Investigate Before You Invest
The goal setting process was a success over Christmas and you are ready to invest in property.
What next? Talk to your advisors about the best entity to hold your investments in. This is a business whether is it one property or 100, so it is important to set the business up as you would any other with its own entity, bank accounts and set of financials.
A relatively small number of investment properties are usually held in one entity (company trust, etc), say 3-5 or $1m worth as loose examples. In a perfect scenario, only one lender per entity. This helps for asset protection purposes in general and allows growth with further entities and banks. These two rules of thumb help develop a “balanced portfolio” within one entity. A balanced portfolio could consist of, for instance; three cashflow properties, one capital gain and one development (buy and hold). The cashflow properties will fund the capital gain property which is likely to be running at a loss. The optional development property is often one that is bought negatively geared but once some work (say adding a room or access etc) is completed, the property becomes cashflow positive. Therefore over time that entity becomes self supporting. This is only one example of a balanced portfolio as there are many varying examples.
Once you have a plan for how you are going to put together your optimal investment business you need to find the stock to achieve this plan. Below are some basic steps.
- To find properties, build relationships with one real estate agent per company in your target market area. In a softer market you may be able to get them to ring you each Tuesday after caravan with details of this week’s listed properties, if not, then ring them!
- Be firm with what you are trying to achieve as you only want to know about the ones that may fit into your criteria to save valuable time – however this will not happen over night as at the beginning
- you are likely to have to calculate the returns on a large number of properties to be able to start easily recognising those within your criteria. Remember your criteria is not fixed. As your circumstances, or the markets, change you will adapt your criteria accordingly. When you first start working with an agent ask them to provide you with a print out of all the properties on the company’s books – not all will be advertised and if it is not one of the agent’s own they may have forgotten about some.
- Each week look at the property press and newspapers. Check out the real estate websites – not all properties are advertised. Look at trade me and other websites that list properties being sold privately.
- As a very loose rule of thumb, double the asking price and divide by 1000 to work out the weekly rent required for that property to be positively geared. For example $145K asking price would require roughly $290 per week rent.
- Look at properties priced within 10% of being positively geared – many houses sell below the asking price. Don’t be afraid to revisit houses which remain on the market for some time. Vendors are conditioned by the agent over time to come down on their expected sale price and towards the end of the agency listing period the agent will be very keen to get an offer accepted. Is there a twist that will considerably increase the rent? For instance building a partition wall to make a two bedroom home into a three bedroom home?
- Process the property details using a property analyser spreadsheet, many are out there and some come from training providers. If a property does not fit into your criteria, look at what tweaking it would need to work for you. How much would the price have to come down? How much would the rent have to go up? How much money would need to be spent on it to achieve the desired rent or desired tenants? This step will take time but you must look at many properties regularly to start to recognise when the deal you have been looking for comes along.
Analysing properties is simply a habit, practise and you will become quick and accurate.
By Tania Elmer