I came across this article and thought that it is good information to know. We always recommend anyone buying a property to obtain a comprehensive Building and Pest Inspections, and only sign a contract with clauses for these inspections to be satisfactory to the buyer.
The easiest way to botch up the purchase of an investment property is by buying the wrong kind of property. Here are five attributes every investor should look out for
- Electrical faults: Many old houses have problems with their wiring systems. If it’s necessary to rewire the house, you’ll find the cost will eat into your profit line. Not only does rewiring have no visual aspect or wow factor, it is expensive and tenants or prospective buyers expect the electricity to work as a standard, so the fact that the house is newly wired does little to impress them.
- Termites: Termite can eat a house from the inside out. Since they are usually eating structural parts of the house, the bill for removal and repair is usually in the thousands. If the house does not come with a clean termite bill, think again.
- Structural problems: Major cracks in the foundation of a house are usually the signs of a serious problem. Old houses often have settling problems, but any changes that are less than 10 years old are usually the sign of an unstable house. Rebuilding the foundation will cost you an arm and a leg. The same can be said for fixing any structure that leans more than one degree.
- Pipes: Faulty drainage systems and rusty pipes can be a magnet for termites, not to mention that they can cause their own structural damage. Pipes can be ultra expensive to fix, and since buyers or tenants don’t see them, they are a renovation expense that, while necessary, have no value adding benefits.
- Extensive mould: Untreated leaks or poor property drainage can result in mould inside the walls. Chances are, if you’re seeing black mould and the house smells musty, there is a major mould or toxic mould problem. There are a number of ways to cover the problem up, but if you’re aiming to renovate to hold, you’ll need to get rid of the problem for good, lest tenants complain. Depending on the damage, this can often be expensive.
Obviously buying the wrong property can make an exciting purchase into a dismal failure, and it is not just physical issues as listed above that can cause a property to be a failure as an investment. There are so many other issues that need to be considered such as:
- Will the property have regular vacancies due to its location and a lack of demand in the area?
It is so important to do your own due diligence on the demand for rental properties in the area you are considering purchasing in. If there is a high chance of regular vacancies, then you need to factor this into the ongoing cash flow of the property.
- Will it attract the wrong type of tenant due to its quality?
Some properties in certain locations that may look a little tired or dated will end up attracting a rental clientele that may not treat the house as well as you would like. This is where keeping the house in great condition and perhaps even renovating it slightly will attract a better tenant, and above all else, ensure you are using a great property manager to look after your tenants so that if there is any signs of problems they can remedy them ASAP.
- Do the holding costs of the property make holding it longer term uneconomical?
Some properties have large body corporate and rates costs that are often overlooked by new investors, and impact ongoing cash flow considerably. This can cause resentment and often results in forcing the investor to sell the property when it may not be the best time to do so. This is something that your due diligence should make you aware of. Treat every new purchase like a business purchase and run a cash flow forecast on the property taking into account all of the income and holding costs to make sure that you will never be placed in a position where you need to sell the property as the cash flow has become too tight.
- Is it so unique that it would be very difficult to sell when you want out?
We all have different taste, and sometimes we may be able to buy that unique gem that really appeals to your inner hippy side, however if the property is as huge departure from the traditional properties on offer in the area, and sought by most buyers, this could result in being difficult to sell when you want to exit your investment property, and it may also make it difficult to rent as well.
Before you buy any investment property be sure that you are really buying something that will be low maintenance, structurally sound, and ticks all of the financial boxes as well. Always do your due diligence and make sure that you get a thorough building and pest inspection as well.
If you want to know what your borrowing capacity is, give us a call to discuss.