Articles by Salesh Chand
I’m often asked, “What do you look for when buying properties?”
Here are some of my tips.
Know your strategy
Work out your property strategy based on your long-term goals and your household situation. For example, are you looking to build a buy-to-hold portfolio that will provide cashflow from rental income? Are you an experienced investor looking to develop and build houses? Or are you starting out with little capital so need to focus on trading properties to build up enough equity to enable to you to buy hold property later? This will determine the areas and types of properties you are looking for.
If you are just starting out, you will likely need assistance to build up your knowledge so that you can determine your strategy. To do this, attend courses (like GRA’s Property School) and consult property experts before you start looking for properties. If you don’t do this, you could end up buying the wrong property in the wrong area and this could send you backwards financially. (I’m sorry to say I’ve seen this happen more than once.)
Investigate the area
Once you know your strategy and what type of property you are after, you can determine which areas to focus on. Research these areas thoroughly. Is there a demand for the type of property you want to buy?
My strategy is focused on social housing, so I look to see if there is a shortage of rental or social housing in that area. If yes, I’m inclined to invest there.
Choose the right neighbourhood
Once the region is identified, I focus on properties in median to good neighbourhoods. This is a crucial step. Avoid rough or gang-infested neighbourhoods – it will be hard to rent your property, capital growth will be dampened, and it will make your property difficult to sell.
Find the right property
Finally we get to the stage where you look for a property that meets your criteria. Questions you need ask yourself are: Will it appeal to your target market? Can you add value to it (e.g. with renovations)? Does it have problems that will be prohibitively expensive to fix (e.g. leaky building)?
Check insurance availability
Before making an unconditional offer, confirm with an insurance company that coverage is available.
o In New Zealand, some areas are challenging to insure.
o If a property can’t be insured, borrowing against it becomes impossible.
Do your numbers
Investing in property is all about the numbers. If they don’t stack up, don’t do the deal, simple as that. I look for instant equity (making money on the way into the deal) and positive cashflow (meaning the property pays for itself from rental income without me having to inject any cash of my own).
Instant equity can be created by buying below market value and/or adding value by renovating. If the property is worth more than you bought it for, you have created ‘instant equity’, which you can then use to refinance and keep on investing.
Example numbers:
o Market value: $600,000
o Target purchase price: $400,000
o Renovation costs: ~$60,000
o Post-renovation rent: $700–$750 per week
Finding such properties isn’t easy. It often requires tough negotiations or unconditional offers.
As I emphasise in my presentations, cashflow and instant equity are keys to successful property investing. They pave the way to wealth creation and sustainable cashflow.
How do I analyse a property?
Here’s a quick calculation I can perform on my phone:
Out-of-Auckland transaction
o Purchase price: $400,000
o Renovation: $60,000
o Total cost: $460,000
o Interest cost (6%): $27,600/year
o Operating expenses: $10,000/year
o Total outgoings: $37,600/year ($723/week)
To break even, the rent must cover $723 per week.
If the property is revalued at $700,000 post-renovation:
o Instant equity: $700,000 – $460,000 = $240,000
o Equity percentage: 34% ($240,000 ÷ $700,000)
Based on this analysis, I would proceed with the purchase.
Negotiate smartly
After identifying a potential property and confirming that the numbers work (for me that means the property will yield a cashflow-positive return and create instant equity), negotiate with the vendor to secure a deal. This takes both time and practice – and you lose a lot more deals than you win.
Typically, I negotiate with cash offers. However, cash unconditional offers carry risks. You really need to know what you are doing, or you risk buying a property that has issues you didn’t know about.
To mitigate this, most investors tend to make conditional offers subject to a due diligence clause. Occasionally I’ll make a conditional offer if I know there are issues that require further investigation, and I secure the property with a contract that has a one-day due diligence period. I’ve found that if you can make the due diligence period really short, the offer can still be very appealing (almost as appealing as a cash unconditional one).
Final thoughts
Any investment property you buy must meet your criteria as determined by your strategy. You’ll need to analyse the numbers properly, negotiate well, and be prepared to have many rejected offers before you secure the right deal. I recommend that you consult your banker, accountant, and lawyer to ensure the property aligns with your financial goals before signing an unconditional contract. Making informed decisions by having the right knowledge and information is critical when investing in properties.
GRA are a one stop shop for property investment resources. Really liked the examples and case studies in Property School - adds a lot of credibility. - Brenda Muller, June 2019
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