Master Checklist for Real Estate Investing If you are a beginning investor who is venturing into real estate investing for the first time, your first question may very well be “How do I get started?” This checklist is designed to answer that question. This checklist covers the logical sequence of events that an investor must follow to get started in real estate investing, and it can be used by beginning and experienced investors alike to make sure that every detail is covered and nothing is overlooked. If you never read another book on real estate investing, or never attend another seminar, you will have learned enough with us this weekend to make sound investment decisions. Remember that most of the presenters at the workshop were not able to give you investment advice. And those who were, including the accountant and solicitor were giving advice of a general nature. That is why each delegate has been given a voucher for a free personal financial assessment with a licensed financial planner.
1.
Understand why you are investing in real estate
Begin with the end in mind. Know what you are looking for in your investment property and why you are investing. Establish in your own mind the need for investing in real estate in order to secure your financial independence. Remember, 95% of the retired people in this country end up practically broke because they failed to realise the importance of investing sensibly for their retirement. Never forget that your primary purpose of investing is to create sufficient passive income that it will support your lifestyle and pay all your bills whether you go to work or not. This may not necessarily come from rentals or cash flow as you first thought. Hopefully this workshop has shown you that building the equity in your investment properties is more important than cash flow. Equity lasts for ever – cash flow is spent and disappears. Of course the reason you are building this equity is because someday, you’ll want to get off that treadmill and relax and enjoy life; or the time may come when you are no longer able to work. You need to be in the position that your money and your investments never retire. Twenty-four hours a day, seven days a week, 365 days a year, they should continue earning money for you. You are the only one who can determine just how much money they earn and how hard they work. Keep in mind that your future financial security depends on where you invest your funds. If they are not growing sufficiently to more than offset the effects of taxes and inflation, you can plan on getting caught in the same financial “trap” as has 95%of our population. That is why I believe you should be investing in properties that have strong capital growth. Learn as much as you can about investing in real estate as you can. Your knowledge will be a valuable commodity that will allow you to make informed investment decisions.
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Property Investment Master Checklist
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Establish your investment goals
Prepare a current financial statement so you know exactly where you stand today. Prepare a long-range financial plan estimating major expenditures you know you will face in the future. Determine how much money you think you will need to maintain your present standard of living when you reach financial independence. Allow for inflation. When estimating how much you will need in 10, 15, or 20 years, allow for the cost of living to double at least every 10 years. Suppose you allow for this level of inflation and costs only double every 15 years instead? You’re ahead of the game. It’s better to have more than you need than not have enough. 3.
Locate sources of investment capital
Consider the following as a source of start-up capital for your real estate investments: - equity in your family home, savings accounts, and borrowing against stocks you own, borrowing from your parents and joint ventures with family or friends who have some equity. Save one salary. When both husband and wife are working, try and save one salary to accumulate funds for investment purposes. If you only have one income, put at least 10% of this aside each pay day and let in accumulate in an appropriate investment vehicle e.g. a share portfolio until you have sufficient for a deposit on your first property. Consider the possibility of borrowing from people you know who would like to earn a higher interest than on their present investment and still have security. Don’t over-leverage. Consider the figures carefully before becoming involved in negatively geared investments. You don’t want to be in a position where you have to “feed” your investment to keep it running unless you are prepared to take that risk. Consider a group investment or joint venture when you cannot come up with enough cash to at least make a deposit on a small rental property. A property may be optioned, if you know you will have enough investment capital available to you in a short period of time to exercise the option and purchase the building. Purchasing a run down property can be very profitable if you are willing to work at it and get it turned around into a profitable investment. Do not let the lack of investment capital stop you. Once you get that first property and make a profit, you’re on your way. Enlarge your investment holdings as your equity in your property increases. 4.
Understand the power of leverage and compounding
Property on its own is not a spectacular investment. But with proper finance and allowing the twins powers of leverage and compounding your property portfolio could grow spectacularly. This means you need to choose a property that will have strong capital growth, you will need to obtain the correct finance and then allow time for the magic of compounding to happen. Copyright ©2004-6 by Metropole Properties Pty Ltd
Property Investment Master Checklist
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Select the right type of investment for you
Consider the various types of real estate investments that are available and what is best for your particular situation. Most investors should start with residential real estate. An established town house or apartment is a great first investment. If you have the time and experience renovating established properties or developing new properties greatly boosts your returns from real estate investing As you become more experienced you may want to consider industrial, commercial or retail properties. 6.
Determine the form of ownership
Discuss with your accountant or financial adviser the best entity to purchase your property. It may be in your own name or in that of your spouse. Or there may be tax benefits if you set up a company to act as trustee of a trust to buy the property. When setting up the structure to purchase your investments, consider asset protection and taxation. When purchasing an investment property a number of taxes must be considered. These include stamp duty, income tax, capital gains tax, land tax, vendor’s duty. Seek advice from a competent accountant. 7.
