Buying your First Investment Property
A Guide for the most important things to remember before you pull the big trigger
In my mind, nothing could be more exciting in an entire lifetime than buying your first investment property.
Marriage? I hear you say.. Allow me to respond to your question with a question..
Does your new spouse provide an 11% monthly yield on your investment?
I joke, I assume you’re happy with your choices.
But in all seriousness, one of my all-time happiest life moments was going unconditional on my first property and knowing that I’d become a home owner and a landlord all in one moment.
Before we begin, I’d probably better get something clear right away,
This article is about investment ownership — not live-in ownership
Buying a home for yourself to live in is certainly exciting.
I assume it’s a blast to knock holes in the walls and not have to worry about what the landlord will say. That’s what you love about it right?
I personally have no idea what it’s like to live in a house that I own. I bought both properties from a distance and didn’t see either of them in person until well after a year of ownership.
I made a lot of mistakes buying the first property, and a lot less mistakes with the second one. So here below is my 5 item checklist of considerations that I recommend you check off before you go ahead and make that purchase.
I’ve tried to leave off anything too obvious from the list, I’m not going to tell you to inspect the property. If you’re dumb enough to buy a property without even having someone inspect it then you’re better off sticking with the stock market.
Let’s get started.
5 Things to consider before you buy
1. The cost of the house isn’t even close to what the house will actually cost
The first big money-grabber you’ve got to account for is the government.
Depending on what country and city you live in, you may have to pay tens of thousands of dollars in either stamp duty or capital gains tax.
Stamp duty is collectable by the government right away, whereas capital gains is going to come later. I’d recommend talking with an accountant about what your government expects from you and when they’re going to expect it. Every country is different and even cities vary.
In New Zealand you’re going to pay far more taxes buying in Auckland than you will buying in Hawkes Bay for example. This is because the New Zealand government is hoping to persuade home ownders to step out and stop overcrowding a city that has a population of less than 2 million people… Come on guys.
Some countries (like Australia) have Government schemes to help with the crushing tax burdens for first time home buyers.
First time home owner grants are easy to get and usually aren’t cancelled-out if you’ve previously bought properties overseas.
However they do come with other conditions. Most states require you to actually live in the house for a predetermined amount of time, usually between 6 months and a year.
So if you want the cash, be ready for that.
2. Lawyers or Conveyancers
In Australia, conveyancers are more commonly used for buying a property. For New Zealand, a lawyer is very nearly required by law.
This is someone you’re going to lean on very heavily for lots of advice, a lot of forms, and as a safeguard against accidentally breaking the law.
Having one is going to cost anywhere from 2 to 10 thousand dollars (depending on your city, country and property) but it’s absolutely money well spent.
Unless you’re a very highly trained professional, do not try to navigate this alone. Plus if you’re smart you can make the money back in other ways.
3. Get The Blueprint
The blueprint of the house you’re buying is sacred. It’s a document that proves that no-one has broken the law by building anything that’s not suppose to be there.
My second property has a sleep-out. A sleep-out is a very New Zealand thing to have in a backyard. It’s a small structure and acts like another bedroom and sits on its own, independent from the main house.
During the buying process it was my lawyer that asked the seller for the blueprint so that she could verify that the sleep-out wasn’t built illegally.
The seller didn’t have the blueprint and was unwilling to obtain it.
I communicated through my lawyer that I wanted a price reduction from my original offer just in case I’d later be facing a fine when the time came for me to resell the property and I’m caught with an illegal change to the blueprint.
The seller accepted the price reduction.
Once he accepted, I got in contact with the local council and for $80 they posted the blueprint to my lawyer. It turns out the sleep-out was legal after all.
The price reduction paid for the blueprint, the lawyer and a brand new lawn.
Champaign! Champaign for everyone!
4. Builders inspection & LIM report
So you or your paid representative have conducted an inspection.
Unless you’re a trained builder, you’re not qualified to find the termite rot or the baby sinkhole thats going to destroy your investment in 5 years time.
Pay a builder to do a thorough check of the property and give you his opinion.
A LIM report is a New Zealand term for a report thats given by a council representative who can come to the house, check electrical and structural integrity and has a knowledge of the history of the house.
This is voluntary and costs money, but it’s well worth it.
If you’ve not yet made an offer then make sure the offer you do make is contingent on the results of these inspections. This way you can pull out of the sale if the builder is not satisfied with the quality of the house and you’ll lose no money.
Except with the lawyer. One way or another those people always get paid.
One factor I‘m always lazy about is properly factoring council rates into my positive/negative gearing calculations.
You will owe rates every year to the city (depending on your city and country). These rates pay for local services such as police and fire, trash removal and other things the city wants to spend the money on.
Tip: Your house may be in the jurisdiction of two councils, if thats the case you’ll need to pay rates twice to two different councils. Potentially at different times.
It’s very important that rates come up during your contract negotiations with the seller. It’s their responsibility to pay for the rates right up until the second the property becomes yours officially.
This will likely require them to make a partial payment to the council before the end of the sale process.
They won’t want to do it, it’ll be your lawyers job to chase them and make it happen.
Make sure you get on the phone during the sale process and find out directly from the council what you’ll be expected to pay in rates as a home owner in their city.
Do not get your lawyer to do it. You will be billed for it. You can do it.
You’re about to embark on one of the most exciting, yet tedious adventures of your life.
Just make sure you have the important things (like a builders report) worded as a condition of the sale on the contract.
Don’t be afraid of asking for a price reduction if the occasion calls, and be picky.
This is an enormous undertaking and every good choice you make now will impact your life for years to come.
Every bad choice will make your life hell.
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