Find out if you are ready to buy your first (or next!) investment property.
LISTEN via streaming audio:
DOWNLOAD (right click and ‘Save As’): EPI 005 – Are you ready to buy an investment property?(MP3 -26.3MB)
SUBSCRIBE in iTunes: iTunes Store – Everyday Property Investing (NB: Need to have iTunes installed)
In this episode we talk about:
- Property management and changing property managers
- Section 32 document and conveyancing services
- Assessing your finances to see if you’re ready to buy
- Listener question – how much money do you need as a minimum to buy your first property?
We have a great interview where Den speaks with Julienne, who began investing in property just a couple of years ago.
And in our quick tip:
- Write down your budget in a spreadsheet or on paper
- Use your credit card or debit card as a means of recording all of your expenses to enable you to assess your expenses
- Write down your income and expenses
- Discover your borrowing power, use bank websites as an indicator
Are You Ready to Buy an Investment Property – Podcast Episode 5
This is Everyday Property Investing episode 5. The show empowering everyday people to
create wealth and achieve financial freedom, so get on board! Everyone can be a property
investor. It just takes a little knowledge, a little support and some action. So get started with us
Hello and welcome! I’m Kaz and this is episode five of our everyday property investing podcast
series. And in this episode we’re going to find out if you are ready to buy. So we’ll be looking at
assessing your current situation, looking at your borrowing potential, budgeting and planning,
and in this episode’s Quick Tip, we’ll look at some of the simple ways that you can assess
your income and expenses. So I’m here with Den and we’re here to help you develop your
knowledge and ours, and to share our experiences with the everyday property investing
community. How’s it going Den?
Den: Great, thanks Kaz, really good. I can’t believe we’re up to episode five already.
Kaz: I know it just seems like yesterday…
Den: It just seems like yesterday, indeed. So Kaz what’s news with you?
Kaz: I’ve actually sacked my property manager, actually two of them, I’ve sacked two of them.
Den: So tell us about your property manager, why you’d sack them, and how hard it is to sack
Kaz: I have these two properties of mine that have been managed by the same people for about
a year and a half. I haven’t actually been that happy with services that I’ve received particularly
over the last six to twelve months. I did give them a ring at one point to say, “I’m not really
happy the way things are going.” They’re not necessarily on top of the income which is really
important. They also failed to follow-up on quite a few things that needed to be done. So the
tenants that asked for something for example, and they hadn’t followed-up on that. Or, we’d
asked them to get quotes to do some work and they hadn’t followed up on that. It just got a bit
much so in the end, we actually we’ve decided to call it quits. Surprisingly, it was actually very
very simple thing to do, Den.
Den: Okay, so now we probably should have an episode on property managers, what to expect
from property managers and all that sort of stuff anyway. But, in the meantime, what contractual
agreements do you have and how do you go about sacking someone like that?
Kaz: Well when you sign up with a property management company, usually you sign something
that sort of says they have exclusive leasing rights for a certain amount of time, but really just
covers that initial period of getting your tenant in. Once your tenant’s in place, you’ll find in most
circumstances that you can change property managers at the drop of a hat. You don’t need to
give them notice, in most cases. Obviously you’ll need to check the lease that you have signed
because it could be different for you. But in our case, we didn’t need to give any notice at all and
it was actually really simple. All we did was, find a new property manager, contacted the new
one and arranged for them to take over, contacted the old one and told them that they were no
longer required. By law, that your existing property manager has to supply all of the relevant
documentation to the new property managers within a certain period of time. So it’s actually you
don’t actually need to do much at all. All it took was two phone calls.
Den: So it’s a user-friendly sort of a procedure…
Kaz: Yeah absolutely, it’s in the favor of the landlord in terms of – you’re not stuck into
something. The one point, the real point that I want to make out of this is that property
managers are working for you, and if you are investing in property like we are – we like to
run our property investing business like a business because it is. I mean that’s the biggest
investments that we own are properties, and we want to run it like a business. And so if your
property managers aren’t managing that business well like with any business, you need to
assess that situation and act accordingly.
