In this article, we talk about property investment referring to buying and holding for the long-term, as in 10 years or more, rather than an entrepreneurial activity where one buys with a view to renovate and sell.
There are many buy to let mistakes you can make when purchasing an investment property.
Cash Flow
Most property investors will name financial freedom as the primary reason for investing in property. Generally, the main way you can achieve that financial freedom is by replacing employment income with passive income from your investment, in the form of cash flow.
So, it stands to reason that cash flow is most important, right? We find that most investors and would-be investors start out with a default position of “cash is king” and simply chase cash flow as their main form of investment return. This goal is all well and good so long as you already have a sufficient asset base to generate an acceptable level of income to enable you
to replace your income. Capital growth is quite important in the cases that you are investing a small proportion of the property in the deal. For instance; £50,000 invested in a £200,000 property that doubles in 10 years mean that you’ve turned your £50,000 into £250,000. Do that a few times and you will achieve your £1M and be able to generate the required £50,000 per annum. Tenant Eviction and Rent Recovery
Buying Cheap
Why wouldn’t you want to buy cheap properties? Well, unless you are buying at the bottom of the market and able to get good quality properties in good areas that are being sold in distressed situations, then usually “cheap properties” are cheap for a reason. The lack of demand for the property is due to a lack of desirability. Unless you are going to do something significant to change the lack of desirability, like a major refurbishment or a complete knock-down and rebuild, then that probably won’t change. You want to invest in a property with growth or rental return potential.
Supply and demand drive the property market. So, you want as much rental and buying demand as possible as that will drive your returns. The desirability to potential tenants and future buyers is of utmost importance. If you have the most desirable property in an area, then you can have confidence in high demand. Landlord Tax on holiday lets
Target Market
Understand who is your target market is and what they want. Analysing the socio-economic levels and demographics of an area is key. Look at average incomes, vacancy rates, unemployment rates, household make-up, average age etc will help you understand who your potential tenant and resale market will be. One way to do this is to analyse census data. However, these are only done every 10 years. So, depending on how long since the last census, this data can be out of date. You must understand what your target market wants and make sure the demand is skewed in your favour. If you’re investing in an area that has high single occupancy rates then a one-bedroom apartment is probably the best purchase, if you’re investing in a family oriented area than a 3-bedroom house probably makes the most sense, or possibly a 2-bed as a single family home. How do mortgage lenders calculate affordability
Emotional Buying
A recent report stated that 90% of all buy to let investors buy within 5 miles of their own home as that is the area that most people are comfortable with as they know the area well. They can go around to the property whenever it is necessary. This isn’t generally the best strategy as there is the high statistical probability that the chances of the best investment being within that circle are fairly slim. Not impossible but slim to say the least. This is where seeking advice on what is most suitable for your situation becomes of utmost importance. An experienced and qualified property advisory company can assess your situation and conduct thorough due diligence on finding the most suitable investment opportunities from the entire market to ensure you make the best possible investment and achieve the right outcomes. How to check if a property is gas safe
Fearing Debt
Many investors spend a large portion of their time trying to reduce the mortgage on their homes and achieve a debt free position. So, why would they now want to go out and leverage themselves again?
For instance, turning £50,000 into £250,000 with your property investment, if you invested that same £50,000 in cash and the investment outcomes were the same (doubling over 10 years) you’ve turned £50,000 into £100,000. This is £150,000 less than the geared example.
In the current low-interest rate environment where mortgages are being offered at 2-3% and properties are yielding between 4-10%, it simply makes sense to have some leverage to take advantage of the difference. Bills included rent
Fearing Leasehold
We have all heard the horror stories of service charges rising exponentially. What we don’t often hear though is the costs associated with freehold properties.
In usual cases, the costs of maintaining a freehold property are often higher than maintaining a leasehold apartment even after service charges.
Over the past 20 years, apartments have outperformed houses in terms of capital growth and rental yields and most apartments being leasehold. They also tend to be located in populated areas. So, disregarding leasehold apartments could be a big mistake.
The point to make here is that both types of properties can be good investments. You should consider all properties on a case by case basis and with an open mind. Generally, new or near new properties are lower maintenance and more passive. Hence, they incur less risk of high or rising costs. However, new builds don’t tend to increase in value in the first few years.
Cost Calculation
Rent – Minus Mortgage Repayments = Net Income
Is this how we should be calculating rental income when buying a property? Anyone with property experience would tell you that is absolutely not the case.
Costs that need to be considered include;
- Maintenance
- Management
- Lettings
- Service charges
- Ground rent
- Re-Mortgaging
- Tax & Accountant fees
- Mortgage repayments
Then there are also capital costs (entry costs) and exit costs such as;
- Stamp duty and Land tax
- Capital Gains tax
- Agent’s fees
- And the list goes on for specific properties
This list may seem long and they will not all apply to all properties but you are always better of over accounting for costs and under-accounting for returns and then you shouldn’t be disappointed. if you’re unsure what costs will apply to your properties or a property you are considering, seek advice.
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