Whether you are looking property specifically as an investment or as a home for you and your family you are investing in your financial future so make sure it is a wise investment from the beginning. While property is seen as a safe investment overall because property values often increase at a higher rate than inflation and therefore a property can often double its value in around 10 years, there are still ways to make sure your property works hard for you. You simply need to invest some research time, and you can feel assured of a safe investment when you buy property if you follow the simple tips on this checklist.
1 Compare property values in the area
With such economic uncertainty in recent years housing prices do not always match the value of the property and can be set much higher than the property is worth because demand is higher in a certain area – perhaps one popular with first home buyers who are boosted by government grants – or property can be overpriced if the seller needs to cover an unmanageable loan and debts.
Therefore to make sure you are making a safe investment and not paying more than a property is worth have an official valuation report conducted on the suburb you are looking at or if you have found a property you like, on that particular home. You will often have to pay for these property reports but it is worth the investment to obtain a comprehensive and unbiased valuation of the property and the area.
It is also important to know that you are paying what a property is worth because you are likely to be borrowing the majority of the purchase price and if the property is significantly overvalued and you pay significantly more than it is worth you will have a loan amount which is more than your property is worth and this is known as negative equity.
2 Choose a location with potential
The potential you are looking for will depend on the demographics of the area and this is information which may be included with your property valuation report, but is also information you can find with some simple research on the ground to see what type of people live in the area. It is important to consider the potential of the property and a suburb not only in relation to your needs but in relation to the needs of potential buyers in the future if you plan to move.
Therefore if you are buying in a family dominated area then you will need to look at the potential of the area in relation to the distance to schools and the types of schools available, local libraries and community facilities as well as public transport. If for example you are looking at a location closer to the city this may be more closely targeted at couples who can be interested in how easy it is to get to the city, as well as the proximity of shops, cafes and restaurants.
Also take the time to find out about any new developments which are planned as these can add or detract from the potential of an area. For example development plans for a shopping complex could add potential to a location, but consider whether the vacant parklands are going to be replaced so you still have somewhere to walk the dog.
3 Organize building inspections
Once you have found a good value property in a good area and you have made an offer, it is time to conduct some building inspections so you know exactly what you are getting; most purchase contracts should have the option to be signed ‘subject to building inspections’.
Make sure you have a professional conduct a building and pest inspection to check for any structural issues or infestation of termites for example. If a building inspection does turn up structural issues you can decide to keep looking for a property or if the issue is fixable you can use it as leverage to negotiate a cheaper purchase price. Just keep in mind that a building inspection will not necessarily highlight any pest issues and you will need to get the property assessed separately for both.
Before settlement of the contract your lawyer or conveyancer will also make sure to conduct a title search and a land survey to make sure there are no restrictions on the property and that it is built within its boundaries and any additions have been made with council approval, because once the property passes to you, you become liable.
4 Compare home loans
Your choice of a good value, well fitting home loan is as important as finding those characteristics in the right property because the easier it is to manage your loan, keep the rest of your finances stable and repay your loan to build equity in your home the more valuable your investment in property becomes. Therefore as you take the time to compare home loans make sure you consider:
- What you need and how will use the loan. Whether you are buying your first home or your fifth property you will still be able to look at your financial situation and understand your spending and cash flow habits to help you decide what you need from a home loan. For example if you are a first home buyer and have scraped together all of your savings to reach your deposit amount then you may benefit from comparing home loans with a honeymoon interest rate so you can ease into home ownership with a lower repayment. Alternatively if you know this property is just your first step towards buying your dream home then you will want to make sure you choose a variable interest rate which will offer you lower exit fees when you upgrade.
- Calculate for the additional home loan costs. Insuring your property is a safe investment is about making sure that you can afford it and when it comes time to apply for home loan you will need to budget for more than just your deposit and repayment amounts. There are also application costs, lenders mortgage insurance, stamp duty, valuation costs, bank legal fees and home loan establishment fees which can differ between lenders, but as a general rule if you are providing a 10% deposit on your home loan you will need to allow another 10% of the purchase price to cover these costs.
- Decide on your deposit amount. On a standard loan if you provide more than a 20% deposit you will not have to pay lenders mortgage insurance because you are less of a risk as you have borrowed less of the property value. Lenders mortgage insurance protects your home loan provider if you default on your loan and if you are contributing a deposit of less than 20% of the purchase price then you will be looking at potentially thousands of dollars of insurance to protect your lender.
Choosing a property and comparing home loans is a very involved process and it can be made more complicated because every property and every buyer has different needs. However the best way to ensure you are making a safe investment is to understand your property needs and financial situation, and then go about matching those needs to property and a home loan which best suits you.
Alban is a personal finance writer. He helps people to take the next step in the property market and provide information on how to