If you’re lucky enough to have a tidy lump sum and little debt it’s a dilemma as to what to do with the money. With interest rates at an all time low leaving your money to erode in a bank account is out of the question, there is little confidence in pension funds, the stock exchange is volatile and how do you go about choosing the right fund anyway?
It is hardly surprising that more and more people are looking to invest in property to keep up with inflation as a less risky prospect. Whether this is the right investment choice is hugely debatable, however the popular view to paraphrase is that “you can’t go wrong with bricks and mortar.”
If you are thinking of investing in property just follow the following rules of thumb to minimise the risks:
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Always take a long term view
If your view is to flip (buy and sell in a short space of time for profit) to make a fast buck, even though in the current market it can be quite profitable, it is a high risk strategy and you can come unstuck if the market turns and you really can’t afford it. If you view the investment as a long-term strategy you can ride those cyclical waves, the peaks and troughs of the market that are sure to happen.
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Do your Research
Call a number letting agents in the area and ask their advice. They are likely to be quite helpful as you may be a potential client. You may not get an accurate response but ask about tenant turnover and void periods. It is not in their own interest to have a property on their books empty. Study the property rental websites for your chosen area to gauge the rental income.
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Adhere to the old adage Location, Location, Location and Assess Your Target Market.
If you need to rent the property always ensure that it is in an area with good transport links, in a commuter belt and within walking distance of a station and a short distance to shops and restaurants.
Are there a lot of young professionals who need to rent and what type of businesses, head offices, universities, colleges are there in the area?
As an example a friend of mine has a little one bedroom flat in Newbury, Berkshire. Vodafone has its head office in the town, as well as the AWRE in Aldermaston about a half an hour drive away. It is on the M4 corridor and only a half hour drive to Reading as well as a mainline station with links to Reading and London Paddington. The flat is also within walking distance to the town centre and the station and it has at the very most been vacant for a week or so in between tenants for the last 6 years
Even if you are not planning on renting to students a university city/town will mean there is more demand for rental stock and a likely reduced supply so you are more likely to have fewer vacant periods.
Talking of student lets, these can be really profitable but can also be a HUGE headache and hassle with regard to ongoing repairs and maintenance so my view is to avoid these unless you have the time for regular inspections or factor in the mess that is likely to be left!
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Never Over Gear
If you need a mortgage to buy a property never over stretch yourself. You should always have at least three months mortgage payments put to one side for vacant periods as well as enough to pay for running costs such as council tax and a percentage of income put to one side for longer term repairs and maintenance.
Most mortgages given for Buy-to-Let properties tend to be interest only which is a lot cheaper then going for a repayment. If you can borrow on your own home equity this will of course be a lot cheaper but ensure that you really can afford the repayments.
If you have an interest only mortgage always ensure that there is a surplus of rental income over costs (i.e profit- see note 5 below) that you can save up and pay off lump sums annually. It is then a bit of a no brainer as the rent is in effect buying your asset, which you will own in x number of years. Oh and don’t forget to factor in a rise in mortgage interest rates.
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Consider Percentage Net Yield
This is in effect the “profit” you are making and your return should always be considered before purchasing. The net yield is your net rental income over total cost of investment expressed as a percentage. Although one should also factor in possible capital growth against this. In other words, if the investment will clearly not provide a great rental income, but you are certain its value will increase, the increase in value may out way the poor return.
For example if the capital cost of the property is £250,000 and your net rental annual income (this would be your total annual rents received less expenses such as agents fees, service charges, ground rents, insurance, mortgage payments) is £11,000 , your net yield would be 4.4%.
With current property prices being high, yields today are relatively low however in comparison, your money may not be able to perform better elsewhere and you are effectively using the surplus to “purchase” your asset over the long term. Another point worth noting is that rents are also likely to rise with inflation.
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Consider Possible Capital Growth
My view is also that you should consider percentage yields in tandem with future capital growth and location. This maybe considered as a bold statement but if viewed in the long term your property will go up in value unless there is a huge shift in government policy and developers start building more houses on Greenbelt land. We are (don’t forget) a small island with a growing population so there will always be grater demand than supply of available land to build on.
So when considering an area to invest in, try to choose somewhere with the potential for growth such as the following:
- Try to buy in a “market correction” when you see property prices falling or at best in a slump. Judging “when” of course is always the million dollar question!
- A new build off plan
- Taking advantage of the ripple effect (this is where one area becomes so sought-after that many people find themselves priced out of the market and they will look at areas on the perimeter that may eventually become hotspots themselves).
- Consider a possible “fixer upper” with the caveat that you will need to turn it around for rental as soon as possible.
- There may be an area that is marked for regeneration and is being gentrified (so to speak) with more cafes and small independent shops opening up on the high street
- An area where there is talk of new transport links
Good luck!
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