A Guide to Successful Property Investment

Each month we will bring you investment advice from some of the most experienced professionals in the industry. This month’s advice comes from:

Kate Faulkner MD, Designs on Property Kate is a renowned property expert and author of the Which? Guides to property, investment and letting.

From an investment point of view buying property used to be seen as an easy way to make money. A rise in prices would almost inevitably follow a purchase and so, on paper at least, one year on and the investment, and consequently any portfolio, would be worth more. However, many areas are now seeing only modest price growth, suggesting that, unlike over the last seven years, supply of property is exceeding the demand in certain cases. As a result, in some areas and for certain property types, price drops of 10% or more are a reality.

So how will it be possible to make money out of property in the coming years? The advice used to be that “You make your money when you buy” and that is still the case, except that you won’t see the benefit until you sell!

The first decision is “Where to invest?” Basically you have two choices, either to try to identify areas around the UK that are likely to outstrip national property price growth, or to look at individual properties in an area you know well, where you are confident you will see future price increases, then identify those that can be bought at a discount and which are easy to rent.

If you are looking at new areas then check out as much information about the area as possible. What you need to look for is a growing economy, with a population that’s increasing, but where there is a limit to the number of properties that can ever be built. Towns such as Cardiff and Leeds, for example, have seen tremendous property-price growth and an increase in the number of rental properties required. This is mainly due to new companies moving in and investors turning “cheap” areas in to “chic” ones. Identify the next area to benefit and you may be rewarded.

A good tip is to go to the area’s council website and read their ‘Local Development Framework’. It describes which areas are going to be the target for investment, the number of new homes planned and what communication links are being improved. New junctions on motorways or the creation of a by-pass or dual carriageway, better local transport such as a new railway station, more frequent trains or faster journeys – they all lead to more people looking to move to an area which they would not have previously considered, pushing prices up.

Unfortunately, by the time developers have moved in and trendy new restaurants and shops start to appear to confirm that an area is being regenerated it is often too late to take advantage of big price increases as the area will already have risen. If this is the case, then check out neighbouring areas as they are very likely to be the next one to become desirable.

Once you have decided where to invest, the trick of the successful property investor is to undertake copious amounts of research and to constantly check out properties that are for sale and try to bag a bargain. It is not easy to buy at a discount. You can’t just walk into a new-build marketing suite as an “investor”, make a low offer and expect to have it accepted. You need to identify in the region of 100 properties, whittle these down to 30-50 to view and then consider making offers on 5-10 where you believe that a discount of around 10% will be acceptable.

But be warned, many properties are offered “at a discount” or with “incentives” such as “stamp duty paid” or “carpets included” especially by investment clubs, and in cases such as these the reductions you are being quoted don’t always exist. Any buyer can take advantage of the incentives but as an investor any discount has to be in addition to these, otherwise you will be paying the same price as everyone else. A good time to make offers on new-builds is at their month-, quarter- or year-end, or when a site has just a few properties left to sell. If a development has a sales consultant manning the marketing suite it will be costing the builder money. At this stage you can also check how much the other properties have sold for and ensure you are getting that crucial discount.

The second essential element for success is to research the type of properties that will be in short supply for the foreseeable future. For example, in an area with lots of two- bedroomed flats, many of which are up for sale or not yet let, you may want to look at what the market for three-bedroomed properties is. There are always growing families wanting to move to larger properties and retired people wanting to trade down, so houses with three bedrooms are likely to be desirable. However in terms of desirability for the investor in any area the main consideration has to be the numbers of properties available versus the demand for rental now and the purchase by a keen buyer to profit from in the future.

An excellent rental yield is a must as void periods (when there is no-one renting) can take Buy To Let (BTL) investors into debt within months. To assess the yield and likely void periods, study the local papers and agents closely over a few months to see what is letting quickly and what is on the market for a month or more. Another important consideration is whether the property is being let at the advertised price – or less. Talk to local letting agents and even local large employers to find out who’s renting now, what kinds of properties are in short supply and what kind of properties might be required for the future. It is crucially important to find out the types of households that are renting. Is it mainly students, professionals or migrant workers? This will tell you what size of property you should be looking for and which target rental market will give you the best return.

Investing in property this way is a long term venture. You therefore need to accurately assess the costs of running a BTL – including mortgage payments, annual gas safety certificates, building, contents and landlord insurance, letting fees and maintenance costs as well as the costs of buying AND selling. You need to analyse all these figures so that you can see what the likely annual return is on the money you have invested as well as the likely return once sold after five or more years.

It is also important to test the rent versus costs ratio, so you know what your break-even position is. For example, if your figures give you £1,000 income, with £800 costs, what would happen if your mortgage payments increased and your costs went up to £900 a month? Would £100 be enough to cover any emergency problems or to save for any void periods? And what if your mortgage costs went up and the rent dropped to £900? If the worst happened, how would you manage financially if you had to pay out £100 a month towards your costs? How long could you do this for?

Finally, once you’ve found the perfect deal or two, check your figures and discuss the likely return with an Independent Financial Adviser (IFA) to make sure that your figures are accurate. They can also check that this is the right investment for you as well as ensure that you are covered if you can’t make payments due to lack of tenants, illness or the loss of your job.

Top five things to ALWAYS do

Purchase at 10% or more discount

Calculate the costs of buying and selling before you make an offer

Check rental yields for each property type/area you consider buying

Get specialist advice from an IFA and a property tax specialist

Secure an independent legal specialist in buying and selling as well as tenancy law for any eviction issues.

Top five things to NEVER do

Buy without viewing the property

Purchase without a snagging survey (for new-builds)

Accept facts and figures from the person selling the property without checking the figures out for yourself.

Over-stretch yourself financially as you could end up losing your own home.

Try and deal with the tenant yourself, form a tenancy agreement.

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