3 Critical Consideration When Choosing a House

Jordan

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When it comes to investing, there’s two thought processes that plague my mind.

The first is the entirely logical process that weighs profitability in the balance and nothing else. If I lived constantly in this mindset, I would only ever buy index and mutual funds. They’re reliable and return a constant yield over time with virtually zero maintenance or thought required.

I honestly wouldn’t own any property if I always thought with complete clarity and had no impulses or emotional involvement.

The other side is the excitable and impulsive part of my mind. It was this side that compelled me to buy Disney shares (way too late in the game) despite the slow growth and tiny dividend yield.

It was also this side that was responsible for both houses I bought.

Luckily, my compulsive mind is still that of an investor, so it doesn’t run free of having to obey the gods of numbers.

Each house was positively geared and returned a decent yield each year. However, they’ve both come with a lot of work and a fair amount of unexpected expenses.

Because of the work and the expense, I can never recommend an investment property over good old fashioned index funds.

But as reliable as index funds are, they’re not enough to satiate my wild side. The part of me that wants to own something, another piece of planet Earth that belongs to me; that side just isn’t going to go away.

So here I am again, looking for something on the market in 2020 that’s going to make sense as an investment. So what am I looking for this time?

1. Numbers

Nothing in the world matters more than the numbers.

I don’t care that the house gave you a magical feeling when you walked inside, and I couldn’t care less that the view took your breath away.

What amount of rent does that view fetch? How does that rent stack up against your expenses? All you should care about is that you’re positively geared and actually making a profit.

This is an investment, never lose sight of that for the romance.

My definition of Positively Geared may not be the same as yours.

Positively geared to me means profitable right from the start.

Right from day one, all of your expenses are covered by the rent being paid by your tenants, and there’s still money left over.

It’s completely fine if what’s left over is very minimal, because that will grow over time.
As rent goes up and your mortgage goes down over the coming years, that margin will increase. But it has to be above zero from the very first day.

“But I got told it counts as positively geared because I’m only losing a small amount per month..”

I’m sorry, but you’re negatively geared. Even if you predict you’ll be positively geared in 5 years, you can’t claim it now based on assumptions.

Even positively geared properties can still lose money for the first couple of years. Tenants move out, Governments enact new laws, people get sued, things happen. But starting in a place of profitability gives you the best possible leg-up when things do go wrong. If you need to withdraw money, you’ll have wiggle-room and cash to spend.

If you’re starting from a loss position, you’re only sinking further and further every time something goes wrong.

Think about it, you’d never buy a business that was losing money right? And no amount of promises from the broker about how things will improve in the future would ever change your mind about that.

Ventures that aren’t profitable have a bad habit of sinking further and further as time goes on.
Have you ever heard of a friend referring to their investment property as a money pit? It didn’t have to be that way. They could have taken the numbers more seriously.

No matter what, the numbers are god. End of story.

They’re god.. Say it with me..

The.. numbers.. are.. god.

2. Tenanted

Some investors are too confident that any beautiful home will have no trouble finding a tenant.

Unfortunately, finding a tenant can be tough for even the best homes.

Maybe the cost is too high, maybe you’re in an inconvenient spot for schools. Even tiny things like a noisy dog next door can mean death for finding and keeping tenants.

Because of this, I will go to the ends of the Earth to keep a good tenant. I’ve replaced carpeting, re-painted walls, all in the name of locking down a great tenant.

I love to make deals with my tenants, such as offering rewards for milestones. When my current tenant asked for a new wall-mounted air conditioner, I told him I’d install one at the end of his second year. Guess what? He stuck around and got himself that air conditioner.

Don’t worry, I didn’t let him freeze to death, he had a floor unit. The wall-mounted air conditioner was a luxury, so I created a situation that benefited both of us.

So when I’m looking for a property, you’d better believe that I’m looking for places that are already tenanted with people who love it there and aren’t looking to leave. Families with kids or pets are great. Situations where it would be inconvenient for the family to leave are perfect.

I don’t say that with the aim to exploit them, only to say that I’m far more interested in a long-term partnership than spending time and money trying to find tenants several times a year.

That being said, factor into your numbers that you could be untenanted up to four months out of the year, each year.
Make sure your numbers still work, even with this fact added. If not, you could find yourself negatively geared, and that’s the worst thing you can be.

3. The Local Area

I assume that if you’re looking for an investment property, you’re not just looking in your local town. I hope you’re looking all over the country for that perfect deal.

Nailing a purchasing price that falls in the rental price sweet-spot is nothing short of black magic, so you need to be casting an extremely wide net.

If you spot a great deal in a town that’s far from where you live, I strongly encourage you to call the local council and find out everything you can.

Folks who work at the council are usually bored as hell, and many are more than happy to spend an hour gabbing on the phone about the new highway they’re planning, or the beach-side development that’s just been approved. (A development that may block views for everyone else on the block).

They’ll also be able to fill you in on all of the expenses you’ll be responsible for once you buy into the town and district.

All councils (at least in Australia and New Zealand) charge annual rates to all home owners in the area, but the amount can vary a lot.

Interestingly, some areas fall inside the zones of two or three different councils, so you could owe rates to two or three different bodies of Government.
Ignorance is no excuse for missing a payment, so you could find yourself in court if you pay one, but neglect to pay another.

The broker or your property manager should make you aware of these situations, but mistakes happen.

If you’re able to physically go where you’ve spotted a great property, find time to make the trip.
Check out the area, and most importantly, talk to the locals.

Your real estate agent won’t tell you that there’s a dangerous gang headquartered down your street and that’s why the asking price is so low, but the local baker will! Find out every scrap of dirt before that dirt becomes your problem.

Wrapping it up

Buying a house is rarely the smartest investment in my opinion, but it’s certainly the most exciting. So if you decide to take the plunge, take your time and do it properly.

Buy all the reports the local council will sell you, and find out every tiny, dirty detail about your house and the local area.

But most of all, make sure those goddamn numbers sing the tune of profit, because for so many people they just don’t.

Many people allow themselves to become negatively geared just because finding a profitable investment can feel impossible. Trust me, it’s not. You just have to keep looking, and you’ll find the winner eventually. Once you do, it’ll be worth it.

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I’m a well travelled writer who loves nothing more than a well polished video game, an expertly crafted sandwich, and a hot mug of Milo.

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