Dear Friends & Associates:-
The following is for your empowerment and information. We look forward to a continued win win relationship with you in the future.
Buying is just a small part of residential property investment
By Cameron McEvoy
Monday, 28 May 2012
In my view there are three stages for property investors: research and due diligence, then the offer and purchase process, and last of all the ongoing management and capital maximisation of the investment property. What I find interesting, and what I am writing about today, is how different people place varying hours of their time into these stages, and how this can be a cause for concern for the less informed among us. So let’s look at each of these stages and get a feel for what is involved in them:
Research and due diligence. This is where you must first identify your objectives. By this I mean you ask yourself the “big” questions about your broader life objectives, such as:
- What are my long-term life goals? How much money do I need to retire on?
- What kind of investment risk profile do I have?
- Is property investment for me? Do I have the time, dedication, and longevity of commitment to stick to it?
And then hone in to get to the “little” questions, about the specifics of what you’re looking for in an investment property, such as:
- Apartment, townhouse, or house? Off the plan, or pre-existing?
- Do I want to live near my investment to keep an eye on it? Or am I OK for it to be interstate or international?
- Do I want a “set-and-forget” approach, or something more hands on and high demand (but with greater potential for capital gain)?
With the above assessed you then need to commence market research (assessing suburbs and property types and measuring them against hard metrics, trends, data, etc), due diligence (lots of time spent here, crunching numbers, working out long-term holding costs, capital trends and so on). Once this is done you will then be armed with all your spreadsheets and formulae to hit the pavement and inspect. You actually won’t need to inspect that many properties, because you’ll already have done all the research leading you up to know exactly what you want.
The difference and net effect of this is like comparing two children who each have saved up pocket money for a chocolate bar. The first doesn’t know what he wants and goes into the shop and is inundated with too much choice. He rapidly and nervously picks a random sweet, not knowing if he’ll like it or not, simply because there were a mass of other kids buying out all different kinds of candy bars and he didn’t want to miss out. He ends up with a Snickers bar, only to open it, take a bite, and realises he is in fact allergic to peanuts. The other child has already figured all that out; she knows exactly what she is allergic to, what tastes good, and what will satisfy her taste. She also knows that the bar she likes is very popular. When the shop opens at 9am, she charges in with all the other kids but takes a fraction of the time, buys the candy bar she’d preselected when she was already at home, and enjoys every bite.
2) Making an offer and purchasing. This is where would-be buyers go through the offer process, negotiate the deal, have their investment property “team” (Mortgage broker, lender, solicitor/conveyancer, accountant, financial planner, tax depreciator, strata officer, and most importantly, mentor) on hand, ready to hit the “green-means-go!” button once the offer is accepted.
3) Ongoing property management and capital maximisation There are many things that will keep you busy when it comes to this area, with each one of these requiring a chapter to cover them better. So I’ll just list the main ones:
- Finding a reputable managing agent
- Tenants moving out and sourcing quality new ones
- Attendance of strata meetings, building maintenance, and occasional council disputes
- Improvements, renovations, maintenance, repairs
- Tax depreciation and annual tax and income management
Getting the most out of your investment property is vital. This is because the return you see from your property can vary hugely, due to a list of unforseen changes to your life. For example, your personal income changes. Few working Australians actually earn the precise same amount of income each year. This needs to be taken into consideration in your overall tax assessment. And what if you don’t work or study for a year? Lose your job? Or get a big $50,000 salary increase? This alone will change the dynamic of your investments’ potential to net you solid returns.
Notice how little I wrote about stage two, compared with the other two stages? This should tell you something about the amount of time you invest in each stage. When I acquire properties I tend to spend my time investment (remember “time is money” in any investment or business undertaking) in the other stages, so my time schedule looks more like this:
Versus less informed investors whose time distribution looks more like this:
As you can see, the “buying” stage should actually be the least time-consuming part of the overall investment process! Sounds weird to say it, right?
So, while some investment property gurus are fast to tout the “you make your profit when you buy, not sell” mantra as a rationale to dedicating so much time to buying process, what they actually mean is that the profit is made in the research revelations leading up to the purchase of your property. Prior research/due diligence should take up the bulk of your time, followed by ongoing management, which can take 10, 20, 30, or even 40 years if your strategy is a more long-term “buy-and-hold” one. Certainly something to keep in mind when preparing to purchase.
Watch this space; next time I’ll put the ”offer acceptance and purchase” process under microscope and list most of the hoops you’ll need to jump through, one by one, when purchasing the property itself. This might help to relax you and take some of the stress away that we all face when going through the buying stage.
Cameron McEvoyis a property investor and maintains a blog, called Property Spectator.
Research your property purchases thoroughly, as a mistake will cost you for years
By Tim Mansfield
Monday, 28 May 2012
The age-old real estate adage of “You make your money when you buy, not when you sell” is as true today as it ever was.
As human beings we often ignore this tip and fall into the trap of buying without doing our homework first. The problem with this is that you may do exactly what the seller is hoping you will do – pay a price above the market value of the property.
The economy, market forces and other factors make it difficult to calculate the time it will take to recoup the cost of a premium you have paid, but even if you paid 10% over market value it could take two or more years.
Astute home buyers and investors do extensive research before they make a decision to buy. They will have established a market value in their heads, carefully balanced out the pros and cons, put their emotions to one side and made an informed decision on the maximum amount they are willing to pay.
There is an important element called “potential” involved in property purchases.
It is not just what you see physically when you inspect a property but also what you believe can be done in future to improve it. This forms part of what adds value for you as a buyer and is particularly important when you decide to sell.
There are three key questions that buyers always need to ask:
1. What is the seller’s motivation? The answer to this question helps to understand the urgency of the sale (or not) and impacts on the price the seller is willing to accept at any given time.
2. How long has the property been on the market? This one helps to understand the reasons the property had not sold. Is it overpriced? Does it have major defects? Or has it just gone stale and the seller is now open to any reasonable offer as other buyers have shied away?
3. What is the market value of the property? Doing your own research helps establish a value in your own mind based on recent comparable sales and current listings in the same area.
Of course the decision to purchase a property needs to be finely balanced between the buyer’s needs and wants. We would all love to own a home with a swimming pool, but do we really need one?
If you are a property buyer and have ticked all the above boxes before you purchase you will have the satisfaction of knowing that you are ahead of the game for years to come.
If you are time-poor or feel you don’t have the experience to buy a home or investment property yourself, engage a buyers’ agent. They have many years of know-how in successful property transactions and will take the stress and strain away from you. Their job is to act independently for you in your best interest and get you the best possible purchase price.
In New South Wales buyers’ agent fees vary from agency to agency but generally they charge an amount ranging between 1% and 3% of the purchase price. Every case is different and depends on a number of factors including the scope of the buyer’s brief (wish list), the resources involved, the geographic location, market conditions, etc.
The fee paid for a successful purchase should be regarded as an investment and it is always money well spent.
A final thought: "As the vendor will engage an agent to negotiate the highest possible price, why shouldn’t the buyer engage one to negotiate the lowest?"
T Mansfieldis a 30-year global veteran in the real estate industry and Founder and CEO of Sydney-based buyers’ agents .
||Linda J. & Carlos Debello, LJ Gilland Real Estate Pty Ltd
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