Investing in property might look like the easiest thing in the world if you binge on a diet of daytime TV, but getting started isn’t quite as easy as Homes Under the Hammer might have you believe.
There are profits and great returns to be made, but there are also pitfalls and hurdles. Here we run through a few things to consider as you look to make your first investment.
What we can’t promise is that if you follow these steps you’ll be a multi millionaire inside a couple of years.
However, fail to follow them and there’s a fair chance you’ll be joining the 25% of single property buy-to-let landlords who are failing to turn a profit.
Step 1 – Have a plan
This one sounds obvious – have a plan. The flip side is don’t have a plan and who would do that?
You’d be surprised though, it’s all too common a problem, investors who seemingly on a whim decide to buy a property with no real sense of whether it’s good value what rental income is possible or how to manage the property. Often there seems to be an assumption that in the worst case scenario they can always sell up and turn a profit. Sadly, the housing market isn’t always so forgiving.
Of course, you wouldn’t do that – the fact you’re reading an article on property investment suggests you’re giving it due thought.
Whether it’s scribbled on the side of a fag packet or stored on the cloud; your plan will need to cover a few basic but important questions. We’ll cover them now.
We believe this is a key question as much of what follows depends on the answer to this step. It generally boils down to how comfortable you feel investing away from home; do you want to invest in property near to home, in an area you know well or are you willing to invest wherever the best returns might be?
There are pros and cons to both. If you’re only interested in investing locally you will have an inherent understanding of prices, know the type of tenants you are likely to attract and also be better placed to manage the property, including arranging maintenance and repairs.
Invest where the best returns are and yields or house price rises might be attractive, you will need to do a lot more research. You will need to know how the area might change, what type of tenants you are going to target and also find out what sort of competition there is in buying a property.
We could go on and on about how to choose the best area, in fact it’s such an important topic we’ve got a blog coming. Watch this space.
Step 3 – Do your research
You’ve decided where you want to invest, now you need to get reading and start asking some questions.
The key thing here is to be thorough. For many, property investment is a full time job and so to be successful if going it alone you need to take it just as seriously. You need to know as much about the local market and trends in general as possible whilst also getting your head round how you will manage the property (or if you want to allow a management company to take care of that side).
What do you need to know about an area? You need to know what properties go for, what the likely rents are and what type of tenant. For example, is it an area where you are likely to attract young professionals, or is it an area with contractors, or perhaps it’s a student town?
If it’s a student town, do you know how to get on the list of approved university accommodation, and how will your figures stack up if the property is unlet over the summer months?
Then there are longer-term considerations in the locality. Some industries are thriving, others are dying, and some towns are sadly reliant on one of these dying industries. If you invest in a town where the main employer suddenly leaves you could have a huge problem on your hands; the smart investor would be aware of such risks and only invest with their eyes wide open.
Research can take many forms. It can be scouring the web for snippets of information, looking at census information and, best of all, just getting to know an area by experiencing it and talking to the locals. They’re a friendly lot.
Research is what separates the successful from the property failures. Yes, you could still see things transpire against you even after thorough research, but at least you will have done all you can. With a fair wind, that should be enough to see a profit.
Step 4 – consider the alternatives
Property investing does not offer a guaranteed return, however for many the returns are significant.
Other forms of investment offer a guaranteed return, however that return is underwhelming at best. It boils down to both your take on risk (even if that risk is relatively limited) and also what you are hoping to achieve from the investment.
This decision is most agonised over as people approach retirement; investing in property offers the promise of a comfortable retirement, but an annuity offers a guaranteed return, even if one which won’t exactly see you going on twice yearly long haul holidays.
On this site we are nothing if not thorough and so we’ve already written something comparing retirement options – you can read it here.
Step 5 – Look to build a portfolio
The most risky type of property investing is when you have a single property. If there are any issues which stop you from renting it out then you only have losses. Bad tenants, flood damage, job losses – there are many factors which can affect the yields on any region and property.
With multiple properties, these issues are offset and so have a limited impact on overall returns. But with a single property this one property IS the returns.
Very few investors with multiple properties fail to make a profit, but of those with a single rental property 25% are either making a loss or struggling to break even.
Do the benefits of having multiple properties change your strategy, would you consider buying two or three properties in relatively cheap areas rather than one in London or other sought-after postcodes?
Step 6 – Do the maths
We don’t need to tell you this, do we?
What yield are you hoping to make? How much is a property likely to cost, how large a deposit will you need for a mortgage and what will the ongoing mortgage costs be, even if only to service the interest.
Would out your likely rental return and you can start working out the potential yield, but don’t forget to factor in periods when the property is unlet as well as maintenance costs and even management costs if not going it alone.
Only consider investing when you are comfortable working out figures and know what effect any changes will have, for example if rental income is lower than expected.
Step 7 – Get your support system in place
We recommend planning for any problems in advance of them happening. What do we mean by this?
Have your contacts in place, if your tenants have an issue with the hot water not wanting, or a roof tile needs replacing you don’t want to find yourself thumbing the yellow pages for emergency help at a premium rate.
By finding reliable tradespeople in advance you can agree fees in advance, while also planning in service and regular maintenance.
Of course, having support in place might also help get problems resolved more quickly, in the aftermath of a storm or flood having an existing relationship with a builder might mean they are able to prioritise your repair.
Step 8 – Do a dry run
We were watching Homes Under the Hammer the other day (it was a tea break) and two separate buyers admitted they had never been to an auction before. They just went along, not really knowing what they were doing, and ended up buying properties for more than they intended to spend.
If you do intend buying at auction, why not go along just to observe first. Get to know the venue, the pace of the auction just so you feel comfortable when doing it for real.
Another common mistake is people neither visiting the property they intend to bid for or even bothering to read the information pack. If you’re going to be that lazy, that lackadaisical you almost deserve to fail.
So, after all that…
There’s a fair amount to think about, a lot for you to do. That’s only to be expected though, you are entering a highly competitive area, yes there are profits to be made but they won’t just happen automatically.
There is perhaps a simpler introduction. At the House Crowd we bring crowd funding to property investment; rather than going it alone you can be one of a number of people investing in a property.
As an example, if you have £50,000 to invest, rather than this being the deposit on a single buy-to-let property it can be used as five £10,000 investments with the House Crowd, with you receiving your share of the returns on each.
With the House Crowd, all the properties are sourced and bought by experts who know both the overall market trends and have local information. This means as an investor you can spread any risk across multiple properties while also investing in property hot spots without having to research dozens of towns across the UK.
Enough of the hard sell though – if you want to know more about the House Crowd there’s a wealth of information on this site.
And whatever you choose to do, information is key. Do your research and take it seriously.