each property – The profile contains information about the target State, suburb, streets, property type, price point, etc. and it is given to local real estate agents to source the property for you (instead of you spending countless hours surfing realestate.com.au aimlessly looking for properties). Once the real estate agent has identified the pre-qualified property according to your deal profile, you will inspect the property, conduct the necessary due diligence (e.g., verify all facts, assertions, opinions and assumptions against evidence), make a written offer, negotiate the price, find a rental manager to manage your property and find a suitable tenant. Each deal profile will also identify the potential risks and mitigations. You move to your next real estate by developing another deal profile and you building up your portfolio, brick by brick!
• Succession planning (seek assistance from a family lawyer). Marriages and partnerships do break down and a strategy is required to mitigate this likely risk.
• Insurances (e.g., income protection, total and permanent disability, accidental death) (seek assistance from an insurance broker).
• Debt management, especially if there are outstanding liabilities and poor credit rating. Guard your credit file and constantly monitor it.
• Tax structure and minimisation (seek assistance from a tax professional).
• Exit strategies to enjoy the fruits of your labour (financial freedom).
Let’s face it, we get distracted easily. Having a well-articulated and written strategy will keep us continuously focused and on track to achieve our goals. It’s a systematic approach to find the right properties that will deliver the outcome we want. It will stop us from chasing after every shining thing that promises instant profits!
There are experts and there are experts. If you ask five experts, you will get five different responses and opinions as what your strategy and purchases should be because they have different skills, market knowledge and business interest. It is only through self-education and having your own goal-focused strategy that will save you from potential financial disaster and being led onto the wrong path.
Without a strategy, it is gambling or speculating. We are leaving it to chance and investing in ways that we do not understand. We are easy targets for slick marketing professionals because of our ignorance (I know from first-hand experience!).
In this unregulated industry of real estate investing, you will come across experts who will give you FREE strategy sessions. Some will claim to be ‘independent’. I have attended a number of these sessions and they are usually sales pitches to buy their services or products at ‘discounted’ prices if action is taken by the end of the session. Often these seminars are fronts for developers wishing to offload stock to investors. If you want to go to these sessions, leave your credit card or cheque book at home – just go for the education experience and ask questions.
The reality is that no one will give you something for nothing. There is cost associated with their time and they will make it up by selling you properties that are on their list or sell you their in-house services like buyers’ agent, mortgage brokering, mentoring programs, etc. They may also advocate certain locations and property types to buy because they are only knowledgeable in that area or they get commissions from selling certain properties in that location. That property purchase may not bring you closer to your goals. As the saying goes, buyers beware.
This is why, as investors, we must be prepared to pay for good independent advice. The cost is well worth it.
For example, if that expert is a renovation guru, they are most likely going to recommend a buy, renovate and hold strategy for you. But if you are risk averse and have no interest in renovations, then you are going to be a miserable property investor. In fact, you will struggle and quit real estate investing all together. It’s like working in a job that you hate!
Don’t copy other people’s strategy no matter how good they sound. Your strengths and situation are unique to you alone including your risk profile and financial circumstance. These factors should be articulated in your strategy.
Well-meaning friends give tips like “buy a cashflow property”, “buy and renovate”, “buy a duplex”, “buy in capital cities”, or “buy in hotspots”. Strategies that they share are so high-level and vague that they are useless because of their personal biases and it does not take into account your personal circumstances. As a result, these people are stuck in tactical hell. They try so many things that they get overwhelmed and frustrated.
In summary, start off by educating yourself first and then develop your very own strategy based on your strengths, financial situation and personal circumstances. If you fail to plan, you will most likely plan to fail in real estate investing.
Wishing both of you (and those who are thinking about real estate investing) the very best in your real estate investing journey.
.aftabParticipant@aftabkJoin Date: 2016Post Count: 9
Thanks Patrick for an awesome, detailed and comprehensive response. You have touched upon various points. As I am a newbie in property investment and looking at various options in Melbourne. On one side, we have a student accommodation where there is a high rental yield and it is cheap to buy (very tempting) but no capital growth plus and large turnover (students come and go frequently).
My budget is around 200k-230k. If I buy a non-student accommodation 1 bedroom unit or apartment, my concern is it would be hard to get in that price bracket in good suburbs and even if I did manage to get one, the property would be in a distressed condition.
Has anyone been in a similar situation?
AftabRichard TaylorParticipant@qlds007Join Date: 2003Post Count: 11,992
Hi again Aftab
Be careful about buying a small unit (non-student or not) as financing anything less than say 50 sq Metres will be extremely difficult.
Not to say it can’t be done but more restrictions in regards to deposit and higher interest rate.
Look for something that can rented to the open market as well as a specific sector of the rental community.
Yours in FinancePatrick OwParticipant@pengowJoin Date: 2016Post Count: 7
Could you please share with us your investment and exit strategies on the student accommodation especially in relation to your goals?
Just want to understand your thinking process around your desire to buy a student accommodation, remembering that buying a property should always get you closer to your goals.
ThanksCorey BattParticipant@cjaysaJoin Date: 2012Post Count: 1,010
I’d shy away from student accomodation. Investing in property is about: Generating a growing asset base and rental income. Student accomodation gives you a specialised security which has negligible if any capital growth – which is what gives it that perception of strong yields. In reality its just the case that the value of the property has lost value in real terms. When you could this with the fact that every year of inflation means your return is dwindling, that ‘high’ yield isn’t all that great.
They also in general will require larger deposits and a large number of lenders won’t touch them at all.
There’s millions of properties in Australia – so there’s no need to sacrifice in some parts of your investment. Stick to A-grade property which ticks all the boxes to get the best long term outcomes for your needs.
In terms of the rest of the thread- when starting out I think it’s best to start with your goal and work you way backwards. This helps give you a strong framework of what you actually need in an investment, what yields you can accept, what growth etc. I’ve previously written a bit about this here: http://www.precisionfunding.com.au/planning-your-investment-strategy/Ethan TimorParticipant@ethantimorJoin Date: 2016Post Count: 282
even if I did manage to get one, the property would be in a distressed condition.
Properties in distressed condition are our favourites! 😂💰💰💰💰
We buy them, fix them up, refinance at a profit and rent out. Everyone is happy and full of joy.
Overall, lots of fun 👍😎
Hope this helps?
EthanCorey BattParticipant@cjaysaJoin Date: 2012Post Count: 1,010
even if I did manage to get one, the property would be in a distressed condition.
Properties in distressed condition are our favourites!
We buy them, fix them up, refinance at a profit and rent out. Everyone is happy and full of joy.
Overall, lots of fun
Hope this helps?
Ditto, reno/refinance strategies targeting distressed properties is a great option which can result in slightly higher yields, ongoing equity to cover future deposits etc. We used this strategy personally to build our portfolio and it’s performed well.
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