Property investment is one of the most popular passive income streams out there.
Making money in property can sound pretty straightforward, yet there are many considerations to make before you get started. As with any investment opportunity, it’s important to spend enough time planning your projects before you begin.
1 . Choose your strategy
One of the most important aspects of property investment is to think about your strategy. On the surface, there are two different strategies; the first is purchasing a property and then renting it out. The second strategy involves purchasing a property and selling to gain a profit. Within these two strategies, there are various other options that you’ll need to decide on, let’s take a look in a little more detail:
HMO Investments: HMO investments, also referred to as ‘house shares,’ involve each room in the house being rented out individually. Naturally, this is a popular option as it allows for a high income on the rent. Of course, when you have more tenants, you also have to spend a little more time on property management. You should also consider that a large number of tenants is likely to result in more maintenance issues.
Single Let Properties: Single let properties are typically rented to working professionals or to families. You rent the house or flat to one group as opposed to individual renters. Purchasing a buy-to-let property is one of the most straightforward ways of entering the property investment market. Compared to HMO investments, you might have more downtime when your property is empty.
Property Flipping: Flipping a property means buying it and then aiming to sell it for a profit within a short time frame. If you choose this option, it’s vital to consider the right location and set a strict maintenance budget. It’s likely that you’ll refurbish the property before you sell it on, (doing so is how you will increase the value). Of course, it’s important not to overspend here, as you’ll end up with less profit. Flipping a property can earn you a great deal of money in a short space of time. However, you won’t get the ongoing passive income stream that you’ll earn on rental properties.
- Landlord and Tenant Solicitors
When you are renting out your property to tenants, it’s wise to hire landlord & tenant solicitors. These types of solicitors commonly represent property management companies or landlords, they might, for example, handle disputes that arise between yourself and your tenants. It’s not uncommon that a landlord may wish to terminate an agreement with a tenant. When this is the case, there are several legal rules which you’ll need to follow. A solicitor can help you to navigate the correct legal processes. As a landlord, you’ll also need to follow the guidelines associated with the Deposit Protection Scheme.
- Study the property market
Before you get started, it’s important to study the property market trends. For example, both the UK and the US are currently experiencing great demand for rental properties. Due to this, investors would be well advised to consider buy-to-let investments. As the COVID crisis negatively impacts the economy, house prices are likely to fall as we face a global recession. According to Deloitte Insights, ‘New investments are slowing down due to uncertainty and valuation concerns.’ To read up on UK property trends, take a look at resources such as Property Week Magazine and The Property Hub Magazine. For US property info, check out National Real Estate Investor Magazine.
- Understand risk factors
Property investment arrives with risks, and it’s important to identify and consider the risks associated with each investment. You should always pay close attention to property market predictions when you are making your investment decisions. The Knight Frank Research Library have forecasted a ‘price growth of 2% across the UK in 2020 and 15% cumulatively between 2020 and 2024.’ With these stats in mind, investors could still expect to see a return on their investment over time. Property investors may not currently be able to flip properties in a short space of time. With a recession approaching, many buyers are holding out on making purchases.
When you are preparing to rent your property, it’s also important to cover yourself in terms of risky tenants. You’ll need to get background checks, financial checks, and references. These checks will ensure that you’re renting to a trustworthy individual (who’s good for the rent)! Remember, if you don’t have the resources to conduct these processes yourself, you can always use the services of a property management company.
- The perfect location
Location is everything when it comes to property investment. If you’re flipping a property, you should choose an area where it will be easy to sell for a good profit. With a buy-to-let property, you need to choose a popular area with a steady flow of renters and desirable amenities nearby. According to Simply Business UK, ‘Liverpool’s L1 postcode is currently the best place to buy-to-let in England, Scotland and Wales. It generates an impressive yield of 10 per cent.’ In the USA market, Global Investments Incorporated suggests that areas such as Memphis, Ohio, and Detroit are some of the best for buy-to-let, yielding returns of up to 35%.
- Which tenants are you targeting?
Deciding which tenants you are targeting is essential for property investment. If you know who you are targeting, and understand their needs, it’s easy to ensure that your investment is a success. For example, if you are looking to appeal to families, you will want to find a family-friendly neighbourhood with good schools. On the other hand, if you are planning to rent to students, consider proximity to universities and a lively area. You may perhaps choose an area that has occupied student properties closeby. You’ll also need to closely consider your target tenants when you set the rental prices. For student houses, it can be useful to take a look at the average price to rent student accommodation in that area. Student houses are usually priced cheaply, so it might take a while to start earning back a nice amount of money.
- Consider tax when flipping properties
To calculate your profit on a property flip, you should calculate the difference between the purchase price (plus refurb costs) and the final sale price. Besides this, you’ll also have to consider the taxes that you’ll need to pay. For example, if you complete the project through a company, the company in question will end up paying corporation taxes. However, if you complete the investment project as an individual, the profit will be calculated along with the rest of your income. Income tax is usually higher than corporation tax, which is why many property investors set up a company. Before you make a decision, it’s vital to discuss your ideas and needs with an accountant.
- Determine your management processes
When you are choosing a buy-to-let investment, you’ll need to think about your management processes. For example, are you going to hire a company to manage the property on your behalf? If not, you’ll need to carefully plan out how you will manage your property. You’ll need to think about how you will advertise, how you will screen your tenants, the legalities of the contracts, and collecting payments. It can be useful to use a software portal to screen and collect payments. You’ll also need to consider the maintenance of the property. Will you invest in a third party to deal with maintenance issues? Or would you prefer to deal with property maintenance issues yourself? The fact is, unless you hire a property management service, this income stream will not be completely passive, (and you’ll have plenty of admin to do)!
- Learn about boosting the value
If you’re flipping properties, it’s important to learn about how you can increase the value of a property; this way, you’ll see a greater return on your investment. Extending the living space is one great way to boost the value of a property. For example, by adding a loft conversion, a garden building, extending the kitchen, or turning the cellar into a living space. Refurbishments such as these can increase the value of a property between 5 and 20%, depending on the conversion. Besides this, redecorating the property to look more modern is another great way to boost the value. A new bathroom is a wise investment, as well as fixing any maintenance issues (however minor).
- Expand gradually
Once you’ve purchased your first investment property, you’ll want to be thinking about expanding your portfolio in the future. It’s best to start small and to aim for diversity, purchasing different types of properties in different areas. The main reason that investors choose different styles of properties is that this tends to reduce the risks involved. A diverse portfolio will also contribute to improving cash flow over time. Expanding gradually is the key, purchasing too many properties at once comes with increased risk (and is not advisable for a beginner)!