Chicken or the egg? Property or the finance?

It’s easy to get carried away with the fun part of buying a property – looking at houses – but delaying the less compelling task of arranging finance will weaken your negotiating position on both the property and the loan.

Looking for a property to purchase is an exciting time. Choices regarding location, size, number of rooms and local amenities often see house hunters carried away in a deluge of daydreams and anticipation.

But, before you get carried away, it’s important to check off the essentials first. Although organising your finances may seem drab in comparison to perusing sales listings, gaining pre-approval with a lender will give you confidence about how much you can afford to borrow.

First and foremost you need to determine if you’re eligible to borrow money from a lender. Apart from showing you have the ability to repay the loan, lenders will also assess a range of other hurdles for you to overcome like credit scoring. You don’t what to find out after you’ve made an offer that your credit history or deposit is not up to scratch.

Arranging finance before finding the perfect property will put you in a good position when it comes time to make an offer. When you do find the house you have always wanted, you can present to the seller and estate agent as a prepared applicant who is serious and reliable.

Sellers are most interested in completing their sale fuss-free and with steadfast funding, and showing that you are capable of both will help put you at the top of a potentially competitive list of applicants. This is especially important in the off-the-plan market.

In the instance that you find and secure purchase of a home without having your loan pre-approved by a lender, there are a few pitfalls that you risk running into. Should you not be able to secure finance for the property, you may have to forfeit your initial 10 per cent non-refundable deposit.

Arranging your home loan at the last minute also leaves less time to find the most suitable loan and have it approved ahead of settlement. Any lender that has a special rate or product on offer will most likely have a longer turn around time than their competitors and as such you may not be able to obtain these products.

Unlike the Chicken Vs Egg debate, this one is simple. Finance pre-approval certainly comes before the Property.

10 tips when buying an investment property

1. Have a clear goal

Understanding your objectives is key to finding the right investment property. The actual property itself is never the end goal when it comes to investment – it’s the financial element that you’re really concerned about.

2. Check your emotions at the door

This is not a home for you so there doesn’t need to be an emotional connection to it. It should always be about which property will give you the best return, not which one is most suited to your furniture. Be prepared to invest your money wherever the numbers make most sense… this could even be interstate.

3. What type of property should you purchase?

An investment needs to be a property that will be in hot demand from renters and possible owner-occupiers down the track. It’s best to do your research to see what types of properties are renting quickly and what properties are staying on the market for longer periods of time.

4. Old or new?

It’s the age-old debate: should you buy a renovator’s delight, or something you can rent straight away? It’s great if it can be rented out as is, but potential to renovate should also be considered. The ability to add value to the property is a good tick, as it will increase rental returns. Don’t immediately write off a property just because it needs a paint job or the kitchen cabinets need to be replaced. Alternatively, there are significant depreciation tax benefits to new properties.

5. Location, location, location

Consider

  • How far it is to the CBD or business area?
  • What is the proximity to schools?
  • Are local shops within walking distance, or will tenants have to get in their car to pick up the essentials?
  • Where are the public transport options?
  • What other amenities are close by?

6. What can you actually afford?

Get pre-approval and make sure you have all extra costs available, including conveyancing, inspections and any taxes – and always ensure you have a financial buffer. You may not get tenants within the first month.

7. How to set up the purchase

When it comes to investing, it’s important to understand how to set up the purchase so it benefits you most. The entity should protect any existing assets and be tax effective. You can purchase in your name, through your super or through a trust, but always understand how the purchase will affect you and your family.  Expert advice will assist in maximising the short and long term performance of your investment.

8. Features

You want to appeal to the highest number of tenants, so look for properties that offer that little something extra, like a second bathroom or a lock-up garage.

Also look at properties that appeal to many segments. For example, a lift may appeal to both retirees and a young family, as both will be looking to avoid stairs.  Just make sure the benefits outweigh any extra costs like higher body corporate fees.

9. Timing is key

You need to understand the market and the dynamics. While there are investment opportunities around most of the time, some market conditions are more favourable. If you don’t fully understand it all, ask for help.

10. Ask for expert advice

Your broker can put you in touch with the experts you need to talk to when it comes to real estate and investment. This means accountants, real estate agents, lawyers and valuers. These people are in the industry and they’ll be able to guide you in your decision making.

Is co-ownership right for you?

Buying through co-ownership is quickly becoming a popular strategy for those hoping to enter the property market but without the capacity to do it alone. Through pooling resources with a friend or family member you can increase your buying power and enter the market sooner.

There are a number of other benefits to entering the market this way. A joint purchase can help ease the deposit and all costs can be split, such as stamp duty, legal fees and maintenance. However, there are a number of pitfalls that you need to be aware of when purchasing via co-ownership. Importantly, you need to understand the below before you enter into this type of purchase:

Timeline – It can take up to 10 years to realise significant growth from a property. Do you and your purchasing partner have the same overall goals and objectives?

Trust – Although you will only have to make repayments on your half of the loan, you are completely tied to the other purchasers’ financial conduct. If they fail to make their repayments, the bank will come chasing you for their half.

Borrowing Power – You may think you only have ½ of the debt to worry about, however in the banks eyes, they assess you as being responsible for the entire debt. This means that should you want to keep this property and purchase another one, you will need to show that you can service 100% of the debt against property 1 and whatever debt is required against property 2.

Utilising the Equity – A common strategy is to purchase a property then use the growth in its value (equity) over time as your deposit on your next property. This is all well and good; however having another person involved in approving the equity release could cause complications. What if you both want the equity at the same time and there isn’t enough?

Legal – Although the transaction may be made as ‘Tenants in equal shares’ this covers how much you own but doesn’t cover what should happen in the event of certain circumstances. A legal consultant can draw up an agreement between the two buyers outlining the following:

  • If one owner dies, does their half go to the surviving owner or their estate?
  • What happens in the event one owner wants to sell and the other doesn’t?
  • How do you determine ‘market value’ of the property at any point in the future?
  • If the property is a rental investment, who is responsible for repairs and maintenance? How are these costs covered?

The good news is these types of purchases are becoming more and more common so there are pretty standard legal docs that can be used. A few of the big banks also have designed lending products especially for this situation which make repayments easier to manage separately.