Kaz: What about you Den, what’s been happening with you?
Den: Well, this week, you will recall we’re looking at selling a property. Now, about four or
five weeks ago, I spoke to some real estate agents, and we’ve chosen that real estate agent
and that’s all great. And we used a conveyancor that we’ve used previously. Now last week
the conveyancor said to us that all our documents were done and all we’re waiting for to get
Section 32, which is a legal document that you need to sell or buy property in Victoria. To get
this Section 32, all we needed was for the body corporate to provide a certain document. Now
a week ago today, the body corporate provided that document, but still the conveyancor hasn’t
given us the final Section 32. So we’re running a week late now, we’ve got three people who
were interested in buying, but they might start looking elsewhere because of it. So we’re getting
really quite frustrated with the process. And again, I think a little bit like your comments about
your property managers, we’re in a position where in a way we’ve hired someone and we really
need to be careful that we hire the right person and that you make sure you learn from these
mistakes. It’s another mistake, and I promised you when we started this podcast that I’d have a
barrage of mistakes and here’s another one. Really we’ve hired the wrong person and a lesson
from this is not to use this person again, and to make sure we get a conveyancor who’s been
recommended by someone who’s really happy with them.
Kaz: Absolutely, I agree with that one. I actually had a similar experience once for the
conveyancor. I was purchasing a property and we had been given a contract for the sale to sign
and I looked a couple of the clauses in the contract and thought that they weren’t necessarily
reasonable. I had to chat the conveyancor who said, “Oh no. They’re fine,” but I just felt really
uncomfortable about it and in the end I went and had those… The conveyancor said that I
wouldn’t be able to change those clauses, and as it turns out they were wrong. So I had those
clauses changed so they were in their favor. I was able to do that and we’ve been given a bit
little bit of not-so-good advice on that circumstance.
Den: So the lesson is know who you’re employing and you’re the employer. And secondly,
make sure you cover your own backside really; that you do your own reading, you don’t just
trust other people, read your own contract yourself.
Kaz: Yeah, I think it really does pay. That’s why having knowledge yourself becomes imperative.
I mean as we’ve said in earlier shows, the person who’s most interested in your success and
your property investment is you, so you’re the number one person looking after you.
Den: Yes, you’re the one that’s going to win and you’re the one that’s going to lose.
Den: Okay, our feature segment this week is Are you ready to buy an investment property?
Assessing your finances. Now what we’re going to talk about is assessing your current situation,
your borrowing potential, and budgeting and planning. So Kaz, what do we mean when we talk
about assessing your current situation?
Kaz: One of the first things you need to do when you’re looking at buying an investment
property is to understand a bit more about your income and your expenses. You need to
understand what’s coming in, what’s going out each month, as well as getting an understanding
of those income and expenses. What are actually needs and what are wants, and that’s
particularly around the expenses side of things. So you’ll need to document these things or
record them in some way; you might get a piece of paper and a pen and start writing them
down. Look at what comes in, in terms of income for yourself, or yourself and your partner,
whatever is relevant for your family, and then writing down all the things that you’re going at.
You can do that by getting the categories down on paper. So for example, house. What are
all our expenses that are related to our house, each month. And that might be your electricity,
water, all those sort of ongoing you know things, or might be a mortgage payment if you’re
buying your own home that sort of thing. Your car, that’s another category. What do you spend
on your car each month: petrol, maintenance, insurance, registration. So if you look at your life
and try to put everything into categories and then work in those categories and write down, what
are those things that you’re paying for each and every month. Now as I said, you can use a
piece of paper to do that. The other thing you can do which I like to do is use a spreadsheet to
put all of that information into a spreadsheet. Now as well as spreadsheets you could also look
at free software. There’s heaps of free software out there on the Internet. We’re actually used
to a budget program that we paid about fifty dollars for, just a one-off fifty dollar payment. We
used that for a while and that was reasonable. We now just use a spreadsheet mostly. But there
are heaps and heaps – if you do a search on the Internet for free budgeting software, you can
usually find something and download that, and that can help you to keep track and, and record
those income and expenses.
