So you’ve bought the property… What’s Next? (Part 1)
What I find is when people are buying an investment property, they use a lot of mental fuel in the decision to actually, will I or won’t I buy one. And I kind of think of it like.. Do you know when a plane is on the tarmac and it’s just about to take off. That moment when it leaves the tarmac and gets up to say 30,000 feet before it levels off. That’s where the plane uses most of its fuel for that trip. And for a property investor, I think they use the most fuel in that early stages to sort of getting over the mental paradigm of “Will I, Won’t I? I know someone who bought an investment property who didn’t do so well. My parents told me I should pay cash for everything”. It’s just all this mental stuff that is sort of a noise that needs to be overcome. So for me, that’s the taking off bit. And then, they use whatever energy that is left over, trying to decipher all of the information that is left out there, “OK, I’ve decided and now I want to buy one.” And so, they use whatever they need to do to get that property purchased. And then once they bought this property, its kind of this relief but ultimately, they are still a lot more work to be done. So for me, there is a few things that you need to think about.
The first one is, ok, you’ve just signed the contract, you’re about to buy a really significant asset, you need to think about how to protect it and how are you going to defend it. Essentially, you need to think about insurance. For me, start thinking about it from the moment the contract goes unconditional. You want to be insuring your position even though you haven’t settled on it yet and whilst I don’t want to give any insurance advice at all, you need to be thinking these things. If I’m buying a house, I want to insure the building. Typically, if I’m buying a strata title property, the insurance of the building is usually covered by the body corporate but also, we need to think about internally. Landlord protection insurance for the stuff that is inside the property that is at risk, let’s say, if its burned down in between you signing the contract and the property settling. So for me, the number one thing, as soon as you sign on the dotted line, you need to be thinking, “How do I protect myself?” and get some insurance in place. And for me, there is a whole range of insurances that you can get but you got to find that fine line between being adequately insured and not over-insuring. That’s really different for different people.
Once you’ve thought about that, the next step is, well, if I’ve signed a conditional contract say I haven’t bought it in auction for example. I bought it subject to finance, I bought it subject to building and pest and any other conditions, your next priority is to make sure those things can be satisfied. So, arrange for a building and pest inspector to go out to the property. Give them the selling agent’s details so they can get through it as soon as possible. And so, you can also read the report and get as much time to digest is as possible.
But you got to remember, when you get a building and pest report done, it is their job to tell you everything that is wrong with that property so don’t be overly discourage by the minutiae of detail because really, what you want to do is find out a couple of things.
Number 1, is the structure sound? And if is sound, that’s a great thing. Number 2, is it riddled with pest? And if the answer is no, its then just looking at the other things and seeing how material they are when it comes to whether or not you proceed. In some cases, you can use it as leverage to get a price discounted on what you previously negotiated. But importantly, think about those two things: Is the structure broken and is it riddled with pest. If the answer is no, you can move on. Equally, if it subject to finance, be proactive with the person who is actually putting the finance together to make sure they are methodically moving through the process because if you’ve got two weeks to get finance, you don’t want them to be starting and picking up your file on Day 11 or Day 12. Then they would ask for extension which can be problematic when getting it with the agent particularly in a fast moving market where they’ve got other buyers stacked up. So don’t undo all the good works that you’ve done to jockey for a position to buy it only to undo yourself from it. So for me, the next priority once you’ve bought it is to methodically work through the conditions that you need to satisfy on the contract.
The third thing is then start thinking about the Quantity Surveyor Report. Essentially, that’s about where you can maximise the depreciation that is allowed for your investment property. You kind of think of that as bonus cash because it is a non cash deduction that you can put on your tax return that most cases, result in a tax refund and you can put it to the cash flow of the property. It’s amazing many investors still forget about this critical component. And you really need it prior to putting in your next tax return after buying the investment property. So you can buy it anytime leading up to that but for me, I always like to get it as soon as possible because that feeling that you get when you see all the depreciation allowances that you can get, its really an exciting part of the property investing process and I know that makes me sounds a little dorky and I’m ok with that because really, property investing is about managing the numbers and managing the cash flows.