What Makes A Property A Great Investment?

What should you look for when trying to identify that great investment property that is going to prove to be low-risk and profitable.

Investment Strategy

In theory, property investment isn’t difficult to do. You just have to buy a property and sell it for more money than you bought it for. And if you want to make money from letting, you simply need to rent it out for more than it costs you to run.

Ah, if only investing was that simple!

Many people tell you property is a ‘sure thing’ from an investment perspective and others will tell you it’s a great ‘armchair investment’. But the truth is, property investment is risky. It attracts a high entry and exit fee, as well as high taxes versus other investments. It’s also a real ‘boom and bust’ market. So, yes, it’s possible for property to be a great investment, but it certainly isn’t guaranteed, so it’s well worth investing some time in understanding what makes a property a great investment.

Here are my 7 top tips to help make your property investment a great success:

1. Secure the best experts to help you

Some people are tempted to invest in property ‘alone’ – and many do so because they’ve been disappointed or felt let down when making other financial investments such as pensions. However, as soon as you add another investment property to your wealth, it affects the tax you pay and can even result in you losing things like child benefits. When you invest in property, you’re also effectively starting a new business, investing typically tens if not hundreds of thousands of pounds, so it really is essential to have a good team of independent experts around you to help make the right decisions from the start.

These are the experts that I think you need on your ‘team’, to make sure you invest in property wisely:

  1. An independent financial advisor, who can check your plans, highlight any potential issues and make sure your planned investment is really going to fill the gaps in your capital and income in the way you want. And it’s essential you have this conversation before you make any investment in property.
  2. A specialist property tax expert that can check how an additional property could adversely affect the tax you pay or benefits you receive. They can also advise on the best way to invest to reduce the amount of tax you pay.
  3. A good mortgage advisor. If you’re considering making an all-cash purchase, it’s still important to speak to a mortgage specialist to make sure you understand the pros and cons of investing with a mortgage vs cash.
  4. A great surveyor that’s experienced in buy-to-let. Look for a professional who can not only check for any hidden problems with the property you’re looking to buy but also advise you on what changes will be required to let the property legally.
  5. A local agent who is a member of either ARLA or RICS and understands what makes a good buy-to-let property in the area you’re planning to invest in. Importantly, they can keep you updated on the 400+ rules and regulations you need to abide by in order to let a property legally and safely.

2. Is there a shortage of supply now – and in the future?

Picking the right area to invest in – whether near to you or far away – is critical. What would you prefer to invest in: an area with little economic growth expected, low wages, high unemployment, poor infrastructure, a growing population and plenty of land to build on… or the opposite?

Interestingly, it is possible to make money out of either market, so some of these things don’t matter, but if you want a great investment rather than just a good one, an ideal scenario would be an area where:

  • the population is expected to grow (increasing demand)
  • it’s difficult to build more homes (shortage of land)
  • economic growth is driving wages and employment upwards.

Coupled with finding a great area to invest in is finding a specific property investment that will deliver good capital growth and rental income, but this isn’t easy, particularly since the last recession. Properties are typically strong in either one aspect or the other – rarely both. The trick is to find a property that is:

  1. in short supply in the local area, e.g. a 3-bed detached on a road of 2-bed terraces
  2. suitable for the rental market you want to target, e.g. students, professionals, or short-term accommodation
  3. ideally bought at a price where you can add value, or bought at a discount – ‘below market value’.

So, to secure great property investment, you need to make sure you find an area and a property that delivers solid returns now and will continue to do so in the future.

Related: Where To Invest In Property In The UK In 2021

3. Making money when you buy a property

If you can buy a property at a discount – paying a price that’s below the true market value – that will give your investment an instant boost because you’ll benefit from ‘built-in’ equity from the start. Beware of people and companies that actively market ‘discounted deals’, as they may not be quite what they seem. Only an independent surveyor can really say whether a property is ‘below market value’ so, unless you’re an experienced investor, make sure you do your own homework – don’t just believe the figures someone with a vested interest in getting the deal done is presenting to you!

And it’s important to think about what you’re asking when you want a discounted deal. Basically, you’re saying to the current owner: ”I want to buy your property for less than it’s really worth so that I can make money out of it instead of you”. That’s not an easy sell!

