Avoid the disaster of buying the wrong property
According to an October 2016 survey published by the Royal Institution of Chartered Surveyors (RICS), the UK is facing a ‘critical rental shortage’. Its report reads like a promotion for investment property, explaining how and why rental demand in the UK will increase by 1.8 million households by 2025.
However, even with this increased demand, property investors could still lose money. If you’re not prepared with a properly constructed strategy, then you could find that you’ve bought:
- the right property in the wrong location;
- the wrong property in the right location;
- the wrong property in the wrong location; or
- any combination of the above at the wrong price.
In this article, I’ll be outlining seven things that will help you to develop a strategy for your property investment plan.
How strong is the UK rental market?
Before World War II, the majority of people in the UK rented their homes from private landlords. The landscape began to change after the end of the war. In 1948 the NHS was formed, with the government of the day promoting policies that were more socially aware. Hundreds of thousands of new homes were built by the government to replace houses that had been destroyed by wartime bombing. Instead of paying rent to private landlords, people were more likely to be housed in council properties.
In the early 1980s, Margaret Thatcher’s Conservative government encouraged a generation of homeowners by making it easy for people to buy the homes they had rented from local authorities. From being a nation of private renters before the Second World War to a nation of council house tenants in the 1970s, the UK became a nation of homeowners.
However, the Global Financial Crisis (GFC) did more to alter the UK housing market more rapidly than any previous government policy. People have become scared of owning homes or simply outpriced and unable to get a mortgage. According to RICS, in 2001 there were 2.3 million households renting homes in the UK. In 2014, this number had risen to 5.4 million. It is believed this number will rise to 7.2 million by 2025.
While the Conservative government has reiterated that its focus is on home ownership, it’s clear that there is a huge opportunity for profits in buy-to-let investment.
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Take care and benefit from buy-to-let property investment in the UK
Don’t be fooled into thinking that buying a property anywhere will reap big rewards. If that were the case, local authorities around the country wouldn’t have been selling houses for £1. There are many areas around the country where average house prices have not recovered after the GFC.
When you’re constructing your property investment strategy, here are seven things you must take into consideration:
1. You’ll need a larger deposit than a home buyer
Buying a property to let to tenants is viewed as a higher risk by lenders. There was a time when investors could get 100% mortgages, but that was when the lending regulation was lax, and experts said ‘house prices will never go down’. (You can read how good the experts are at forecasting house prices in my article “Property experts – embarrassing predictions”.)
Today, you’ll need a deposit of around 30% before the majority of lenders even consider you as a suitable buy-to-let borrower.
2. Your rental income is likely to vary
Make sure you’re diligent and realistic with your investment property cash flow estimates. Unless you have a tenant sent from heaven, you’ll have void periods to contend with. You may find that you have to be flexible with the rent you charge to minimise these void periods, and you’ll need to be strict about your tenant vetting and referencing procedures.
3. Be aware of tax
Depending on your personal tax position, your rental income, and how your investment is structured, you will probably be liable to income tax and/or capital gains tax (when you sell). There may also be stamp duty to pay when you purchase the property. Fortunately, there are some expenses and strategies that can be used to reduce your tax bill.
4. Start small and gain experience to grow your portfolio
I’ve witnessed plenty of investors who have bitten off more than they can chew, or invested without due regard to their cash flow position and the potential for the unexpected to happen. My advice is to start small – a single apartment, for example – and build your knowledge and experience in a controlled manner.
5. Beware of older properties
There are plenty of television programmes which romanticise property investment. In those half-hour slots, it looks easy to buy a property cheap at an auction, do it up, and then sell it for a massive profit or rent it out for life-changing income.
While this is possible, there are just as many cases where a ‘bargain’ buy of an existing property turns out to be the hell of a money pit. Off-plan property may sell for a premium, but you could save tens of thousands on the cost of renovating an existing property, as well as benefit from lower maintenance costs.
6. Benefit from property investment education
Warren Buffett, probably the world’s most famous investor, gave this advice to all investors:
“The best investment you can make is in yourself.”
By getting a great property investment education, you’ll give yourself the best chance of profiting from your property investment.
We’re committed to providing an exceptional education for all property investors. Our property investment education blog is part of this commitment. Our property investment research is also designed to improve your knowledge and property selection skills.
7. Consider the future and your role in it
What is it that you want from your investment? Do you want to create a passive income stream, or become a landlord who is always on the road chasing rent, repairing burst pipes, and taking midnight calls from irate tenants because a tap is dripping?