Banjo Smyth

So now that you know what your basic plan is, it’s time to start getting a little serious and put some structure into your actions.  The first thing you need to do is to get ‘pre approval’ for a loan.  In other words you need to find a lender that suits your needs and get them to agree ‘in writing’ to lend you a certain amount of money to buy a Property.  I remember when I bought my first property feeling completely over my head when it came to getting my finance into place.  I had so many questions – most of which I managed to answer by trial and error.  I will try to give you a detailed overview of all the question, problems and answers that I have encountered with getting finance.

Q.  Why do I need to get ‘pre approval’ of a loan?

A. You don’t NEED to get pre approval but I highly recommend you DO for a number of reasons.
-  Pre-approval will let you to know EXACTLY how much your budget is and therefore allow you to exclude properties that are out of your price range.  This can save you valuable time.
-  If you are competing against other buyers then having ‘pre-approval’ will definitely give you a big head start and allow you to take advantage of Vendors who are looking for a quick sale.  Think about it – If you were the vendor and two people both offered you $350k for your house BUT one of them had ‘pre-approval’ whilst the other didn’t.  Who would you choose?  It’s a no brainer, there are even times when you offer $1k -$30k less than somebody else and they still choose you.  Why? Because for one reason or another  the vendor needs to sell straight away and they can’t wait to find out if the other offer will be approved.
- Keep STRESS to an absolute Minimum.  There is nothing worse than having your offer accepted and then having to wait for the bank to make their decision.  This is especially the case if you haven’t got a home loan before or are self employed.

Q.   Should I use a Mortgage Broker?

A. Yes, a good mortgage broker should save you thousands of dollars and help you get a loan easily.  If you are buying your first property then you will appreciate as much help as you can get.  Mortgage brokers deal with banks every single day and they should know how to get you a loan and more importantly WHAT loan to get.  Have you noticed that there are a million different loan options these days?  A good mortgage broker will know which one suits your situation and save you lots of time and money.  Always do your own research but if you find someone who you trust you should have no problems.  Best of all you don’t even have to pay them; the bank will do that on your behalf.  So really there is no reason NOT to use one.  Just remember find a Broker who you trust and get along with.

Q.  What sort of loan should I get, and what does Interest only mean?

A. The best person to advise you on this is your broker but generally speaking Investors only ever use Interest only loans.  What this means is that they will never own the house outright, instead they make smaller repayments that only cover the interest bill.  This can be a crazy idea to get your ‘head around’ at first but the reason is quite simple.  The lower your repayments are on your property the less restricted your cash flow is, therefore you have more excess money to help finance your next investment property.  The logical question is – but if you never pay off the house how can you make any money?  As we learnt in Chapter 1, you can still access the equity in your property without selling or completely paying off the house (see chapter 9 for more details).   It’s also worth mentioning that the Interest component of an Investment loan IS tax deductible whilst the principle repayments are NOT, just another reason why Professional investors always use Interest only loans.

Q.  Should I fix my Interest rate or leave it variable?

A. I have a basic rule or recommendation when it comes to this question.  When you first see banks raise their long term fixed rates you know it is time fix your loan.  Using this rule and some common sense you should be able to work out what’s best for you.

Q.  How much do I need to save for a deposit?

A. Once again it depends on your situation and circumstances.  A ‘normal’ property loan would include a 20% deposit but professional investors will always try and pay as little deposit as possible.  So, would I recommend getting a 95% loan?  With caution and common sense, yes I would - BUT every situation is different and I obviously wouldn’t recommend for someone who is earning $20,000 a year to get a 100% loan for a $500,000 property.  Use your common sense whilst doing everything possible to make it happen for you.  The worst feeling in the world is when you have saved a decent deposit but decide to wait another 6 months to save that extra little bit only to find out that house prices have risen and your deposit is now effectively worth less than it was 6 months ago.

Ok, so you have decided that you want to buy an Investment property but you’re probably finding it hard to know where to begin.

Should I buy an old house?  Should I buy a new house?  Should I renovate? Should I buy a block of land and build a house? What does ‘off the plan’ mean?

All are great options but I’m going to focus our attention on what I believe is the best and most ‘accessible’ option that any ordinary person can use to fast track their Property Portfolio.

