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6 steps to buying an investment property

08 Jul 2016

Buying your first investment property can be scary, and rightly so if you don’t know the right steps, understand the investment process or if you are incorrectly informed. 

After you've achieved verbal agreement on the property, you’ll enter a phase known as final ‘due diligence’. During this time, you’ll want to have the property inspected thoroughly to ensure that it has no latent or patent defects.

This is according to Paul Stevens, CEO of Just Property, who says when your biggest investment, which may be worth millions, is on the line, it's imperative that you fully understand the investment criteria and the commitment you are about to make. 

He says a comprehensive step-by-step guide is necessary to follow before you buy your first house, flat or investment property that you want to rent out. The basic steps will help you minimise the potential problems and fear that can accompany these issues. 

Stevens shares some basic investment steps you need to consider before taking the plunge to buy. 

Step 1: Do your homework

Before you even think about placing a deposit, it's important that you first spend a good amount of time doing research.

You should be spending time reading through educational books, websites, property blogs, real estate forums, and speaking with current investors to determine exactly what you are looking for as well as educating yourself as to what is out there.

Step 2: Define your investment criteria

After reading everything you can about property, it's time to nail down exactly what type of property you want, within your budget. 

Will you be looking for a freestanding family home, sectional title townhouse or flat, duplex or countryside property? This entails actually getting out a piece of paper and pen, and writing down exactly what you are looking for. 

You should answer the following questions for yourself….

- What type of property will I be buying?

- How much do I want to spend?

- How much cash flow do I need to service the maintenance and costs?

- What neighbourhoods will I look at?

- What condition do I want to buy in?

- Who will manage my property if I decide to rent it out?   

Step 3: Work out your available finances and budget

When buying a house or investment property, there are two basic ways to finance your investment.

The first option being a cash offer which entails investing the full amount (if you are privileged enough to have that amount of money). This allows you to save massively on interest and finance costs.

The second option involves getting a bond or mortgage. Also known as leverage, this process entails borrowing from the bank or from another lending institution and paying back the money with interest over 20, 25 or 30 years.

If you choose a bond as most people do, then decide how much cash you need to raise for the deposit (normally around 10%) and transfer fees.

If you don’t have a big enough budget as an investor, then consider partnering with someone who does have cash available, such as a family member or a friend.

Open up a dialogue between your local lending institutions and get pre-approved for your loan. This way, you'll know exactly what you can start buying for.  

Step 4: Begin searching for your property

At this point, you've done your homework, defined your criteria, and have your financing lined up. Now it's time to go searching. 

Make sure you take out the emotion when making financial decisions. Stick to your investment criteria and budget, and don't fall into the trap of trying to buy something outside your price range because it's attractive and has all the right finishes. 

When you find a property that fits your criteria, it's time to submit your offer.  

Step 5: Make an offer

When buying an investment property, it's important to stick to the criteria you’ve set as most sellers are unwilling to compromise enough on the price for it to be a good deal for you. 

So be prepared to submit offers on numerous properties, and don't get too emotionally attached to any one property. 

It is important that your offer have a 'subject to' clause such as subject to finance or subject to a full inspection of the property. This allows you an escape clause in the event of you changing your mind or identifying a better property. 

Step 6: Due diligence

After you've achieved verbal agreement on the property, you’ll enter a phase known as final ‘due diligence’. During this time, you’ll want to have the property inspected thoroughly to ensure that it has no latent or patent defects.

The signing of the offer will be done with the estate agent and then the signing of the documents will take place at an appointed attorney's office. 
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