Do You Want to Invest in Property?
Is now a good time to invest in property? Are we still in a property bubble? Are there better ways to invest: pensions, stock market? Will property prices stagnate for years to come? Doesn’t owning property create too many headaches?
Although we cannot predict what will happen in the short term, history shows us and there’s much convincing evidence to prove that over the next 10 to 20 years property prices will continue to add to your wealth.
Property has two things that generally other forms of investment don’t:
- You can borrow safely against bricks and mortar using the property itself as security
- Property produces a very respectable positive cash flow income, month on month, year on year
The housing market is still feeling the effects of the massive overcorrection brought about by the lending debacle and the economic recession of recent years. If you can see past this, you may begin to expect average annual rates of return for property to stabilise and increase because a growing and expanding population will always need housing and roofs over their heads.
Becoming a landlord can be a daunting prospect at first, but with a little experience and a bit of effort applied to getting yourself organised, you will find that property management is quite straightforward. Many do it as a side line to a full-time job, and some go on to make their growing property portfolio a full-time occupation.
Generally property can outperform all other types of investment for the following reasons:
- Provides dependable and growing rental income
- You can borrow against the property and effectively your tenants buy your asset over a number of years
- You can make a big gain when you buy – buying below market value and getting a bargain should be the aim of all property investors – that way you make a profit when you buy.
- Over the long term the value of your property will increase and is the best hedge against inflation.
- You can add value to your investment by making sensible improvements – adding a bed room, improving the view, landscaping grounds, the possibilities are endless.
- As landlord you enjoy certain tax concessions like being able to claim expenses for managing your property.
What should I consider before Investing in Property?
History shows that those with the courage to go against the crowd, to buy when the market in down, the so called contrarian investors, are the ones that make the real money. In reality, most people do just the opposite. They only get interested when the media frenzy of a property boom shows that everyone and his dog is making a killing, so, eager not to miss the boat, they jump in at exactly the wrong time, when the market is beginning to peak.
There are three keys to success with any investment: research, research, research!
- Talk to other property owners and get their views. Find out what it’s like to be a landlord and the business prospects. Find out how they did it. Consider joining a local landlord’s association and go to their meetings.
- Research the local market and get comparables: walk the streets, talk to letting agents, search the rental ads and see what demand there is, what prices and rents they are asking. You may even pose as a prospective tenant, making enquiries and doing some viewings – it will give you a chance to see just what’s on offer and what competition you will have.
- Beware of “hand-holding” so-called investment advisers and properly sourcers. Some are good, but many are out to make a “quick buck” and will put you into any old rubbish so long as they can make a profit out of you. Take responsibility for your own research and decisions, even if you do use an adviser. Always ask to speak with their previous investors before committing to anything an advisor brings to you.
- Think about distance. Managing a property at the other end of the country, or even 40 miles away, is difficult unless you use an agent. Agents are fine so long as you employ a good one, but make no mistake, there’s no such thing as a passive “arm chair” property investment, even when you pay an agent to manage it for you. Don’t believe anyone that tells you otherwise.
- Keeping things local means you are in a position to not only know the market well, you can save yourself a lot of money, usually around 15% of the rental income, by learning to market and manage tenancies yourself. If you can do a bit of DIY, most landlords do, and then you save yourself even more. Rentals will always need a “lick of paint” between lettings, and wielding a paintbrush and roller should not be beyond your skill level!
- Be comfortable with your financing arrangements. The services of a good finance broker – see the long established www.LandlordMONEY.co.uk – one who knows the mortgage market inside out, is invaluable. You need to consider carefully whether you can afford to take on a significant investment, so the experienced advice from the broker will be very important.
- Be prepared for a lot of extra work in the early stages, especially if you want to embark on improvements and refurbishment work, so assessing your free time is important. Make sure your family are fully supportive of your venture, and see the long term benefits, otherwise it can put intolerable strain on a relationship and children might miss out on family time.
- Be prepared for a period with no rental income whilst your property is being prepared and during a period of marketing. Your research should tell you roughly how long it will take to find a suitable tenant, but there’s no guarantees here.
- Budget for income and expenditure over a 12 month period into the future. You do this using a cash flow forecast – a spread sheet that lists income, minus expenses leaving a remaining balance in the bank, month by month. With experience you will be amazed how accurate you can get with this forecast and it puts you in good stead to run any business. You lenders can see that you are “on top of the game” and know exactly what your future finance need will be. This exercise will give you a good idea if your investment is viable – cash-flow positive – before you commit.
- Make sure you have good insurance cover and factor in the cost, especially during any refurbishment / development phase, but also once the property is tenanted. Your biggest risk as a landlord is third party liability – someone being killed on injured on your premises – you need £5 million cover.
- Allow for the cost of marketing you property, or if you decide to use an agent, the cost of the agent’s fees. Always check out potential agents to make sure they are members of recognised professional associations. If they are not your rent and deposit monies may be at risk – members of the main professional association must have an insurance bond and use separate client accounts.
- Don’t go overboard on the quality of kitchens, bathrooms and other facilities when refurbishing – remember this is a rental which need to make a positive return, not your own home. You need to factor in that kitchens and bathrooms may need replacing after 10 years or less and carpets may need replacing after 5. Estimate the cost of maintenance and repairs over a 12 month period. Keep some cash in reserve for unexpected bills.
- Do your homework and learn the skills necessary to become a successful landlords. There’s lots of information on LandlordZONE® to help you do this.
Not everyone is suited to be a landlord, so you must factor in the cost of using help, agents, trades people, if you are to go ahead. You should be cautious; otherwise your rental property investment could lead to financial problems. Taking on a large mortgage commitment is long term and should not be taken lightly; you just can’t afford it without a positive cash flow investment.
New Landlords – More Articles in this Section:
- Letting for the first time
- Am I suited to becoming a landlord?
- Preparing the Property
- Marketing the Rental Property
- Sealing the Deal – Offers and Deposits
- Check-In and Check-Out
- The Tenancy Documentation
- Dealing with Agents – Fees and Costs
- The Tenancy Documentation
- The Main Landlord’s and Tenant’s Responsibilities
- Useful Links and Contacts
By Tom Entwistle LandlordZONE® ID2011
©LandlordZONE All Rights Reserved – never rely totally on these general guidelines which apply primarily to England and Wales. They are not definitive statements of the law. Before taking action or not, always do your own research and/or seek professional advice with the full facts of your case and all documents to hand.