So why would anyone sell to you at a ‘discount’? Here are some genuine reasons:

  1. They need a quick sale. They might be committed to another property, need to sell to pay off debts, be separating from a partner or moving abroad. If you can offer them a quick purchase – especially if you’re buying with cash – they may be prepared to give you a good deal. However, you need to be realistic when you’re looking for deals like these, as there may only be 1 in 150 properties/people that meet the criteria.
  2. The property needs work that most people don’t want to take on. For instance, it’s been diagnosed with subsidence, there’s been a fire or it just hasn’t been upgraded for decades and needs a complete overhaul. When a lot of work is required, it often means there’s less demand for the property – especially if it’s not mortgageable – so you may be able to pay substantially less than the property will be worth when fully renovated, even taking into account the cost of the works.
  3. There are restrictions on the property, such as a right of way through the garden. While homeowners might be turned off by that, tenants might be happier to put up with if it’s not their permanent home.

Essentially, if a seller’s time pressure is greater than their need to get the full market value and you can offer them a quick solution, you’re likely to be able to buy at a discount.

4. Letting it at a profit

This isn’t easy with today’s harsh buy-to-let tax environment and the huge costs landlords have to incur to keep a property in a legal and safe condition to let. And there are more costs to come, including things like making sure a rented property has a minimum EPC rating of ‘C’. Although that’s only a proposal at the moment, it’s likely to come into force between 2025 and 2028.

So, before you invest in a rental property, be very clear on how much it will cost to run, including landlord insurance, and make sure you have a forecasted maintenance schedule so you can budget and make sure you have money available for a new boiler, windows or roof when required.

Bear in mind that when you’re letting property, you’re running a ‘business’ and ‘making tax digital‘ is on its way. So if you still use spreadsheets or this is your first investment, you’re likely to need an approved financial tool – such as an app like Landlord Studio or other online software – to help you track your expenses carefully.

With Landlord Studio digitize receipts at the point of sale, and connect your bank account to reduce manual data entry making your property bookkeeping faster and more accurate. Plus, their award-winning income and expense tracking tools are paired with professional reports giving you granular insights into the performance of your portfolio.

5. Investment or cost?

Many landlords – quite understandably – get frustrated at the increasing costs associated with having to bring rented properties up to a higher and higher standard of living for tenants. However, a well-presented, legally and safely let home should help to improve the property’s capital value and attract the highest paying tenants. So, rather than looking at everything you have to pay out as a ‘cost’, consider what is actually an ‘investment’ that could mean your property is now worth more and/or you could charge more rent.

If you manage to improve the value of your property with rental upgrades, that could lead to a reduction in the mortgage loan to value, which could result in lower mortgage payments. Alternatively, you may be able to release equity and invest in another income-producing property.

Remember that restricting what you spend on a property to save a relatively small amount of money can often be a false economy, in a sector where both standards and tenants’ expectations are rising.

6. Understanding what might wipe out your investment

Whenever you make a financial investment, it’s important to understand the risks and try to mitigate them as far as possible. In the last recession, property values fell by 20% on average and rents fell by between 5% and 20%. This meant that those who had secured high loan to value mortgages ended up on high rates they couldn’t switch away from and some who were struggling to keep up payments sadly lost their properties altogether, as they couldn’t re-mortgage. So it’s worth looking back at property price changes during 2007 and 2013 and working out whether your current property investment or prospective purchase could survive this happening again.

More recently, in response to the Covid pandemic, the Government changed the eviction rules in order to protect vulnerable tenants. That has led to some landlords not having been paid rent for a year or more and not being able to evict the tenant either.

So work out what the ‘break even’ point would be for your own investment and make sure you understand what could lead to you being forced to sell or unable to let your property – and what the impact would be if you couldn’t get a bad tenant out. Once you know the risks, you can mitigate them by having a plan to lessen the financial blow if the worst happens.

7. Contingency planning

Any investment and business needs to have contingency plans to survive, and property investment is no different. So, have you got spare cash to cover the unexpected, such as voids, a boiler breakdown, a non-paying tenant that won’t leave, flood or fire? And have you explored all the different insurance options from guaranteed rental income to emergency repair cover? All of these are worth considering to ensure that if things go wrong, you aren’t forced to sell your property – or even a whole portfolio – and your overall finances aren’t too seriously affected.

It really is possible – especially the longer you invest – to make good money from property, but don’t believe all the hype suggesting that it’s easy and doesn’t require any time or effort on your part. There are risks and it’s important to approach this as a business investment, which means you need to do careful research and take advice from experts to help you achieve the returns you’re hoping for.

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