I like to call it the ‘5 R’s Strategy’
It revolves around buying an existing property at or under market value.  Then you simply follow the 5 R’s.

Revamp
The idea is to buy a property that is ‘structurally sound’ but in need of some cosmetic repairs.  I won’t go into too much detail here but you would be amazed at how much value you can add to your property by doing a few minor things.  Whether you polish the floorboards, paint the walls or even just replace some light fittings you can literally add thousands of dollars to the value of your property.  In Chapter 7 (Revamp/Renovations) we will discuss how much (or how little) you should do depending on your circumstances.

Rent
Simply rent your property out and start letting your tenants pay the mortgage.  Chapter 8 (Leasing out your property) will cover the pros and cons of doing this yourself or going through a Real Estate agent

Revalue, Refinance & Repeat
This is the most exciting part of the strategy that ordinary people don’t realize is possible.  If you have ‘Revamped’ your property correctly it will now be worth more than what you paid for it.  What most people don’t understand is that they can actually get instant access to this money.  Simply get your property revalued - then refinance your loan and use this extra equity you have created as the deposit for your next property.  WARNING - Make sure you don’t refinance and then use the money to buy a plasma TV or go on holiday.  Leave that stuff until after your 2nd or 3rd property.  Don’t worry if the idea of refinancing is a little confusing – Chapter 9 (Revalue, Refinance & Repeat) will go into it in much more detail

So now that you know roughly what your plan is you need to decide Where and What to buy?

Let’s start with Where?  What area should you buy your first Investment property?
This is a very important question but please don’t let it be too important.  What I mean is that lots of people get so stressed out about where they should buy, that they end up doing nothing at all.  There are plenty of websites and companies that can give you great information and research about predicted ‘high growth’ areas which can make you hundreds of thousands of dollars down the track.  So definitely take advantage of the resources that are out there.  Another aspect to consider is that if you are going to be spending some time revamping & renovating your property then it would be silly to buy in an area that was a 7 hour drive away.   So do your research and use your common sense.  Most importantly don’t stress too much and try to enjoy the research – It should be fun.

Now the question is What?
This depends entirely on what area you decided to buy in.  You always want to buy a property that is somewhere around ‘the average’ or ‘typical’ property in that area.  Why?  Simply because you want everything to be as easy as possible.  Imagine trying to rent out a brand new mansion in a lower socio-economic area.  You will find it very hard to find a tenant who will have enough money to pay the high rent of a mansion , yet be happy to live in that area.  Also when you are getting your property revalued the banks use ‘comparitable sales’ to decide how much your property is worth.  In other words they look at similar properties in your area and what price they have recently been sold for – If there are no comparitable sales the banks become very reluctant to give you a favorable valuation.

So I would recommend trying to establish what sort of rental properties are the most popular in your chosen area and start focusing your attention on that sort of property.  Anything from a 1 bedroom unit to a family home can be a fantastic investment, just make sure you get the right place in the right area.

So that’s the basic plan of attack, next we need to look at how we can get a bank loan so we can actually buy the property.  We will cover this in Chapter 2. - Getting Your Finance Pre-Approved

How to Buy Your First Investment Property

-A step by step guide-

This is an easy to follow, step by step guide to buying your first investment property. I have split the somewhat daunting task of buying your first property into 9 chapters. Each Chapter will walk you through the process in a simple and easy to follow format. Beginning your Property Portfolio should be a happy and fun experience that you look forward to. Too many people are too scared to take any action simply because they don’t understand how easy it can be. I hope you enjoy this guide and it helps you take your first steps towards financial freedom.

INDEX

1. The Plan – How, What & Where?
2. Get your Finance Pre-Approved
3. Finding the Perfect Investment Property
4. Purchasing the Property
5. How to Buy at a Great Price
6. Waiting for Settlement
7. Revamp/Renovations
8. Leasing out your property
9. Revalue, Refinance and Repeat

Does this sound familiar?  Isn’t it interesting that the common perception amongst the public is that investing is way too risky ?  What’s even more interesting is that if you asked any poor or middle class person how they thought the Rich made their money almost all of them would include ‘Investing’ in their answer.  So if poor people know that wealthy people are ‘Investors’ then why on earth do they believe that it is too risky for them to get involved?