Get to know the rules of thumb
Become familiar with the various rules of thumb. They will help you quickly analyse a property that is of interest to determine if it is worth pursuing., but never rely on a rule of thumb to make a decision to buy or sell. Always work from a complete computer property analysis. Recognise that you can only have 2 out of the following 3 elements of property investing: capital growth, rental income and risk. I prefer to forgo high rental returns and have a low risk strategy with capital growth Become familiar with the various techniques that will be helpful to you in selecting and analysing investments. Understand the ways in which a valuer determines the market value of an investment property. Recognise how the property cycle affects property values. Understand where you are in the property cycle and the difference between a “buyer’s” and a “seller’s” market. If you buy during a buyer’s market it will be much easier for you. On the other hand, you cannot afford to wait until the “perfect” market opportunity for you arises. It may never happen. Understand how suburbs also have a cycle. To find a top performing investment property you will need to find a suburb that is going through gentrification or find an aspirational suburb.
Copyright ©2004-6 by Metropole Properties Pty Ltd
Property Investment Master Checklist
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Locate your investment property
Give yourself a choice of investment properties. Even when there is a small selection of properties for sale, keep researching the market until you can give yourself a choice of at least two. By researching the market, you will be able to assure yourself that, even though you could not find an investment that meets all of your investment ideals, it is still the best one you can locate in the present market and it will still give you a sound, profitable start on your real estate investment program. Conduct your due diligence in the area where you would like to buy your investment property. Become thoroughly familiar with property prices and rentals. Develop an investment comfort zone. Do not rush into the purchase of a property if you are not convinced it is a good one. Take your time. Do not, however, delay purchasing until the “perfect” investment comes along— one that meets all of your investment dreams. You will probably never find it and may never get started in real estate investing. Buying an investment property is different to buying a home. The numbers have to “stack up”; you don’t have to live in the property. Look for a property with a “twist.” This may be a property where others can’t see the potential or one which has renovation potential and you can add value. Or a property with development potential. Remember that it is the land component of a property that goes up in value over the years. Look for a property that you can purchase at near land value which is lettable but has development potential. Either for refurbishment or development. New properties tend not to have strong capital growth for the first few years as one usually pays a premium for new properties. 9.
Analyse your prospective investment
Analyse your prospective investment carefully and thoroughly after locating it. Verify all details, by carefully checking the vendor’s statement and getting what profession advice you require prior to making any offers. Never make a decision to purchase based on the “aesthetic beauty” of the building. Take the time to prepare a thorough property analysis. This is the only reasonably certain way of making the right investment decision. If your property analysis shows that the property does not make financial sense, forget how “pretty” it may be. Don’t buy it! Use the following list of the various facets of the property to analyse the property’s investment potential. If the property does not seem to make financial sense after your initial analysis has been made, perhaps altering one or more of these will improve the financial picture and make the property a good investment for you. Income: What rent can you achieve? You should know this by having first done your due diligence, and you won’t need to rely on the agent to tell you this. If the property is currently tenanted, can rents be increased, and can they be increased soon after you purchase the property? Expenses: Take a close look at likely operating expenses. You may not have control over some, but there may be others that you will you are able to lower. Financing: are you going to use interest only finance or will you pay principle and interest? Are you going to choose fixed rate loan or will the interest rate be variable? Copyright ©2004-6 by Metropole Properties Pty Ltd
Property Investment Master Checklist
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Your overall benefits: Don’t look just at “pre-tax cash flow.” Consider the three types of returns you can expect. Determine what your property will give you in the way of a return after taxes and most importantly consider the potential capital growth of the property, Price: Some properties simply will just not make sense unless you can get the seller to accept a lower price. Use a computer property analysis program like PIA to analyse your potential investment 10.
Use the financing technique that gives you the best results
Evaluate the best financing strategy to serve your needs. Look at various lenders including their terms and fees or better still; find a finance broker who can do this for you. Determine just how much financing you feel comfortable with. Keep the benefits of leverage in mind. Once you decide what you will accept, make the most of it. No other form of investing offers the high use of leverage (other people’s money) that is available in real estate investing. 11.
Consider the tax consequences
Remember that most people earn money pay tax and live or invest off what is left. The rich who have good tax structures do it the other way around. They earn their money, live off or invest their money and pay tax on what is left. Use a knowledgeable tax accountant to make recommendations and set up the correct tax structures for you. Ensure your tax structures are in place before you purchase your property. Analyse your investment from a tax viewpoint, by calculating your after tax income, taking into account depreciation allowances. Remember it doesn’t really matter how much you make, what is more important is how much you get to keep after tax. 12.