Den: So what you’re actually saying is, keep track of everything you’re spending your money
Kaz: Absolutely right…
Den: So then you going to have to start having a look at what you’re spending your money
on, every penny. So you going to have the things that are necessities and the things that are
luxuries. Now, how do you go about looking at that? How do you go about deciding what’s a
necessity and what’s a luxury? Is it something that starts coming back to your mind-set as a
property investor in the first place?
Kaz: Yeah, I think you’re right there. It’s all about that concept of what are you prepared to
give up to make this work. So, when you look at things like your groceries, you probably need
your groceries I imagine. You know you need to pay your electricity bill and you need to pay
your water bill. Do you need the hundred dollar a month gym membership? Well, for some
people that will be a really high priority because they may value their health and that gym is very
important for them. For others, they may decide that “well I could probably forego that because
I actually like to jog around the park quite a lot and I only get to the gym once a month anyway.”
So for one particular person that might just be a want and they could probably take that $100
dollars a month and do something else with it.
Den: So for the moment, what we’re doing is we’re having a look at everything we’re spending
and we’re making sure that what we’re spending is fitting in with what we want.
Kaz: Yes, that’s right…
Den: Fantastic. Alright, now the second part is having a look at your borrowing potential. How
would I go about if I had no idea and I’ll tell you a story: I recently sat down with a couple of
friends of mine who are really quite intelligent people. They’re a professional couple and they
said to me “Den, we’d love to invest in property but we have no idea how to do it.” So I
said, “Okay this will be easy. Tell me how much you earn, tell me how much you spend and we’ll
work out how much you can borrow.” Now, they didn’t know how much they earned, we had to
go through their bank accounts to work that out. What we did to do that is look at the accounts,
we looked at the income that came in and it was fortnightly for both of them. So we got a
fortnightly income, we multiplied it by 26 and that was their annual take-home income. We
looked at their expenses in very much similar way to what you said and then we went to some
bank websites, and what we said was “Okay, these people are looking at this much of an
income, they have these much of a deposit.” And we had a look to see how big a loan they
could get that they’re comfortable with. So there are bank websites – pretty much every bank
that loans money, and I think that’s pretty much every bank, will have a mortgage calculator. It’s
really worth while jumping on there and just crunching a few numbers and seeing how much you
can actually loan. I think the other thing you need to consider as well is, if you’re buying your first
place than you’re going to need some sort of a deposit. But if you’re buying a second place or
your first investment property but you already have your home, then there’s a good chance you
could use some equity in your home. The equity is the difference between what you’re home is
worth and what your loan is. So you can use some of that value that maybe owned by you to
borrow against. Whereas if you don’t have that you going to need to have your own deposit
saved. So you’ll also maybe have to have a look at other assets. Now there are a lot other
assets that the bank loves because if something goes wrong, they don’t feel that they can get a
huge profit out of them. Another thing that can impact your borrowing potential is your credit
cards. If you’ve got a credit card that’s got a massive limit that will negatively impact how much
you can borrow even if you don’t use that whole limit or if you pay it off every month. Regardless
of those things the bank will still charge or will still consider that you’re using that credit card and
that you have a considerable repayment. The last thing to think about, and this is for someone
who’s already a property investor, the rent that you have coming in from your properties doesn’t,
isn’t counted 100% as your income. Banks normally take a figure of round about 70%, and say
70% of the income from your property goes into your income, the 30% they don’t count. So that
can negatively impact your borrowing potential.
Kaz: So Den, with the credit cards that you were saying that’s a really interesting point that just
having all those credit cards can actually impact upon what you can borrow. So you know how
the banks sends out those automatic mail-outs, and they say, “Hey you’ve qualified to have
Den: Your $20,000 limit, now your $50,000 limit…
Kaz: Exactly…hey get this new $20,000 limit…
Den: As great as that sounds because you have gotten more of a limit, the problem is that if
you take them up on that offer and then you go in and ask for a mortgage, that can reduce
the amount you can borrow. Because the banks have a formula where they consider a certain
percentage of your limit, is what you need to pay on your credit card and not necessarily what
you’re using. So if you’re going for a loan and you can’t quite get as much money as you’d like,
one are the strategies that I’ve heard people use is to reduce their credit card limits. Okay now
the last thing we were going to talk about is budgeting and planning. Kaz, tell us about that.
