I noted last week that I would address this, so here it is. Like everything in this blog it’s Australian so you probably have a different experience overseas.
I’ve never bought a property before. It’s that simple. I purchased my mum’s home from the estate, but that was a very different activity – so the actual mechanics of buying another property were foreign to me. Not that it slowed anything down, but I certainly had a few tense moments. It all started when I was having coffee with my dear wife and we were talking a bit about finance. She’s never been interested in finance and I get that, just not her cup of tea. On this occasion however, we came together in accord and decided the time was ripe to buy something. That weekend (not two days later) she had circled several properties in the paper to consider.
Three to be precise. I duly followed up – one sold, one had a deal on the table… and the one we quite liked the price dropped by $5000 that day. So after a bit of a chat with the real estate and with my wife I popped down to the bank to see if they were willing to get involved. There have been changes in the banking business around investment homes and the rules are a lot more stringent around what you can be loaned. Partly this is a result of the sub-prime fiasco in the USA, but also because the banks are becoming a bit more conservative here in Australia due to some tightened legislation. In this case though the bank came through with the goods. They were happy to lend me just about exactly the right amount. And that included all the costs except some legal fees. So with that knowledge we made an offer on the unit.
After a bit of to and fro, the offer was accepted and then the circus began. The bank wanted a contract before they’d offer any money for a deposit. The vendor wanted money before they’d offer a contract. I didn’t want to find any money because it was a 100% loan with equity from my current property used as collateral, but eventually I scraped together 5% and that got the party started. It was actually nice to find I could bring so much money together in such a short time. The actual amount isn’t important, just that my finance system worked and I had the slack to do this. More back and forth between real estate and lawyers. Found a great builder to do the inspection and he went through the place with the greatest of care. Offered a very blunt assessment of what would go wrong and where our risk was. He was also surprised at the price and suggested it was a good deal based on what he’d found. That was positive and the process continued to roll ahead.
Silence for almost a whole month
Waiting for the 30 days to elapse before the deal finished. It was so quiet I thought I’d dreamt the initial two weeks of screaming around getting things organised. It’s probably worth mentioning that I was in a new job and there was some stress around that involved too.
And then all of a sudden it was all go again and I was signing more documents and BOOM. I had another property to my name, the bank had me deeper in it’s clutches and my tenant had a fresh faced new landlord. And we haven’t looked back since. How did this really come about though? It’s a good story and light on details so let’s get into them.
I had a substantial equity in my first property and some large cash assets (superannuation) behind me and this was the impetus for considering another property. Additionally, we are in the position where our incoming money will continue to improve so it is a good time to invest. But the new investment had to match our requirements:
- Little to no initial repairs required
- no heavy maintenance, no big gardens
- long term, happy tenants
- rent => loan repayments (this one we blew out on a bit)
- well within our repayment capabilities without being stretched
The new property almost ticked all of these boxes. The rent was low – well below the median for that class of property but we can fix that over time. The winner is the long term tenants who are still there. They’ve asked for some additions and these are being worked on now.
The bank was great – clear directions about what had to be done and when. They had suggested a conveyancer for the work. A conveyancer works with the contracts and the transfers of titles, but here is the kicker – the buyer (me) would have to go and check all sorts of things about the property. Things I have no clue about like title and leasehold, is it near an area about to be developed etc etc. I went with a lawyer who did all this and more, and even though the cost was almost double – the value was far greater. I was (and still am) delighted by my lawyer’s work in this matter. If you’re embarking on a journey like this one, then find a good lawyer who you can trust. Don’t be cheap on this – get a good one and then work with them to reach your goal. In this case, the lawyer was part of my system of learning. I had several in depth conversations with them and they were willing to talk to me when I was stressed about the whole business. This was a key factor in the success.
The other important factors were understanding my budget and the return on the investment. I didn’t buy the property to flip it quickly – the real estate market around here doesn’t have huge up or down fluctuations, and I didn’t want to kill myself on fixing it up. I’ve got no skills or interest in that area. It had to pay for itself (as much as possible) and then earn me money down the track. Some Excel skillz0r and I had a decent idea of how it would perform as an investment. 7 months on and it’s pretty well on track. Another important factor – management of the property. I’ve already noted in my last post I use a real estate agent for this and they have been great, solving problems and keeping the tenants reasonably happy.
The total net cost of this investment property was around $2000. That was lawyer’s fees, building inspection and some incidentals. The rest of the costs have been bundled into the loan and are being paid off. I was quite pleased to have realised that. I even got the deposit back – it was covered in the loan and after having a month without it, I decided to simply put it into some Vanguard shares and start that adventure. Systems thinking for the win! I keep an eye on this property (and the other one) but not in any fanatical kind of way. It’s doing what it’s supposed to and looking forward 20 years or so will be a key component in my post-work financing. I hope you’ve found this useful and it gives you some confidence that getting into these finance activities is doable – even by a relative beginner like myself!