How Do I Purchase My First Investment Property?
When it comes to investing in property, the first is almost always the most important. Get it wrong and you may only have one, or worse, none if you’ve bought really badly.
While it’s an exciting time that absolutely needs to be celebrated, there’s an art to buying a rental property that is very different to purchasing your own home. So, before you spread your wings and make one of the most incredibly rewarding financial decisions of your life – STOP – and get across these fundamental steps when it comes to investing in real estate.
STEP 1: GET CLEAR ON YOUR GOALS
Too many people who have got the means and desire to become a property investor jump in with zero strategy.
They listen to the wrong people about what, when and where to buy and make decisions that aren’t based on expert information or knowledge.
While some might get lucky and do alright, others end up with a lemon.
The real reason behind this is a lack of strategy.
Property investment is a marathon, not a sprint, and to play a long game you need a well prepared, thought out strategy.
An investment plan will ensure you ask and answer questions like these and so many more:
- How much income do I need to live the life I want?
- How many properties will I need to make that income?
- How long will it take me to buy those properties?
- Do I have the means to create financial buffers for myself and each of my investment properties should things change?
- Do I know what kind of loan structure I need?
Without a strategy you’re in the dark, which is never a good place to be when it comes to smart investment choices.
STEP 2: FINANCIAL CAPACITY
Oftentimes those wanting to build a property portfolio usually own their own home, which they leverage to get their first investment. They do this through the use of available equity. This is the difference between what your home is valued at, versus what you have left to pay on your mortgage. If you meet the criteria, then you can use a percentage of this equity to buy your next property.
This is of course if you meet the bank’s strict serviceability standards.
A good mortgage broker or advisor who specialises in property investing, will be able to assess your available equity, servicing ability and any other lending requirements to ascertain your overall financial capacity. They also may be able to look into all of your available lending options based on your current circumstances. Even if you don’t have an existing property there are ways you can still get your foot up on the property ladder.
Without the finance box ticked, it’s unlikely you’ll be able to move forward.
STEP 3: ESTABLISH YOUR BUYING CRITERIA
This step in itself is intricately tied to Step 1. With the right road map in place, you’ll know exactly what to look for when buying your first investment property based on your wider life goals. Now, with the added bonus of knowing how much you can borrow, you’ll be able to assess the types of properties available to you, while still ensuring it works in with your overall plan. This is essentially the, where do I buy and what does that look like?
In New Zealand now it’s very clear what an appropriate investment property is and what isn’t because we’ve naturally been funneled down a certain path due to the stringent property laws that have been put into place.
For example, if you buy a brand-new property as an investment, you can get 80% lending. If you buy a second-hand property, you get 60%. So, there’d be very few investors that would choose to put twice the deposit amount in for second hand property.
Added to that, IRD has chosen to now restrict the deductibility of interest if you buy second-hand stock.
Okay, but now what do you buy? Is that a brand new four-bedroom, two-bathroom home? Is that a townhouse? Is it a one-bedroom apartment?
More often than not, this comes down to location. And what makes a good location for a rental property is very different to why you may have purchased your home as an owner-occupier. For example, you may have bought your home because it was uniquely suited to your personal circumstances based around schools, family friendly zones, employment and certain amenities but those things may not be seen as valuable to your ideal tenant.
Look for areas where there is a high investment planned for infrastructure improvements or developments, as these areas are likely to grow and attract people. Find out what areas have consistently high capital growth, or are going through a phase of gentrification and are starting to become brands or highly liveable places.
Taking the time to find out where to buy is just as important as what to buy.
STEP 4: REMOVE BUYERS EMOTION
When you buy shares, you’re making a decision purely based on data and evidence. You’re thinking about what will give you the best return based on performance and real estate should be viewed the same.
Many first-time investors are able to jump through all the hoops mentioned above but at the last minute get cold feet because they’re too scared to make the leap. In my experience there is a lot of nervousness around risk which can lead to apprehension of moving forward. But the great thing about risk is that you can absolutely manage it. Again, this goes back to developing a clear investment strategy up front to remove any of the stumbling blocks that might hinder your ability to create wealth for the future.
If you’re someone who naturally feels anxious around big decisions like purchasing an investment property, it can be helpful to understand your own individual risk profile so you know the sweet spot of where you’ll feel comfortable investing. Then by going through the due diligence process you can battle test worst case scenarios, back-up contingencies and exit options should something not go according to plan. But again, with the right strategy in place it’s unlucky you’ll be putting yourself in a situation where the risk outweighs the reward.
BUY YOUR FIRST INVESTMENT PROPERTY!
Let the experts at Positive Real Estate teach you about the different strategies around buying so you can get started.
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By Sue Irons
CEO – Positive Real Estate New Zealand