Kaz: Well, you need to start to make judgments about what you need to spend and what you
can save. Now we talked earlier about assessing your income and expenses and in looking at
those expenses in terms of what’s a need and what’s a want. You need to start to make some
judgments about what you’re actually spending and what you think you can save. Now you
might be able to cut some of those wants out, and then work out what you’re actually left with.
One of the important things that I actually learned early on was, somebody said, “Pay yourself
first,” and I think that’s really important. So if you sit down and you’re looking at your income,
you’re looking at your expenses you can see there’s a difference there, and hopefully it’s in
the positive, then you need to say okay if I’ve got theoretically $500 a month left over that I can
actually save, I’m going to take that $500 and put it over to one side somewhere. So I’m going
to put it in an account, I’m going to get it paid directly out of my pay if you can do that. Because
if you don’t see it and you don’t know it exist, you’re paying your savings first than you’ll find it
much easier to actually save.
Den: Okay so what you’re saying is for example, if that figure is $500 or $100 or whatever, get
that money straight away before the month starts and put it into a savings account…or a term
deposit or something like that.
Kaz: Yeah if you can, put it somewhere. Now a lot of people have offset accounts on their
mortgage and things like that. So you might not necessarily physically move it to another
location. What we do, once again, the spreadsheet, is we actually have a spreadsheet and
so we have almost what we call virtual accounts. So we might have say, $12,000 sitting on
our offset account as an example, and in a spreadsheet somewhere we’ll say okay well ten
(thousand dollars) of that is money in excess, two thousand of that is money that we are saving.
So I’ve moved money in a virtual account which is basically a spreadsheet, which telling us how
much of this is our savings money.
Den: Okay, and therefore how much of that you can’t touch.
Kaz: That’s right, it’s all about the mindset you know, it might be physically in the same account
but we know that that money is our savings money and we don’t touch that.
Den: Okay so that’s what you mean by paying yourself first. What about the idea of selling of
assets. Now I know that it’s a once-off. You can’t sell your car every year without buying a car
obviously, but what’s the idea about selling of assets I’ve heard people doing that before.
Kaz: Yeah look, I think it’s a really great idea. If you are really passionate about this and
you really do want to get started and you’re a few thousand dollars short of a deposit, then
sometimes you know just doing a big clean up of the house and working out – we might have a
spare laptop sitting around and if we just put that on eBay or the trading post or something like
that, we might be able to get some money for that. And we’ve actually managed to scrounge up
a few thousand dollars doing that. If you got an old boat that’s been sitting on the backyard and
getting moldy for three years or something, you might be able to get a few thousand dollars for
that and if that’s the difference between you being able to invest (because you can start) pulling
together that deposit and not, then why not.
Den: Okay so what you’re saying is – again and again I’m getting this idea that it’s about your
mindset; what you’re prepared to give up, what you’re prepared to sell, what you’re prepared
to put aside and save. So the number one thing it seems to come back to, even though we’re
talking about money, is still your mindset. If you’re prepared to sacrifice and to put money aside
than you’ll find yourself in a position of being able to put that in your deposit first.
Kaz: That’s right.
Den: Fantastic. So what we’ve talked about today. First of all, assess your current situation –
have a good look at your accounts, your income and your expenses, and what you actually
already own. Secondly, what you’re borrowing potential is – how much you can borrow, how
much equity you have, maybe having a look at your credit cards and see how they could impact
your borrowing. And finally, budgeting and planning – sit down, work out what you need, what
you want and what you’re prepared to do without.
Den: Now I’m here with Julienne who’s a property investor. Julienne can you tell us a little bit
Julian: Well I suppose a woman in her mid to late 50s and I’ve been working as a teacher for
many years. I’ve bought two investment properties just recently, in the last two years – one or
Den: Okay and what’s you’re property investment strategy?
