How do you buy a property like a professional? The first step is to ask yourself three questions to determine your buying criteria.
In this video presentation (the first of a series) I gave to a group of property investors on the Sunshine Coast recently, I discussed what those questions are, how they can influence your criteria, and how to approach those questions the way professional and seasoned real estate buyers do.
Okay so we’re talking about buying like a pro. And that is by using the right strategy, choosing the right location and the right property.
So what’s the difference between those people who buy property like a pro and the other 95% of people who buy property?
To me the difference is three little questions: 1) What are you looking for; 2) Where should you buy; and 3) Is it the right property? And to me they equate to for what are you looking for, that equates to having a clearly defined buying criteria. Where should you buy equates to doing the appropriate location research and analysis.
Is it the right property equates to your property search and due diligence.
Now that sounds pretty simple but most people don’t ask themselves these questions. So in this talk tonight we’re actually going to have a look through each of those three questions and have an approach to those questions like a pro.
So number one, what are you looking for? And this is about setting buying criteria. So how do you set buying criteria? Firstly it’s all about simply asking yourself a set of questions. Making a list of what it is that you’re looking for and prioritising that list.
So why would you do that before going out there? Most people jump on the net as their first stage of looking for property and they start, “Oh look at this nice house, look at this apartment, look at these townhouses, look at this renovator, look at this already renovated property”. And they’re all over the shop.
So by sitting down and actually asking yourself a few questions about what is it that you’re looking for, it helps you clarify the purpose of the property in the context of your goal and your strategy. And that makes your search process far more efficient.
It makes you ask yourself the really hard questions about what is my strategy for this property, what is it that I’m looking for this property to do for me in my portfolio. And it makes you answer those questions and that in turn will clarify your goal and make your search process more efficient.
So, what is the purpose of the property? Is it for cashflow or to build equity? Are you looking at holding the property or selling it? Do you want to renovate, develop, strata, title, are you looking to build student accommodation?
Answering these questions of what the purpose of the property is helps you, firstly to determine the correct structure in which to purchase and obviously you need to consult a professional for that. It also helps you to identify what are the key qualities of the property that you’re looking for.
Next, what is the budget for the property? Now the budget for the property would be one of the main factors that helps you to work out what you can actually be purchasing and where you can be looking. Because obviously there’s no point looking in a suburb that has all the prices up around at $900,000 mark if you’ve got a budget of $350k for example. So that budget will really help you define and narrow down locations.
Also you need to set some high-low parameters. Some people have fixed budgets of $350k, for example, and that’s all they can spend. Other people have more money available to them but for this particular purchase, this is the actual budget that we want to set for the property. You may have a little more play in that budget because if you have more money available to you the more you need to spend for this purchase. Obviously you can stretch a little and have some high-low parameters.
The other thing to think about is cashflow limits. If you are looking for a positive cashflow property, how positive does it need to be for it to be a positive cashflow property for you? So if you’re looking for positive cashflow and it earns you, say, a dollar a week—is that enough? If you want to retire on properties earning you a dollar a week you kind of need a few of those. You need to think about it. If your strategy for this particular purchase is that you need a positive cashflow property, is it enough to be a dollar a week, are you looking into a neutrally geared, or it doesn’t need to be $200/week, for example, now there may be different properties you’re looking for in that case.
Same if you’re going for a negatively geared property—how negatively geared is acceptable to you? Obviously you can only sustain a certain amount of negatively geared properties so you need to think about what is an acceptable level of negative cashflow you’re willing to take on this property.
Also if you’re looking to do something like renovate or development, then you really need to look and do reverse feasibility testing.
For example, just having a certain amount of money if you are a to say yes or no have $300-$400,000 of finance and you go buy a property your strategy is to develop townhouses and you spend your money on a $400,000 property, how are you going to fund the development? And likewise if you’re doing renovation, how are you going to fund the renovation? So you need to actually work backwards and think what it is that you need to do if you’re going to renovate or develop, what are all the costing involved in that and work your way backwards to work out what is the price you can actually spend on the purchase price of the property.
Now what location characteristics or parameters are you looking for? This is another question you need to ask yourself when you’re setting your buying criteria. So your purpose, your cashflow, your budget parameters we’ve talked about previously—all of those things will influence what location you can look at. But you might also decide to set some parameters around other things such as population size, growth, or trends. You might look at vacancy rates, for example, and set a parameter that says I’m not willing to look at locations that currently have a vacancy rate of more than 3%. You will look at rental yields. Once again you might be looking at only places that have rental yields of at least 5% and up and you might discount a whole lot of suburbs based on that. You might also be looking at growth drivers and growth stats. For example you might say, “I’m looking for houses that are within 2 kilometres of major shopping centre. Or within 2 kilometres of a train station, and things like that.
So you might identify some of these things as part of your key criteria and you’ll set that in your buying criteria. Now when it comes to the actual property there are also characteristics and parameters that you will be looking for in a property. Some people are looking for houses, some looking for units, apartments, some looking for land or commercial properties —what is it that you are looking for?
I know a lot of people prefer to buy houses over units or apartments. So if that’s the case then that forms a part of your buying criteria so then you would not be looking at units and apartments because it’s just a distraction if your buying criteria is that you’re looking for a house.
Number of bedrooms, number of bathrooms, car accommodations, swimming pool, shed, indoor living areas, outdoor living areas, all of these things make part of your buying criteria. And of course it pays to look at, if you’re looking for a particular area, what are the key demographics of that area; who’s your target audience? And that should then be determining and influencing the buying criteria when it comes to actual property characteristics.
And the other thing is, where is this particular property in relation to facilities and infrastructures such as sporting facilities, shops, hospitals, train stations, etc.
So once you’ve got that buying criteria, what are you going to do with that? Well you write down your statement of requirements. You write down your criteria and it can just be a simple bullet point list and then you can assign priorities to them, say you might have high, medium low; or must-have or a nice-to-have.
Just remember, though, that if you have too many criteria you may find yourself in a situation where very few properties are actually meeting those criteria. If you have too little criteria then you find that you’ve got too many properties to consider and you’re not narrowed down or focused enough.
So that ends our discussion today about buying criteria. In the next session we’re going to look at where should you buy—the location research and analysis that you should be doing.