Questions to Ask Before Buying an Investment Property (Part 3)

In Part 1, we looked at the first five questions regarding buying an investment property, which laid down a solid foundation with a clear vision and a workable strategy.

Then, in Part 2, we broke down the next five questions, which set you on a well-defined path toward finding your next investment property deal.

Finding a deal requires no commitment, so now it’s time to form your ultimate opinion. That way, you can either pull the trigger and make an offer, or reject the deal and keep looking.

In Part 3, we’ll cover the five final questions that are geared toward helping you arrive at a high-quality investment decision. The answers to these final five questions will help you find the confidence that your next property purchase won’t be one that you’ll later regret.

I’ll only scratch the surface here, but in Steve McKnight’s Property Apprenticeship course, you’ll find an entire module, including 25 sessions, that will equip you with the tools to buy with absolute confidence. It’s complete with templates and invaluable due diligence resources, as well.

Part 3: Buying Like a Pro

In order to know whether or not your investment property decision is the best possible, ask yourself the following key questions:

11. Who Would Want To Live Here?

You must consider your target market. Do you plan to rent your new property to a tenant, sell the property to an owner-occupier or perhaps to another investor?

Who would you like to market this property to, once you acquire it? Will it be a family with small children, young professionals, retirees or another real estate investor?

Who could find this property attractive? Each demographic has different needs and wants. Matching the right property to the right tenant or buyer is crucial to successfully converting your dwelling into dollars.

12. Do The Numbers Stack Up?

The most important aspect of your due diligence is calculating the most likely financial outcome of the deal. Buying an investment property is about either building wealth or generating income. So, you must have absolute confidence that your asset will achieve your desired goal.

Investing has taught me a lot about my susceptibility to greed and fear. These emotions have led me to make some bad decisions based on gut feelings rather than solid facts.

When I’ve made money, it’s because I remained disciplined, kept my emotions in check, and let the numbers make the decision for me.

Two of the most important measures you’ll want to arm yourself with are cash-on-cash return and net profit percentage.

If you need more insights on due diligence and number crunching, Steve’s book From 0 to 260+ Properties in 7 Years is essential reading.

13. What Are The Terms Of My Offer?

You’ve found your ideal property and worked through your initial due diligence, so you’re confident the deal stacks up. Now it’s time to submit a formal written offer. If accepted, this will ensure that no one else can snatch the deal away. Check with the agent of the property to clarify whether they require an official contract or whether an email or faxed letter will suffice.

Either way, this is where you commit yourself. For the first-time investor without a mentor or coach, taking this official step can feel very daunting. New investors often ask themselves: “What if I’m making the wrong decision?” “What if I’ve missed something in my due diligence?” “What if I change my mind?”

You can alleviate some of these fears by including special “subject to” clauses or conditions in your offer. These clauses can offer you the certainty of securing the deal while also maintaining the freedom to exit if you change your mind or gather new information.

Here are a few common clauses you might consider:

• Subject To Finance – This one is pretty standard. It sets a timeframe, often 14, 21, or 28 days, to secure finance arrangements.

• Subject To Pest Inspection – Checking for termites, fungal decay and borers is standard practice.

• Subject To Building Inspection – This one is also a standard clause, but it could be a bit too vague if you are really serious about securing the deal. The clause “Subject to no major structural defects” is another option that could offer the vendor more certainty you are not wasting their time.

• Subject To Due Diligence – This will give you time to tidy up your final due diligence. It could even serve as a catch-all if you later decide to back out of the deal

• Subject To Soil Sample – If you plan to build a dwelling on the site, this clause will be important. Your proposed builder can help you organize this.

• Subject To Subdivision And Development Application Approval – If you’re securing a site for subdivision or development, this clause can ensure that you receive no surprises from the local council. However, it could delay a settlement for months, which may be a turnoff to the seller, unless you sweeten the deal.

Remember, unless you’re buying from a distressed seller, you’ll need to give the vendor a reason to say yes. Often, your offer will either meet them on price or on settlement terms. Also, you’ll need to be mindful that too many “subject to” clauses can make your offer seem much less attractive.

14. In Whose Name Should I Buy An Investment Property?

There are numerous ways to own or control your wealth, and your circumstances will determine which structure is right for you.

Here are your general options:

• As An Individual Entity – This is when you acquire property in your own personal name. While it’s simple and informal, it offers minimal asset protection.
  It could also lead to unwanted personal income tax consequences.

• In A Partnership Agreement – This is when you agree to own the asset together with another person or entity. This may be advantageous, as you can pool financial resources and borrowing power.
  However, it can come with some potential legal and relational challenges to navigate.

• In A Company – A company is a business entity owned by shareholders and run by directors. While buying property in a company name can provide some liability protection and a flat tax rate, companies can be expensive to maintain. They are generally not the best way to hold property long term due to the absence of the capital gains tax discount.

• In A Trust – A trust is a legal entity that provides the control of assets to the trustee(s), individual or company, but without granting ownership. The profits of the trust are distributed to all of the beneficiaries. While trusts provide the opportunity to distribute investment income for tax purposes, trusts can also be expensive to maintain and difficult to understand.

Each of these structures have their own advantages and disadvantages. It is crucial that you consult a legal and/or tax professional before making your final decision.

On a final note, it’s important to be clear on the ideal structure before you purchase a property. There can be some painful stamp duty implications if you later decide to transfer the ownership of the asset into another name.

15. Who Are My Team Of Professionals?

Smart investors don’t try to do everything themselves. They surround themselves with a great team of partners and advisors to help them achieve their goal.

Find a trustworthy accountant and mortgage broker. Once you sign and exchange the contracts, you’ll need a property conveyancer, ideally a lawyer, to facilitate the settlement.

If you’re just beginning to build your team of professionals, be selective in putting this team together. Find a good referral, preferably from another investor. The more your team aligns with your goal, the more likely you’ll appreciate and benefit from their advice.

If you have missed Part 1 and 2 of the 3-part series, you can read them here:

• Questions to Ask Before Buying an Investment Property – Part 1 – Developing Your Vision & Strategy
• Questions to Ask Before Buying an Investment Property – Part 2 – Finding Your Next Deal

By Jason Staggers

Jason was a personal mentor working with Steve McKnight's Property Apprentices. He helped hundreds of investors apply Steve's teachings in the real world and achieve greater results on their journey to financial freedom. Jason now lives in Perth, WA where he leads Neuma Church.