Property investment is one of the safest ways of investing your money and one of the few that can generate real passive income.
Although it is very attractive, many people have been scared by the housing market crash almost a decade ago and there are still areas where the market hasn’t recovered to previous crash levels. Many investors have lost money during the crash and there is lots of skepticism about property investment.
Property Investment doesn’t have to be scary if you know where to look.
Property Investment – Tips on Investment
Before you start your property investment career, there are a few things you need to know so you don’t make mistakes and end up loosing money.
Invest for Cashflow or Capital Gain?
Basically, there are only two options in property investment: Cashflow or Capital Gain!
Capital gain means that you make an investment where you hope the value in the future will be higher than the purchase price. Basically that’s what investors do when buying stocks. They are looking to have the stock value go up so that they can sell later at a higher price and therefore make a profit.
The same happens in the property market, many investors look buy a property below value and then sell it at a higher price to make a profit.
This was the strategy that affected investors during the housing crash, properties lost value and investors lost their money.
This sort of strategy is a good strategy because historically property prices will increase, but the increase is over the years and there are fluctuations throughout. So you need to take the right wave to make a profit from capital gains.
A cashflow strategy (also named Buy to Let or BTL) is less used because lots of potential investors get deterred by the thought of having to fix houses and be on call whenever a tenant has an issue.
Professional investors are not on call, they hire companies to do that.
A cashflow property investment strategy is a great opportunity because you get cash into your pocket every month that helps pay your bills. Once can passively cover your bills, you get financial freedom!
You don’t get a big lump of money at once, but you do get bills paid.
The Numbers Make the Deal!
Never forget this, do your math and include everything that is a expenditure. If the numbers come out positive go ahead, if not, stay away. It doesn’t matter if it is the perfect house. You are investing, not buying a property to move in.
I will make another post going over the numbers you need to look at before deciding on your property investment but I will tell you which ones are important.
- Cashflow Analysis
The result of these calculations will let you know if the deal is ok to go or not.
Location is King
You’ve heard the saying Location, Location, Location! This applies to many businesses but it is extremely important for property investment. The location importance goes from country down to the street.
On the country level, the characteristics you want to look at are:
- Market performance
- Legal System
- Tax System
- Access to and cost of Money
Every country is different in the characteristics above mentioned and some are more attractive than others.
I will be focusing on the UK because the combination of the characteristics makes it a very attractive country for property investment.
UK Property Investment Overview
Why choosing to invest in the UK property market?
The UK property market, unlike many other markets, has some unique characteristics:
- Well known housing shortage that creates constant demand for new houses and flats
- Legal system favours landlords (quick to evict tenants that don’t pay)
- Tax system for Ltd company is favourable with low fixed rates
- Mortgages are based on the property cashflow and valorisation potential not in personal income, therefore easier to obtain and without restrictions in property number
The UK property market has shown a strong growth over the past 5 years with a 27.87% increase in property average values.
UK Property Market in Detail
The UK current average asking price of property coming to market (December 2017) showed a slight increase over the last 3 months and the average property asking price is very near the all-time high at £392,015.
According reports (https://www.theguardian.com/business/2017/feb/09/uk-rents-rise-faster-house-prices-next-five-years-rics-survey) early this year, rental demand in the UK will continue to rise and push rents higher. This overall positive effect on rents is not present across the entire UK though, so it is important to analyse the market well and choose investment areas with growth.
The Government has introduced changes in the tax structure that do affect landlords but this is primarily for those which have their portfolios in their own name (so called solo investors). For more detailed information see http://subscribe.propertywire.com/tax-implications-for-landlords.
There have been other changes that affect the BTL market (http://subscribe.propertywire.com/buy-to-let-supplement-2017) and increase the cost to landlords. Like stamp duty changes, the ban on letting agents fees on tenants, insurance premiums increase, added surcharge of 3% for additional properties owned, removal of wear and tear allowance. Some of these changes are applicable only to solo investors.
In order to avoid such changes, it is best to consider opening a Ltd company,
Interest rates are expected to continue low for the next couple of years but they will be rising. In fact, interest rates were just increased by the Bank of England, the first one over a decade, from 0.25% to 0.5% . It is said that over the next 3 years interest rates can further increase (http://www.bbc.com/news/business-41846330). A real concern would arise if interest rates rise above inflation.
As the interest rates affect mortgage rates, these expected increases will negatively influence the cashflow from the property investment.
The obvious impact is that mortgage rates which are not fixed will increase affecting the cashflow produced from our properties.
Therefore, when calculating your numbers you should account for these increases.
Property investment doesn’t need to be scary and it is much safer than many “opportunities” out there, which are just scams.
It is important to determine your strategy first. Do you want to invest for capital gains or to produce monthly cashflow?
Answering this question is important because the ideal locations will depend on the strategy you choose.
Once you determined your strategy, you can search the area and run the numbers to know if it is a profitable area. Lastly, look at the property deals available.
The UK is a great market because it favors landlords and the legal and tax systems are good. Additionally, there is high demand due to a housing shortage.
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