What should you look for when trying to identify that great investment property that is going to prove to be low-risk and profitable.
Written by
Kate Faulkner
PUBLISHED ON
16
Nov
2022
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:
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:
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:
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:
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
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:
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.
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.
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.
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.
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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