A Lesson For The Novice Property Investor
Okay, so you have decided to buy an investment property or your first home. Congratulations and welcome to an exciting world! But how do you get started? For most first time buyers it is all about "bang for your buck". You want as much house for as little money as possible. Unfortunately this can also lead to disaster.
Here is a scenario that we hear about on a frequent basis. It obviously isn’t the case for all people, or even most people in a similar situation, but it is common.
You are a young couple looking to buy your first home. You have a number of suburbs picked out that you would like to live in. You spend Saturday morning going through the paper and attending open homes. It becomes very apparent very quickly that you can’t afford to buy here. So the next weekend you do it all again, but this time in the next couple of suburbs further out, unfortunately with much the same result. So weekend number three comes along and you find yourself further out yet again and at last, a number of the properties you inspect are suitable for your tastes and budget.
But if you want this to be an investment, then you have potentially made a fatal mistake.
You will be buying without paying above your budget, so you have got that right. But you have also purchased at market value.
Here’s a fairly foolproof method of buying well
Do exactly as you have done above, but when you find that affordable suburb, go back again to the less affordable suburb. Now the objective is to buy something similar in the less affordable suburb than what you could buy in the suburb you eventually settled on.
Sounds simple, but it is amazing how many people do not do this. They concentrate on the suburb they can afford, but wouldn’t it be great to get what you want at the price that you want in the better location? You can only do this if you have done the above exercise (unless luck is on your side). You need a taste of the expensive and the affordable so you know what to look for and can recognise a bargain when it comes around.
You also need patience. The reason you didn’t find what you were looking for the first time around is a combination of not knowing what represents a bargain and not spending enough time in the market.
You also need speed. When a bargain comes up you need to be able to recognise it (hence the exercise above), then to be able to act upon it. Bargains come around all the time, but you may only have a matter of minutes to act upon it and you may only get one chance at it.
Lastly, you need to be able to research the basics. Unfortunately there are a lot of properties that appear to be bargains to the untrained and uneducated. Most people know that research is one of the fundamentals to buying well and buying with limited risk, but it seems the more experienced you get, the more there is you have to research. So you need to at least be able to research the basics.
It is hard to limit what you research to a top 5, but here is probably the 5 things I would always research:
Well duh. But include in this the price of the finished product if you plan on renovating.
2. Flooding and overland flow
Sometimes this doesn’t seem important, after all, Brisbane as an example has not had a major flood in 35 years. But you don’t want to be the one that buys in a flood zone and have the heavens open up the day after you buy. Not unless you are buying at a massive discount anyway. Overland flow is the water that is not captured by the stormwater drains and that runs over land. In other words it is the rain that may fall on your yard or driveway. A lot of this will be collected by the curb and channelling in the street, but the rest will follow the gullies, so avoid buying in gullies and low points. That being said, if you are buying a house, it is what you want it to be (i.e. you aren’t planning on extending or raising), it is all legal (in other words the design has taken into account the overland flow) and you have bought at a discount, then the overland flow is less of an issue as it is unlikely to affect any future plans for your house. The same can be said about flooding.
Things like busways and train lines and new roads. These may severely influence your buying decision in a negative or positive way.
You don’t want to be the one property in the street that has a stormwater and sewer pipe running through it and not know about it.
5. The structure
Most of us know this. In fact for a lot of novice investors and first home buyers this is the only thing they know... ‘when you buy you must carry out a building and pest inspection’. It surprises us that everyone knows this and yet they don’t know to research the rest of the items in this list. Why do we research the house, which depreciates, but we don’t research the land, which appreciates?
And narroely missing out on the list but worth a mention is zoning. Very important, but we are assuming here it is less relevant for first home buyers and first time investors as they are more likely to be buying a house and not a development site. None-the-less, the zoning may affect the value, so is worth a mention.
There is no quick and easy way to educate someone on how to buy their first property, but hopefully this is a good start!
Justin is a licenced buyers agent, a qualified town planner and educates property investors at the popular 'Developing for Profit' Workshop. Click here for more information on Developing for Profit.
Click here to read more about how Justin can help you buy your next property.