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Buying Property as an Investment

Asking about buying Property as an investment and how to select the right Property?

Our tried and tested method follows.

Location, Location, Location!

How many times have you heard that. Well to a degree it is true but what makes a good location?

When we first started our property portfolio, this list below is what we based our selection on.  Our opinions have changed on a few things but not many this is what we looked for;

Units

Mainly due to the fact these were more affordable we could pay them off quicker and therefore we would be able to buy more sooner with the equity.  (We would not buy a unit now).

Ground Floor location

This widened our potential tenant market (elderly and families with small children don’t have to worry about stairs/balcony etc).

No Pool or Elevators

These are large expense items whether maintaining, refurbishing, replacing and all the associated insurance and checks that have to be made by the body corporate).

No onsite managers

Nothing personal against onsite managers, in a large complex you are one owner and one vote.  If you disagree with their management style, lack of maintenance of the gardens or treatment of tenants you are one vote.

I have seen many complexes particularly big ones that the managers make or break their success and therefore value.

There can be a HUGE difference in the amount of Body Corporate Fees being paid too.  Some people hate to rent a unit in a complex with on-site managers as the managers are there all the time. They feel like they are being watched.

In fairness others like the fact they do not feel alone and have a sense of security in them being there.

Also in some cases on-site managers charge a higher commission than your normal property manager –an added expense you don’t need. (Queensland Legislation).

No less than two bedrooms

We have broken this rule once, but later in the building of our portfolio.  For a variety of reasons but mainly any unit under 50sqm the banks have restrictive lending policy and some not at all.

Therefore if you bought one as your first property portfolio it will hinder your progression.  It will be looked upon as a liability but not count as equity.  Equity would assist in building your portfolio.

Now this could vary state to state but WELL worth asking your bank how they feel about lending on one bedroom units before you sign a contract.

Will they lend (if you pay enough deposit they will lend) but ask if once you have paid some of the principal off can you use the equity in that property as collateral for your next purchase. This is where you will run into trouble.

Don’t limit yourself at the beginning of the portfolio.

Over the years we have had tenants stay with us for years at a time, 6,7 & 8 years etc the main reason they choose to leave is their circumstances change and they require more room.  Whether that be for another family member lose their job and need to take in a boarder or whatever.

The important thing here is, if they had another bedroom this provides an option to have someone share until they get back on their feet, without the disruption of losing a tenant, reletting fees, advertising etc

If you own are renting a one bedroom that provides no other option than to move out or end up in arrears.

Over time we were fortunate enough to be able to add a variety of different size properties 1 2 3 & 4 bedroom and on occasion have been able to upgrade “good/reliable” tenants that we didn’t want to lose to more suitable accommodation, within our own portfolio.

We have also had tenants contact us many years later to see if we had anything for them again, this is a good feeling, and shows you have done something right.

Public Transport / Services

Especially where units are concerned but this applies to any type of property they must have access to

Hospital

Schools

As close to a prospective employment area as possible (whether that be an office district or industrial) to provide potential employment for your tenants

Parks/Pools/Leisure area

No highrise units

Only three storey walk ups or way better still Duplex (to start with at least) this is mainly due to;

Will nearly always have onsite managers (and if they don’t mainly owner occupiers reside there and will run the body corporate)

Body Corporate Fees are high as there are normally always Pools Tennis Courts Lifts – all high maintenance costly items.  These items require a large sinking fund to stay on top of it all.

It can be very hard to assess if a sinking fund is healthy if you are not used to reading budgets from body corporates. In some cases it could cost over $140,000.00 to paint a highrise building.  You were excited to hear the sinking fund has a healthy balance of $120,000.00 when you bought it but in the situation there would still be a special levy required.

That shortfall can potentially become a special levy to all the owners to raise the funds required.

Also and more importantly for portfolio building you will own it sooner more equity as the loan will be less outgoings less more accessible to a wider tenant base (less rental but in comparison to cost base much better return)

Body Corporate Managers

Whether highrise or lowrise (three storey walk-up) you will normally always have a body corporate manager, who will get paid to “mediate” most of the time between owners  and liaise with the onsite managers to ensure fire audits, maintenance meetings and the like are attended to.

There is a place for body corporate managers and the amount of times I have done conveyancing for body corporates privately run by owners to save?? money that are under insured.

The most important one is to be sure there is “office bearers” insurance.

Do not think whatever you do, a property is more attractive because it has low body corporate fees because “Ma & Pa Kettle” have looked after it for years to save everyone money.  The minefield of liabilities etc are endless.

Obviously purchase price is important to you. But if you negotiate well and do your research there is every possibility that you may be able to go straight into a duplex villa or townhouse. Different states call them different things one roof common wall multiple residences.

Duplex/Strata

Strata-titled which is most commonly two units, one person could own one or both. One title not strata is where one owner owns both units.

Anything built now will be strata-titled. This means they can be sold individually or as a pair but hold separate titles.

It also means they will be separately metered and you can charge water consumption.

The main value of any property is in the land.  The last 100 years of historical data proves this.

Without you doing anything to the actual improvements on the land your investment portfolio grows in equity allowing you to grow your portfolio  – which is what you want.

NB. See end of page for example of High-Rise Three storey walkup unit blocks and Duplex Pairs

With a duplex that is strata-titled (Each Unit has its own Lot and Plan and can be owned by different people). It also allows you to look at being in a position to buy the neighbouring one down the track.

Duplexes provide an opportunity if you can only afford one at a time but end up with the pair and a sizeable land area in which you may be able to re-develop later.

The neighbour is the only other person you have to  communicate with about any works required and insuring the property.

The only body corporate fee you will have is half of the insurance policy which you can have input into getting quotes and ensure it is reasonable and no “commission” fee is paid to the body corporate manager.

Cheaper is not always better when it comes to insurance and we use different companies for different insurance.

There is more control and a WHOLE lot more equity as you own the land which is what goes up so the bank sees this as a more valuable investment.

When you do buy a duplex or a pair of duplex whether now or later in your investment journey it is always a good idea to put aside a regular amount.  For example an amount of $20 a week so when something needs replacing it is not such a dent in your budget.

Its not fair I didn’t get a grant like kids do today

Don’t be caught up in the whole “I missed out on the First Home Owners Grant” or “I need to buy before the grant is discontinued” which will happen.

A grant is a bonus for sure but it is possible to negotiate the same amount off a suitable well researched property when you have done your homework.

In most cases you will do much better than a grant amount.

Is the property tenanted and if so is the rental being achieved market value?

A lot of investors think they are saving money by managing the property themselves or letting the property to friends/family.

When you are inspecting them you should always ask what the current rental is. Ask what the market value rental that could be achieved would be for that property.

Research Research Research

Drive around the neighbouring streets and call other properties that are on the market.  Ask those agents what that property would rent for ensuring of course it is same in bedrooms bathroom pool.

This will help you calculate the return on the property.  If the tenant has been there for years consideration should be given to the benefits of stable income and the property being kept in A1 condition.

You are ready to look at buying an investment property. You have a tried and tested method for identifying what is important before making your purchase and to find a tenant.

The most popular real estate websites for research are realestate.com.au  and domain.com.au

Below is an example of what I was referring to when I say High-rise, Three storey Walkup and Duplex Pair (in order)

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