Homeinvestment

Things to Consider Before Investing in Property

Things to Consider Before Investing in Property
Like Tweet Pin it Share Share Email

Property is one of the key asset classes for investors – and unlike stocks and shares, bonds, or even cash in the bank – it has a great advantage in that you can touch it. You know that it is real, and cannot disappear overnight if the stock market was to crash.

What’s more, a property is traditionally a good and stable investment. Property values can fall – they did for a short during the financial crisis of ten years ago – but, overall, the trend is almost always up. Plus, of course, capital growth isn’t the only return from an investment in property. It can deliver a regular income from rents.

But like any other investment, you need to understand the negatives as well as the positives.

Is it the right type of property?

There are four classes of property – residential, industrial, retail and commercial. Residential property is the most common solution for new property investors.

Shelter – a home – is a basic human need, and in a crowded island like Britain, people will always be looking for property to live in, so you should always be able to find tenants for your residential property.

However, residential property may actually have a lower profit margin compared to the other types. Commercial, retail and industrial properties may be able to offer a more significant profit margin, although the risk of voids – periods where no tenant means no rental income – can be much higher. If you are new to property investment, you might want to leave anything that is not residential to a more experienced buyer.

In any case, buying commercial or mixed-use property – and most industrial property – will usually require a much larger investment than residential property, which can range from houses down to small studio flats.

Is it in the right location?

In property investment, location is key to top returns. Always perform thorough research on any area where you are planning to buy an investment.

Commuter towns in easy reach of big cities seem to be always in demand, and offer the best prospect for the highest returns. Is the property you are looking at near road and rail links? Is it safe  – and are there schools and shops nearby? You should always consider these factors before investing in a property. A look at the local crime figures can be revealing – plus you can find them online.

Is the property right for your target market?

If you are buying or developing a house to rent out or sell, it is tempting to do so to reflect your own tastes – but this might be a mistake. Consider your target tenant. If you are buying a small flat near the station, your target market will probably be young professionals who might want style and features such as a luxury bathroom. A new property bought directly from the developer might be ideal.

If you are buying a large home, your tenants will probably be a family. They will appreciate a garden where children can play safely (avoid hazards such as ponds) and nearby schools – and durable, wipe-clean surfaces are a must. Older properties might be preferable, as they frequently have more space, with larger gardens.

Have you done your sums?

When you are buying your own home to live in, you can let your heart rule your head – you will need to like the place you live in. When you are buying property as in investment, you need to take the opposite approach.

You need to look at the cost of buying the property, and the returns you can earn on it – but both these measures are more complicated than they first appear. Your purchase price is clear enough – although you should always negotiate. But on top of it, you will probably need to pay Stamp Duty Land Tax (SDLT). This is a tax placed on properties purchased in England and Northern Ireland which you have to pay when you buy a residential property that costs more than £125,000, or an additional property that costs more than £40,000.

As someone buying as an investment, you could find yourself paying like a buy to let or second home, which attracts an extra 3% charge. It is calculated on a sliding scale and could mean spending tens of thousands of pounds to buy a property.

There will also be solicitors fees to pay.

When it comes to a return on your property, your income will be obviously reduced by the need to pay for maintenance bills – but the real drain on your return will be tax. You will need to pay income tax on rent, and capital gains tax when you come to sell your investment.

You need to get professional advice from an experienced accountant or financial advisor to ensure that your plans really are profitable.

Have you found the best way to raise the cash you need?

All property is expensive, and investing in property is a long-term financial commitment.

You will need to make a substantial initial contribution – often a minimum of 25% of the purchase price of the property yourself – although it is possible to provide this as a charge on another property, such as your home.

There are a number of ways to raise the funds you need. A Buy to Let Mortgage can be the simple solution. This operates in a similar way to a homebuyer’s mortgage, in that it is a large-scale, long-term loan secured on the property itself. However, there is an important difference, in that the key affordability factor is not your income, but the return available from the property.

Lenders will want to see that the rent from the property will be able to cover the mortgage costs, plus a ‘stress test’ figure which ensures it will stay affordable, even if interest rates go up, or if you have voids to deal with.

Another possibility is a Commercial Mortgage, which will allow greater flexibility and might even allow you to buy a property which requires refurbishment before it is ready to be let out or resold. If you are looking at a property in need of real redevelopments – such as a large house that needs converting into flats, a purpose-designed Development Mortgage might be required to fund the building work as well as the purchase.

These types of mortgages are essential for investment property – you cannot use a conventional homebuyer’s mortgage if you are not planning to live in the property. Arranging them is also a little different from an ordinary homeowner’s loan. You cannot simply walk into a high street building society to arrange one. It is essential to get expert support to ensure you have the loan that is right for your particular circumstances – and to avoid paying too much.

Business finance finders Rangewell can provide more information about buying for investment – and offer a free funding finder service.