Julian: Well that’s a very good question. My strategy is buy and hold. For a long time I’d wanted
to invest in property but I was actually very concerned about getting myself in over my head with
debt, with paying off more than I could afford. But then I heard about positive cash flow, and I
thought that could work for me. So that got me interested – the fact that I could actually buy a
property and not be out of pocket at the same time.
Den: Okay fantastic. Can you tell us – when was the moment when you thought you were ready
to invest in property? When were you ready to take the plunge and buy your first investment
Julian: Being honest about this, probably when I spoke with you – someone who had done it
successfully. And I think that I’d known you for quite a while and I thought that it was a very
good strategy that it worked for you. I could say that other people have done it and it did work.
Den: So it was more about being part of a community and, and knowing that there are other
people who are doing it.
Julian: Yeah, I think very much that it, it would seem to reduce the risk factor for me. That I
wasn’t just isolated, thinking can I do this? I could look at other people and think yeah, other
people have done this and it is working. So I could see people…
Den: Okay people who you knew?
Den: Were doing it.
Den: Right, so what advice would you give to someone who might be interested in starting a
property portfolio, and really doesn’t know how to go about starting and how to do it.
Julian: (Yeah) Well I think that first of all, doing some research can’t really go past that. Listen to
all the blogs and podcasts you can, and read as much as you can. Basically you’ve just got to
be ready. Get yourself up and ready – ready to do it. Obviously the financing aspect is another
one too – I felt that I had great help with the finance. And I wasn’t confident perhaps going to the
bank on my own and I’m arguing through things, so I had support on that area.
Den: Fantastic. So, surround yourself with the right people?
Julian: Yeah, get good expert advice and be around positive people. And be ready to take a
Den: Fantastic. Thanks very much Julienne.
Kaz: Right so now we’ve got, Den, a listener question that’s been sent to us. I’m really excited to
Den: Fantastic, I’m really thrilled that we’ve got first of all, someone listening to us. But also, if
you’ve got any questions that you’d like us to answer or just muse over maybe for a bit, send it
to us. Our email address is email@example.com and Kaz and I will have
a look at it and maybe even read it out on the show. So Kaz, what’s the email please?
Kaz: We’ve had Cameron from Sydney, who sent us in this. “Hi Kaz and Den, thanks for the
podcast last week. I’m interested in getting started with property investing, but don’t really know
how much I need to get started. Is there a minimum I should be aiming for?”
Den: That’s a million dollar question – well that’s a million dollar question it’s probably not a
million dollar answer. The minimum you need to get really depends on what you’re looking for.
So we probably can’t really give a single number. But what we would say is this, or what I would
say is this; if you’re looking at a property that’s worth $200,000, and you don’t already have
another property (you don’t have equity), you need a 20% deposit and you probably going to
need around about $10,000 or 5% of the value of the property for your other costs. So if you’re
looking at a $200,000 property, you probably going to need around about $50,000; $40,000
which would be the deposit; $10,000 would be the costs. If you’re looking at a $500,000
property, you going to need considerably more and you might be looking at, maybe $125,000; a
hundred thousand would be your deposit and twenty-five thousand would be your costs.
Kaz: I remember Den, I just want to share a story around that. When we were first interested
in investing in property, I was burning with desire to, to buy a property, I was itching to get
out there and actually purchase something. I went to a property investment expo and walked
around and talked to a whole bunch of people there who were there to sell you property or sell
you their investment services in some way. We had enough of the deposit for a house of – look
probably would have been $180,000 you know – and this, it’s only few years back so…
Den: So you’re really at the lower level of the market…
Kaz: Yeah, such a low level in fact that we property investment companies would walk past and
they would go, “Hi! Come on in – let’s have a chat,” and they’d talk about, “how much do you
have?” I’d say that we could probably afford about a 180 (thousand dollars) and they’d say, “Oh
just come back…our properties start at around $350,000 so let us know when you’ve saved up.”
