Is that cash flow property investment worth the risk?

Tips for successful property investment from day one

Property investment today is being questioned as a worthwhile strategy. Affordability is the issue, with some property experts saying that property prices are overvalued. In September 2016, for example, UBS said that London property prices are the second most overvalued in the world.

I don’t hold with the view that property is overpriced in the UK. Demand is way higher than supply. PwC forecasts that the number of households in the private rented sector is set to increase from less than 6 million today to more than 7.2 million by 2025. Property market dynamics would have to reverse for property investment to be a bust here.

However, if you’re beginner investor, it can be hard to have faith in a market that ‘feels expensive’. Instead of investing in a property that you hope will rise in price, you should consider investing in a property that will produce income.

In this article, you’ll learn:

  • The most common property investment error uneducated investors make
  • What positive cash flow property investment is
  • A simple calculation to evaluate your investment
  • How to reduce risk when you invest for cash flow
  • My top tips to make the best property investment for cash flow

Avoid this classic beginner investor mistake

One reason property prices keep on rising is that uneducated investors buy without doing proper research or due diligence. They see property prices rising, get scared they’re going to miss out and buy at any price. They hope that their investment will rise in value and make a packet when they sell.

This strategy is guaranteed to cost you your shirt. If not on the first deal, then on a subsequent investment.

What is positive cash flow investment?

Instead of buying a property hoping to make a killing from a rise in value, a more conservative approach is to invest for positive cash flow. Your main gain will be a stream of steady income:

  • Investors who buy stocks for cash flow receive their income by dividends. It is usually paid quarterly.
  • When you invest in property for positive cash flow, you’ll benefit from monthly rental income that pays more than your costs.

You probably won’t experience the excitement of a large and fast jump in the value of your investment property. And you probably won’t feel the pain of a collapse in your property price. Instead, you’ll have joined the real game of property investment: steady wealth-building.

Short-term market fluctuations don't concern long term cash investors. They’re building wealth towards a goal, and are less likely to make poor, emotion-led investment decisions.

Evaluating your investment

You’ve done your property investment research and are buying in the best places to invest in property UK. How do you know the investment property you’re considering compares well with other income-generating assets? You need to work out your real yield. This is an easy calculation which takes no more than a few seconds to make:

Let’s say you’re considering a property for £200,000:

  • You’re going to pay a deposit of £50,000 and benefit from leveraging using a buy-to-let mortgage of £150,000
  • The mortgage plus other costs total £1,100 per month
  • Your rental income is £1,400 per month
  • You net  £300 per month – or £3,600 per year

On your original cash investment of £50,000, your real yield is 7.2% (£3,600/£50,000). That’s a decent yield.

How to reduce risk when you invest for cash flow

There are several strategies you can use to reduce risk when investing for cash flow. These include using a buy-to-let mortgage broker to get the best mortgage deal, structuring your investment to pay the least tax, and ensuring you get great tenants.

Apart from these strategies, always do your property research. Invest in value. Buying in the best places to invest is always rewarded in the long term.

Top tips for beginner investors in cash flow property

Investing in cash flow property is a good way for beginner investors to get started. It helps to start small and learn about property investing, including the emotional aspects. It’s also a great strategy if you are investing in creating retirement income, and build a wealth pot to leave as a legacy to your loved ones.

Here are three top tips for investors who are starting in cash flow property investing:

1.      History repeats itself

History is no guarantee of future returns. However, history does repeat itself. Property prices in the UK have doubled on average every seven to ten years. That’s been true since the end of World War II. Every downturn (of which there have been few) has been followed by a strong rebound in prices.

2.      It’s not all about yield

Don’t invest simply because a property offers the highest yield today. Make certain that the property you buy is one that will perform in the long term. Invest in a property that benefits from the property fundamentals to support tenant demand and property value: shops, schools, transport links, major employers and major investment.

3.      Get educated and get help

There is no need to go it alone. Get help, get advice, and get educated. Every minute spent with a property consultant, reading investment education blogs and articles, digesting property investment books, and researching potential property investments is a minute well spent.

Contact one of our team today on +44 (0)207 923 6100, and we’ll help you discover the best property investment opportunities for market-beating real yields on your investment. Unless, of course, you’re happy to leave your money earning 1% in the bank (if you’re lucky).

Live with passion

Brett Alegre-Wood

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