Negotiate the purchase
When negotiating for your property, remember the 3 vital elements of information, time and power. Both parties generally feel the other side has more of these elements. Go into the negotiations knowing what price and terms you will be willing to accept. If the final offer falls short of these terms, do not agree to anything until you have had time to reanalyse the investment based on the vendor’s final offer. Be prepared to make a formal offer in writing by signing a contract note with the selling agent, accompanied by a deposit cheque. This way the seller will know you are serious and he will be more willing to negotiate on price and terms. Insert the clauses in the contract that you want for your protection, such as approval of the contract by your solicitor. When the price and terms negotiated are acceptable to both you and the vendor, “lock up” the property with a fully executed contract by both parties, including initials next to any changes that were written in later. You have reached the point of finding the property you want at a price you can justify. You don’t want to lose it now Copyright ©2004-6 by Metropole Properties Pty Ltd
Property Investment Master Checklist
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Take the necessary steps before and after settlement
Engage a competent conveyancing solicitor to handle the conveyance for you. Ask your solicitor to prepare an estimate of costs required for settlement so you have an idea of how much money you will need at settlement. Make a list of the items you expect to receive from the seller at settlement. This includes: keys, original leases, list of service people, any service contracts, and plans and surveys of the property, any permits that may come with the property. Insure the property noting both your name and that of your mortgage. Visit your property before settlement. Make sure everything that you expect to be left in the property has been left behind and ensure that the property has been left in good condition. 14.
Set up a record-keeping system
Set up a simple bookkeeping system for your property. This can be as simple as a paper system using a book with multiple columns, but preferably you should be using a computer program. A simple Excel spreadsheet could suffice, but I recommend a cashbook program such as Quicken. It is the ideal program for a small property investor. Once your accounting requirements become more complicated, especially if you need to complete Business Activity Statement, I recommend graduating to a more powerful program such as, Quicken Cashbooks, QuickBooks or MYOB. Establish a separate bank account for your property business. Keeping it separate from your personal cheque account will greatly simplify your bookkeeping. 15.
Monitor your investment with return in mind
Don’t fall in love with your property. That could be the start of failing to realise your investment goals. Unlike your home, your real estate investment is nothing more than a “money-making machine.” If it no longer does what it is expected to do, consider the alternatives such as renovation, refurbishment to maximise its return. If your property is a house consider maximizing the use of the land by developing multiple dwellings of the property ,either by retaining the original dwelling and building behind it, or by demolishing the dwelling and building a totally new project Monitor your investment portfolio. Like you, your investment needs a regular checkup to be certain it is still performing well. Use a computer program like PIA Pro to keep track of your portfolio and its returns. In particular keep tabs on you net cash flow, your equity and your gearing ratios so that you will now when it is time to add another property to your portfolio.
Copyright ©2004-6 by Metropole Properties Pty Ltd
Property Investment Master Checklist
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Structure the sale to suit your needs
As you know by now, I am not generally in favour of selling properties, but if you ever need to sell a property: Establish a reasonable selling price for your property based on actual market value. Do not let “pride of ownership” influence your decision. Consider listing your property exclusively with a good agent. Consider the tax implications when selling an investment property. 17.
Secure your financial future
Plan on pyramiding your real estate investments to build your wealth. Borrow against the increasing equity in your properties and use these funds as a deposit on your next properties. Eventually you will have a substantial property portfolio of high growth properties. To enjoy the benefits of these properties you may choose to live on the income of these properties. You can achieve this by balancing the debt in your property portfolio. You can do this by Growing your property portfolio more slowly (not buying so many properties) so that you build your equity faster than your debt. Paying off some of your debt using principle and interest loans. Using your superannuation payout to pay off some of your debt. Sell some properties Redevelop some of your older properties. Instead of living off the income of your properties, consider living off the increasing equity in your properties by borrowing against the increasing equity and using these funds for your living expenses. Conclusion
Do not go into real estate investing expecting to become a millionaire overnight. Your goal is to acquire sound investments and let appreciation take over. Your primary purpose of investing is to secure your financial future by developing a steady stream of passive income. So now we are back to taking that first step. Don’t be afraid to take the plunge. If you invest using the knowledge you have gained from this workshop and buy a well-located, sound, income producing property, your investment should be secure. You have a distinct advantage in a real estate investment. You have the opportunity of personally examining your investment and verifying its income and expenses and more importantly, controlling its operation. From this point of view, you have more control over a real estate investment than you do if you buy shares in a company. Investing in real estate has long been recognised as the best way to build wealth. No other form of investing offers you the combination of leverage, tax shelter, high return on cash invested and appreciation that can be realised in real estate.
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Property Investment Master Checklist
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If you follow the steps outlined at our workshop and seek advice from your solicitor, accountant or financial advisors on your own personal circumstances, you probably will end up quite wealthy. In fact, it will be hard not to become wealthy as your possible financial rewards in real estate investing are second to none. But follow the path of sound investment techniques rather than high risk, get rich quick schemes. You now have these sound investment techniques. You now have the knowledge you need to make your fortune in real estate. You are now ready to join the ranks of successful real estate investors, that top five percent whose investments have made them financially independent.
INVESTORS...as your buyer's agent Metropole will help you acquire a top performing investment property at a "below market" price. "It's great having an agent on your side, working exclusively for you, giving you insider information on the property market." We are the opposite to selling agents who work for and are paid by the seller. We are licensed real estate agents (members of the REIV) and over the years have bought millions of dollars worth of properties for clients. We have no properties for sale, but unlike selling agents, we have access to every property for sale through every selling agent in Melbourne. We scour Melbourne to find an investment property to suit your needs and provide independent and unbiased property advice to help you make more informed property purchasing decisions. We also help you pay the minimum price required to secure your property. Please call us on 03 9532 8889 to discuss your options.
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