Investing in property is an expensive and complex process, so it’s important to get it right first time. As your experience and knowledge grows, so the rules become more like “guidelines” to consider, but for the first-time investor it’s critical to maximise your odds of the success.
What follows are some of the more common mistakes made by inexperienced real estate investors, in order to help your first experience of buying investment property a successful and enjoyable one…
Knowledge, as they say, is power. Never is this more true than when stumping up for your very first property investment. In general, it’s better to carry out thorough, detailed research on any area, market or property type before you push the button.
Better to miss a few good deals along the way, and approach your very first purchase with confidence, than to find yourself saddled with a dud that is haemorrhaging money and nobody wants to buy off you.
But what should your research entail? Here some smart ideas to get you thinking…
Property Prices – How much are properties in your target area worth? What factors are affecting these prices, what can be done to increase the value of a property and what is the ceiling on rents?
Each area will typically have these market limitations – your goal should be to educate yourself enough that you can spot a well-priced property, you can quickly identify effective ways to increase the properties value, and you have a fair understanding of how much rental income you can expect.
Marrying these elements together ensures you go into a purchase with your eyes open, confident that you’re buying a property that stacks up financially.
Local Audience – Who is renting properties in your target area? Are these young professionals or families, for example? Investigate other rental properties, asking yourself what these potential tenants may like to see in a property.
Also, consider the specific location; will your tenants need access to transport routes, for example, and are those trendy bars down the road a good thing or a bad one?
Predicted Market Conditions – The property market is never static. Areas rise and fall in popularity. New employers and urban regeneration can rapidly turn a less-appealing place into a property hotspot. Just as importantly, interest rates can (and do) go up. While it is impossible to predict the future with any degree of certainty, it does make sense to run a number of models to see how you could be affected.
While investing close to where you live may cut down on the research necessary, it’s important to realize that rental yields can vary massively across the country. In the UK, for example, 2016 saw a 2.2% drop in London property, while investment properties in Manchester offer far better rates averaging 6.2%.
The same pattern plays out in each country, at various scales. Even within a single city the yields can vary dramatically from one area to another. So while doing your research don’t just limit yourself to the area in which you live. Instead, be willing to think “outside the box”, using local agents if necessary, to source and manage properties wherever your returns are likely to be greatest.
Just as each area experiences oscillations in property prices, so too do interest rates. While these rates have been held at a historically low rate for the last few years, this is unlikely to last much longer.
Sadly, as interest rates rise, so too do the costs of variable-rate mortgages, leading to home-owners getting squeezed. It’s all too easy in the good times to stretch yourself too thinly, only to have a nasty surprise as rates rise.
Do your calculations so that you are confident you can weather interest rate changes without discomfort, and hold onto your investment property for the long term.
No property is free to run. While your tenants may pay all the utilities, as well as their rent, you also have a range of ongoing costs. From managing agents fees, to routine maintenance and taxes, the income you enjoy is unlikely to be 100% profit. Also, don’t make the mistake of assuming that your rental property will be tenanted every month of the year; tenants move out and it can take some time to find a suitable replacement.
When investigating your first property investment, therefore, don’t just consider your finances in terms of rental income minus mortgage payments. Instead, take a more intelligent and nuanced approach to your business plan, and only take action if you’re confident it still produces reliable, positive cashflow.
You might think it was foolhardy to buy a property without not only an inspection but also a thorough surveyors report. Yet all the same, every year investors get stung for their lack of research.
Arguably even worse are those who request the necessary surveys, then largely dismiss the findings. All too often, this ends in tears, as the buyer is obliged to fork out large sums of money to return the property to a suitable state.
This is arguably the easiest mistake of all to avoid. Seek the qualified guidance of a professional before purchase, and discuss indepth any potential issues that they have highlighted.
Since the financial collapse of 2008, banks have slowly tightened up their financing options for landlords. There are now fewer choices than ever before, and it’s all too easy to end up paying far more than you need.
From deposits to interest rates, from paperwork requirements to insurance, each lender is different. So don’t jump at the first offer you get, but instead shop around in order to find the very best deal possible. Sometimes an unprofitable deal can suddenly become financially viable with the right financing. Of course, in contrast, the opposite is also true.
It’s worth re-iterating here that many investors – both large and small – have made considerable sums of money from property. Whether the choice is flipping a property in cosmetic distress, or buying to rent out, everyone from teachers to train drivers are preparing for the future by growing their savings through property.
This article, therefore, is not intended as a source of scare-mongering. It’s also not intended to knock property as an investment vehicle in any way. Instead, the goal here is to better prepare you for selecting the right investment from the outset – and helping you leapfrog over less experienced investors.
With a little time and effort, anyone can become a successful property speculator. All you need is the grit and motivation to get started.
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