It is a well-known fact that property is an excellent asset. This is precisely why a lot of people are doing it while others are already thinking about jumping on the bandwagon. And with 2018 seen as a better year in the housing market for first-time buyers, now is a great time to decide.
But as with any other kind of investment, property investing has its risks. For instance, the prices of properties and demand for rentals can go up and down. Another risk is if you are ‘over-invested’ in a property such as when most of your money is tied up in a buy-to-let (BTL) property. This can potentially put you in a tight spot when the housing market slows down.
To avoid these risks, it is recommended that you diversify your investments. Additionally, you also have to consider the following, especially if you’re a beginner:
Decide which investment property you want
There are a couple of ways that you can invest in a property. Basically, you need to decide what you want to do with a property after buying it. For example, you may decide that you want to buy a property and let out to someone else. If you do it this way, know that being a landlord is not the simplest of tasks so you may want to consider using a managed letting service.
You can also venture into property development where you buy a property, develop it, then sell it later on. Buying a new build to sell, on the other hand, has its appeal since it is a cheap investment that you can sell for a profit. However, the risk lies in the fact that you don’t know how the property and the area where it’s situated in will end up once everything is completed.
Finally, there’s the option to invest in properties abroad if you think that you’ll get bigger returns than investing in the UK.
The condition of the property
Regardless of which type of property investment you want, the condition of the property is always something that you need to consider carefully. As such, it’s critical that you carry out a house survey before you give it a go. This survey will provide you with valuable information that will work to your advantage.
If there’s a property that you are eyeing on for investment, you can use a not-so-good survey report to adjust your offer accordingly. Furthermore, you can utilise your DIY skills to deal with minor works that need to be done like making a small room look and feel bigger, for instance.
Any important job should be handled by professionals. What you’d like to do is get a quote from at least three reputable contractors. Choosing which one to give the job to should depend not just on how low their quote is. More importantly, your decision should be influenced by how long it takes them to complete the job as well as the number of people vouching for the quality of their work.
It’s also worth noting that you should never underestimate the potential to add value to any property. It’s true that a property that is ready to let will save you a lot of time. However, being able to add value to property especially with minimal refurbishment can possibly increase your ROI (return on investment) significantly.
Not only is the condition of the property, but also its location is something that you need to think about before investing. For your first investment property, consider choosing an area with a mix of homeowners and private tenants. This should help keep the house prices and rental prices affordable by balancing the demand for both groups.
Of course, the location wouldn’t matter much if you are buying a new build to sell. But if you are buying to let, choosing an area wisely is vital. Otherwise, your investment property will just sit there without tenants, and you’ll lose money in the process — it should be an area where tenants will want to live in.
The first on your list when choosing a location is safety. After all, no one wants to live in an area where the crime rate is too high. The rest will depend on your target market. If you’re going to rent to families, the area should have well-known schools. Transportation should be easy as well and there should be access to amenities such as malls, groceries, parks, etc.
Naturally, you can’t start investing if you don’t have the capital to do so. If you have a full-time job, it’s just not about working out your income. You also have to factor in the money that you have and how much of it you are willing to spend.
Sure, you can take out a mortgage to get you started, but it’s not as simple as that. You need to decide how much deposit you are able to afford. Many lenders will require at least 25% of the property’s value, and there are some who’ll accept just 15%. Taking out a mortgage has its risks as well that you need to be aware of.
First, there’s no guarantee that you’ll be able to earn enough rent to cover for your payments. And if you are buying to sell, you can’t expect that you’d be able to get a buyer immediately. Second, the cost of the mortgage might rise. Third, the bank or building society can take the property back should you fail to make your payments.
That said, it’s vital that you take into consideration how much your mortgage payment is going to be before deciding how much to rent out a property for. For example, if your mortgage payment is £500 monthly, most lenders will expect you to rent out the property for £600 (120%) or £625 (125%).
And don’t forget to take into account other expenses such as repairs, refurbishments, agency fees, and other unexpected costs down the line.
Have an exit strategy
It can be challenging to understand the concept of an exit strategy especially for those who are new to property investing. But the truth is, an exit strategy is crucial not only for when you retire but more importantly if things don’t go as planned. It might seem premature to think about it when you’re just starting, but it will actually save you the trouble when the time comes.
So what do you do when things don’t go as expected or when you decide that you want to stop being a property investor? Here are a few:
Sell some of your properties
This is an excellent exit strategy especially if you own multiple properties. The idea is to sell just enough of your portfolio to pay off all your debts. After this, you are left only with properties that you own outright, providing you with a steady source of income for as long as you need.
If you decide that you don’t want to have anything to do with property investments, then, by all means, you can sell all of them. If you go this route, however, you will be subjected to capital gains tax if you decide to invest your money in a different asset.
Buying to hold
This exit strategy is when you buy a property and keep it indefinitely. You can then rent it out for as long as you want, refinancing overtime to harvest dead equity.
These are just the basics of property investing. There’s a lot more for you to learn which can only come from experience and a whole lot of research. Investing in properties can be very rewarding but making mistakes can be really expensive so keep that in mind.