The answer is simple

Humans are terrified of anything that they don’t know or understand.  In the immortal words of Garth from Wayne’s World “We fear change”.

So am I saying ‘Investing is not risky?’ Not at all, in fact if you don’t understand it or aren’t properly educated Investing is incredibly dangerous and risky.  But the same can be said about almost every daily activity that we undertake.  Whether it be swimming, crossing the road, riding a bike, driving a car or even eating a chicken wing – all of these activities would be highly dangerous if we hadn’t been taught or shown how to do them properly.  Luckily for us our parents took us to swimming lessons when we were children but unfortunately for us our parents never seemed to take us to Investment school.  Instead they taught us what their parents taught them about Money & Investing - and that was “to earn money you need to work hard”

Well I’ll tell you now that if you want to become financially successful and a master of wealth creation you will need to step out of your parents shadows and learn that ‘Rich people don’t work for money, they let their money work for them’.

I was first introduced to this concept in high school when I read ‘Rich Dad, Poor Dad’ but it wasn’t until a few years later that I truly understood the concept of having your money work for you. 

When I finished university I decided I wanted to travel the world for 6 months so I began working my backside off to try and finance the trip.  Whilst I was confident of my saving ability in the back of my mind I knew that I could always fall back on some money that my granddad had given me in the previous year.  As an early inheritance he had invested $7k (plus $3k of my own savings) into some shares that I knew very little about (other than the fact that if my ‘overseas trip fund’ was running low I had a backup plan).

To cut a long story short I managed to have the most amazing trip without eating into my Granddads shares.  But more importantly when I was overseas I met a fellow Australian traveler who was funding his trip by trading the stock market in internet cafes all over Europe (earning between $5-$15k per month).  Needless to say my interest in the Stock market suddenly grew and as soon as I got home I decided to see how my own shares were going.

Well to my great surprise the $10,000 that had originally been invested had now grown to $16,000.  So whist I had been climbing the Eiffel Tower and watching the Aurora Borealis in Norway my money had been hard at work.  What an amazing and life changing feeling!

 So how can you learn to make your money work for you?

Well as I found out this question is harder to answer that you might expect.  After learning about my shares success I couldn’t help myself from telling everyone I knew but for some strange reason no one seemed to share my enthusiasm.  All everyone could say was “be careful, the stock market is very risky’ or they would tell me stories about how their ‘nephews, cousins, friend had once lost all their money on the stock exchange’.  At this stage my head was starting to hurt and I didn’t know who or what to believe.  Just recently I found a great quote by Kurek Ashley that summed up the position that I was in perfectly:

“The most expensive advice you will ever get, is free from poor people”

If you look at what this quote really means you will be able to understand why the average person believes that investing is too risky.  It is simply because your typical ‘poor to middle class’ person is receiving their advice from a fellow ‘poor to middle class’ person.  Surely this is a case of the blind leading the blind, or at best the blind leading the severely visually impaired. 

If your child wanted to be a professional gymnast and you knew nothing about gymnastics what would you do?  Obviously you would find the best Coach/School and you would let them teach your child.  Well the same principle applies if you want to be financially successful.  You need to find Mentors, books, DVD’s, Seminars anything or anyone that knows more about Wealth Creation than you do and gradually build up your knowledge.  Then eventually like a professional surfer glides over the waves you can successfully let your money work for you rather than drowning in an ocean of uncertainty and risk.  As Warren Buffet once said “Risk is not knowing what you’re doing”

So you are now faced with a few options

1. Not invest and spend the rest of your life ‘working for money’
2. Invest your hard earned money before you are educated enough, loose  your life savings and in turn become one of those people who tell everyone else that “Don’t invest, it’s too risky, the stock market stole everything I had”
3. Or you can dedicate yourself to learning about Investment strategies and techniques and gradually build up your confidence until  you become a successful Investor and let your money work for you.

So are there risks with Investing? YES of course there are, but like swimming, crossing the road, riding a bike and driving a car once you educate yourself you lower these risks and in turn get to enjoy the wonderful benefits.

Surely NOT investing is the biggest Risk of all.