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10 questions to ask before you buy a rental property

Monday, April 18, 2016


1. Are you ready?
Whoever told you that property investment earns you a passive income is lying. The buy-and-forget strategy makes a deposit not an investment. Before you buy a rental property make sure you are prepared for the hard work that is to come. You will be spending your time screening tenants, managing tenancies (or your property manager), tending to maintenance and repairs, actively looking at value-adding opportunities and crunching the numbers so that you can springboard off this property into a full blown portfolio. As with most things with life, you get out of your rental property what you put into it. If you are not quite ready to take on the extra responsibility then perhaps you are better off putting your money in a term deposit.

2. Have you done the numbers?
Before you sign on the dotted line, make sure you understand the full financial implication of this transaction to you. What is your projected rental income? Have you budgeted for all the expenses as well as contingencies? When all is said and done, is this property a good deal for you? What are the numbers telling you? Do not be tempted to massage the numbers in your favour just because you are desperate for a deal. If you are new to property get someone who is more experienced to go through how they do the numbers on a deal so you know what to expect.
3. How long are you going to keep this property for?
No no, don’t get too excited. The answer is not two years plus one day.
Contrary to popular belief, the bright-line test is not a backtrack on the original intention test. If anything, bright-line has strengthened intention in a way that it is now easier for the IRD to determine an intention for capital gain if a property is sold within two years.  Having a clear and unequivocal idea as to how long you will be holding on this property for will not only give you the opportunity to make adequate tax plans but also inform your overall strategic approach to investing. 
4. How does this property get you closer to your overall financial goal?
For your portfolio to have a meaningful impact to your life, each and every acquisition must have its own purpose. When you become immersed in investor communities such as ours, it is very easy to fall into the trap of pressuring yourself to buy more properties just to keep up with everyone else. Any sage investment advisor will tell you that it is not about how many houses you own but rather your overall net worth. Be a discerning shopper. If this property is not getting you one step closer to your overall financial goal then it is not the right property for you.
Related article: 5 minutes with Lisa Dudson

Related presentation: How to buy a rental property - a closer look at property due diligence

5. What value add potential is there?
Is there any scope for you to add a bedroom or build a minor dwelling on this property to increase your rental return? A lot of investors will tell you that the quickest money you will ever make is to buy a house under the market value. To make a good deal even sweeter, buy one that has untapped potential that you can easily convert into actual value and you will be away laughing.
6. Do you have a crisis buffer?
You know that saying failing to prepare is preparing to fail? Nothing is perfect in life so don’t expect your property to be too. Rent could stop coming in for any number of reasons, the market could turn tomorrow through no fault of your own, your bank could ramp up your interest rate or a tree may collapse through the roof because of a storm. How do you make sure that you continue staying the in market despite these crises? The worst nightmare for a property investor is to have an asset that turns into a burden. Make sure this never happens to you by having a contingency plan in place to see you through the tough times.

Related video:  How to deal with disruptions to your portfolio?

7. What repairs are needed before you can rent it out?
You wouldn’t expect to live in a derelict house and neither would your tenant. If a property is being sold to you cheap would it be because it is in such desperate need of repairs that the previous owner simply couldn’t be bothered to do? Having a complete understanding of what needs to be done to bring the property up to tenantable standard will save unnecessary delays and vacancy after the transaction that will only eat into your return.

8. Will this property attract the right type of tenant for you?
Many of us have a preference for a specific tenant type that suits our overall landlording strategy. Would you rather deal with student or families? In terms of your time and effort, do you get a more rewarding experience renting to professional couples or transient travellers? Having an understanding of what types of tenants you are confident dealing with will help you hone in on issues such as what to buy and where to buy.

9. Why are you buying this property?
For many of us, our first ever property transaction is likely to be for a home rather than a rental. The thing to remember is that a home is an emotional purchase whereas a rental is a business decision. You are not buying a house, you are buying a deal. Have a honest conversation with yourself to find out what exactly is compelling you to buy this property and stick to logical and strategic reasons rather than because you love the curtains.

10. What future infrastructural developments are there?
Major infrastructural developments in the area may have significant impact on the rental demand of your property. Make it part of your due diligence process to find out the incoming public infrastructures that will drive population growth and overall accessibility of the area you invest in.


Come on!  These can't be the only questions a sensible investor would ask.  What else do you consider when you buy a rental property?  Comment reply below!


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