The point I want to tell you is we got that we got the same story from a whole bunch of people at
that place, but I really wanted to get started and for me it was all about wanting to call myself a
property investor and wanting to have a property so…
Den: Look I’ve got a really similar story (and I know I’ve said before you’re investing in bricks
and mortar and not diamonds and pearls). My first property was $200,000. Now that isn’t a top
end property by anyone’s imagination and it’s not like it was in 1948 when $200,000 was a lot
of money. I started at the bottom end and generally I look at the bottom end for properties, or at
least in the bottom half of the market. Now what I find is there’s a million reasons why you might
want to go with a cheaper property, but one of them is that it gets you into the market. And once
you’re in the market, you can always trade up or you can use that as equity or something. So
I think the most important thing is to get into the market. So Cameron, in my idea ah for your
email, and thank you very much, is probably have a look at about $50,000 or $60,000. You can
probably get to sell for property that’s between $200,000 and $250,000. And if you’re looking
in that area and all the other things that we’ve talked about matched, then that’s probably a fair
enough deposit for you.
Kaz: Yeah, I’m with you on that Den. Cameron get in there and get started I reckon.
Kaz: And now for our Quick Tip, Den what’s your quick tip for today?
Den: Well my quick tip for today is… it sort of flies in the face of what you said a little bit. If you
want to do budgeting, some people will write stuff down on paper, and some people would put
everything in a spreadsheet, and some people may even get software where they enter things.
I find that can be a little bit arduous. Now if you’re not the sort of person that likes to keep lists
of all those sorts of things, what you can do is use your credit card and put everything you
spend on the credit card. What that does is, after a month or two months that will give you a
really good indication of what you’re spending in your day-to-day living. Now of course there are
major expenses which might come around every three months or every six months which you
won’t get, and of course, don’t forget that if you’re throwing lots of stuff on your credit card you
need to be able to pay that off. So the last thing I’m advocating is getting into credit card debt
and if that’s something that you might find then maybe use your savings account and eftpos
everything but be careful of the fees, or get a visa debit card so you can’t get into debt but it still
gives you a really good indication of what you’re spending.
Kaz: So what you’re saying Den is to, use it as a tool to capture all of that information just for a
short period of time like a month or two months.
Den: Well yeah… You certainly use it as tool to capture the information. I know your credit card
accounts will have all the details of what you’re spending. I use it permanently as my tool to
capture what I spend so I know I can go over a whole year and have a look at these things. But
that’s not for everyone and it also comes with the risk that if you’re not great at budgeting or if
you do worry about going into credit card debt, that might not be the perfect tool for you. So it’s
a great tool but you’ve got to be really careful with it.
Kaz: Nice tip, thanks Den. What about our action for the listeners today?
Den: Okay the action today, now we’ve talked about your borrowing power so we want you to
go to three bank websites. See if you can get a local bank, a national bank and an online bank.
And dive on there and have a look at their mortgage calculators and see how much you can
borrow. So this week your action is to discover your borrowing power.
Kaz: Great! Thanks Den. Well next episode, we’ll run for the basics of property investing
and de-mystify common property terminology such as depreciation, negative gearing,
positive gearing, cash flow, yield, capital gains, tax, Section 32s, all those things.
This is all important information which will be critical to your decision of what property
investing strategy is right for you. So if you have a question for us, please send it to us at
firstname.lastname@example.org. And we’ll also have next week our usual segments
which include News and Tips, so get on over iTunes and subscribe to the podcast, head on over
to the website www.everydayproperty investing.com, sign up for the Email newsletter there.
That’s it for today, Den!
Den: Alright, so until then!
You’ve been listening to Everyday Property Investing, the show empowering everyday
people to create wealth and achieve financial freedom. Please note that this show provides
general advice based on personal experiences and is for educational purposes only. We’re
not qualified accountants or lawyers or licensed to provide professional financial advice
for you. We strongly advise that you employ the services of qualified professionals and
seek their advice that is specific to your own personal circumstances.
You can visit us at www.everydaypropertyinvesting.com. See you next time!