The search for cash flow property couldn’t be easier
As a property investment strategy, exploiting the benefits of positive cash flow investment property is becoming more difficult. Rising property values and tax changes have made it harder to find property investment opportunities that pay enough rental income to cover costs.
Many investors now buy property to take advantage of the five benefits of investing for capital growth. By adding a small amount each month to a negative cash flow property investment, in a few years, it’s possible to unlock stunning retirement income.
Though harder than previously, investing for positive cash flow isn’t impossible. This five-step process will help you pinpoint the best investment property opportunities. Following this method, you could benefit from excess rental income within weeks.
Step 1: Use the latest analytical tools
Everywhere you look, you’ll find heaps of data available. You can now find rental prices, property values and running costs in a few clicks of a mouse. These will help you as you progress through steps 2 to 5.
It’s essential to identify the costs associated with an investment property purchase before buying. Without these, you can’t complete the last step of your quest to find the perfect positive cash flow property.
You should also uncover other data that will be needed. It includes:
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- Void period averages
- History of rental in the area
- Breakdown of rentals and homeowners where the property is located
Step 2: Identify the best places to invest in property UK
One of the biggest mistakes that property investors make is buying in an area which is convenient, rather than one that will be profitable. To maximise profits from rental income, you’ll need to invest in a location that benefits from high demand. And that’s probably not around the corner from where you live.
Invest where the property fundamentals are strongest. Here's how people chose to buy property – usually… and it's based on the property fundamentals:
- Transport links
- Major employers
- Major investment
Here's the trick though. Smart property investors use the same fundamentals to invest in properties but in the oppositve order. Those are the order which most affect real value, and drive capital growth. Our research includes is driven by our Hotspots Algorithm. We analyse 108 data points across 324 postcodes across the UK. We rank investment potential for investors and produce free-to-download property investment guides so you know you're buying somewhere strong.
Step 3: Narrow your property research
Now that you’ve selected the best places to invest in property UK, it’s time to narrow your search to specific properties. You’ll find many of the best and most in-demand properties on new developments. The real cream though, the best of the best are those where there are major infrastructure projects about to get started, or underway. Next, investment property near schools and transport hubs. Try and focus on those near to shops and leisure and recreation amenities, including bars, bistros and restaurants. All these help make your property extremely attractive.
Step 4: Before you invest, calculate the gross rental yield
Take time to understand the rental potential of the development you invest in. Remember that even on the same development, not all properties are equal. A top floor apartment may have greater rental potential than a ground floor apartment at the rear of a block. It will likely produce higher demand and a higher rental value, but might be priced lower initially. What's the difference between the two when you look at rent? Are they that different? Does the difference matter?
Calculate the gross rental yield of the property. It will give you a good indication of its potential to produce positive cash flow. A property with a gross rental yield of between 7% and 10% should produce the goods.
You might decide to invest in off-plan property for sale. When you buy off-plan, you’ll benefit from investing at today’s price, and you may get a discount, too. When you come to settling the investment property purchase, you could find you benefit from a higher gross rental than originally planned. Your purchase price has been set. If the property is in demand and its rental price has increased, this will help your cash flow.
You invest in an off-plan property, agreeing to pay £200,000. With the forecast rental of £14,000 per year, the gross yield is 7%.
In two years, the property has increased in value to £240,000. If the gross rental yield has remained unchanged, the new rent will be £16,800. However, based on your purchase price, the effective gross rental yield on your investment is 8.4%. That’s well within the range which is considered a cash flow positive territory.
Step 5: Deep crunch the numbers
Okay, so now you’ve identified:
You’ve also a good idea of the gross rental yield. Now investors need to subtract the costs of owning the property from your rental income to calculate if it will produce positive cash flow or not. The expenses you’ll need to consider include:
- Rental income
- Mortgage costs
- Legal and survey fees
- Repairs and maintenance
- Investment property management fees
- Void periods
- Service charges
Let’s put some of these numbers in, using the example above:
- Rental income = £14,000
- Mortgage = £6,750 (£150,000 @4.5%)
- Legal and survey fees = included in mortgage
- Repairs and maintenance = £700 (5% of rent)
- Investment property management fees = £1,400 (10% of rent)
- Void periods = £1,166 (1 month)
- Service charges = £1,000
- Taxes = £150 (council tax during void period)
In total, your positive cash flow will be: £14,000 – £11,166 = £2,834 = £236 per month
The devil is in the detail… but the hard work is worth it
Uncovering positive cash flow properties is not easy or everyone would be doing it. It takes some work and effort, but you also need to know what you're doing. You need to know where to find accurate information, and how to verify that information. As you can see, when you do find the perfect positive cash flow property, it can be very lucrative.
We’ve helped hundreds of investors find the best UK investment property to achieve their financial goals and achieve the lifestyle they strive for. Our process is easy. We meet with you and learn what you're after, your investing goals. We then do all the hard work for you to find the perfect property investment for you.
Contact one of our team today on +44 (0)207 923 6100. You could be just a step away from investing in lifestyle-changing investment property.
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