Questions to Ask Before Buying an Investment Property (Part 2)

Part 2: Finding Your Next Deal

In Part 1 we answered the first five questions every investor should ask before buying an investment property.

Now that you’ve established a clear vision and strategy to take you to your investing goal, it’s time to dive into the next logical step: Finding your next deal.

6. What Is My Buying Budget?

Before you can answer this question, you must be clear on your available resources and current financial constraints. Here are a few sub-questions to help you work out your buying budget:

How Much Cash Do I Have Available?

The foundation of any investing plan is the ability to spend less than you earn. If you haven’t mastered this fundamental key, then take a few steps back and start there.

The amount of cash you currently have available will set the boundary of your buying budget.

Cash reserves are important to fund the deposit and closing costs for your property purchase. They also cover the unforeseen expenses that inevitably arise as a landlord or developer.

How Much Equity Do I Have In My Existing Properties?

Equity is the amount of debt-free value that you currently own or control in your property. In other words, if you sold the asset today and paid off the mortgage against it, how much would you have left?

You might be able to use this wealth to fund your next property deal. I’ve worked with many investors who got started by tapping into the equity of their primary place of residence. Others have used equity of investment properties as down payments to buy additional properties.

In order to know exactly the amount of equity you have available, you may need to have your properties re-valued.

How Much Can I Afford To Borrow?

The best way to answer this question is to speak to a good mortgage broker. Because brokers often represent many different lenders, I prefer to deal with them, rather than directly with a particular bank.

Just be sure to find a broker that you can trust. Lenders pay brokers when they sell you a loan product, so some brokers may steer you toward a loan with a higher payout for them. That’s not necessarily the most cost-effective option for you.

Remember, it’s not the broker or the bank’s job to decide how much you can afford to borrow. That’s your responsibility. Just because the bank is willing to loan you the money, it doesn’t mean you can afford to borrow it from them.

Finally, when determining your buying budget for a particular property, don’t forget to factor in additional costs, such as stamp duty, land tax, council rates, legal costs and borrowing costs, just to name a few. It’s never fun to have surprises when it’s time to settle.

7. How Much Am I Willing to Lose On This Deal?

I’m sure you’re thinking, “I’m not willing to lose anything when buying investment property,” but this is an important question, because it reveals your risk tolerance. Your toleration of risk is a function of several factors, including your age, personality and financial position.

Here’s another way of asking the question, “What’s the worst thing that can happen if this deal turns ugly?” As Steve points out in his Property Apprenticeship training course, “The worst-case scenario is as likely to happen as the best-case scenario.”

Are you willing to lose your family home? If not, then it’s a bad idea to use the equity of your dream house to fund your next deal.

8. What Suburb or Area Will I Focus on in My Property Search?

Many inexperienced investors focus on “property hotpots.” What qualifies an area as a property hotpot is usually nothing more than the opinion of a so-called “professional.”

Rather than making investing decisions based on the opinions of others, we advocate a more sophisticated approach to the question, “Where should I buy?”

We teach every investor to form their own opinion on an area by becoming an area expert. Before you sink your hard-earned capital into any property, research and assess the area to gain a level of knowledge that only locals have.

Recently, I heard a woman ask Steve, “Where should I buy my next property?” He responded with two questions, “What area can you afford, and what area do you know best?”

For most people, this means investing in the area where you grew up or where you currently live. Not only does this level of knowledge help you mitigate the risks of the unknown, but you probably already have a relational network there. This helps you form your team of trusted partners and advisors more readily.

9. What Exactly Am I Looking For When Buying An Investment Property?

When I’m coaching investors, after setting goals and determining strategy, we work together on creating a deal profile by writing down on paper exactly what they’re looking to buy. Here are some questions to help you lessen distractions and narrow your focus:

• When considering an area to invest, can you narrow down even tighter than a suburb, perhaps to a neighbourhood or even a street?
• Do you want to be close to public transport, schools, shops or other amenities?
• Is there a particular block size you’re aiming for?
• Are you looking for a vacant block or for an established house?
• Can you tell me the details of the house you’re looking for, such as how old it is? What about the architectural style? How big is it, and how many bedrooms or bathrooms does it have?

10. How Will I Find My Next Property Investment?

While we live in a day when information is readily available by clicking and typing, we must remember that nothing will bear more fruit in our property investing than good ole’ fashion networking. While the mass of property seekers are hunting on their favourite Internet advertising site, sophisticated investors are getting calls from agents before properties are even listed.

For shy, quiet-type people, building relationships with agents, builders or developers can seem a little intimidating. For others, there may not seem to be enough margin in the day between work and family commitments. Regardless of your situation, it’s crucial that you begin to build the skills and confidence to get out there and connect with real people.

Wherever you plan to buy, set aside a few hours, perhaps on the weekend if necessary, to visit some agents. Hand them your written-out deal profile, so they know exactly what you’re looking for.

Visit networking events to connect with other like-minded investors. Find out who are the best agents and builders to work with, and meet other developers.

On a final note, when you’re dealing with agents and salespeople, be mindful of how they are incentivised. Agents are paid a commission by the seller upon the sale of their property, so they are not independently representing you. Salespeople who work for builders are often paid on commission, as well. While these can be valuable relationships to form, be sure to verify the information from them.

Now that you’ve honed in on exactly what you want to buy, it’s time to explore the specific aspects of buying investment properties. In Part 3, we’ll take a look at five more questions centred on buying like a pro. 

• Questions to Ask Before Buying an Investment Property – Part 1 – Developing Your Vision & Strategy
• Questions to Ask Before Buying an Investment Property – Part 3 – Buying Like a Pro

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.