Real Estate is a very attractive investment strategy, particularly in the UK, where entering the property ladder is everyone’s dream. But how do you invest in property successfully?
A very famous show, Homes Under the Hammer, shows the common citizen and investors buying property at auction to either move into, flip or rent.
Auctions are a great means to invest in property as it is possible to find good bargains. But this is not a strategy in itself and it does not guarantee success. Actually there are many aspects anyone who goes to auction needs to be careful of. Soon I will share another article about auctions, so stay tuned not to miss it.
How to Invest in Property Successfully
Whatever means you use to invest in property, you need to have a strategy in mind to be successful.
You must establish a plan and follow through with it, otherwise you might get stuck with property you don’t know what to do with. You may even loose your investment!
A basic plan I use that helps me invest in property is called SAP.
It stands for:
The plan is to use these three points in the order I mentioned, otherwise it makes no sense.
Invest in Property – Strategy
The reason why I start with strategy in this plan is very simple. If you don’t know your strategy you will be lost. It would be the same as having a GPS with you to take you to a destination, but you don’t tell it where you want to go.
Going back to the TV show Homes Under the Hammer, often the new home owners will say don’t know what they will do. They say they will renovate and then see the evaluations and decide.
This is what first timers do. They don’t know what they are doing and just want to get started. It can be very costly to try to make money this way. Most likely, money will be lost.
You need to know what you want to do first.
Basic Strategies to Invest in Property
Let’s take as example the most common ways to invest in property. The strategies at the bottom of the property investment pyramid and most frequent are:
- FLIP – buy property to fix and sell it for profit (hopefully – and this is where many investors loose their money)
- BTL – buy to let – a great strategy to earn passive income
- HMO – house of multiple occupancy – another great way of earning passive income but this strategy requires compliance to many regulations which are to be changed later in 2018
These 3 strategies have different requirements and because of them, one needs to know which one to use BEFORE one invests.
Why is Strategy so Important when you Invest in Property
You bought a house, at an auction or from a agent, you love it and you do the renovation work yourself to high standard.
Once you finish you ask another agent to valuate the property.
You are shocked…. the agent just told you what a wonderful job you did and gave you the highest asking price of the area. Great news!
Until you realize that the price you paid plus the renovation costs are higher than the valuation you just got.
You’ve learned now that your area of choice is preferential for the rental market and for professional workers.
Ok! Nothing is lost yet. You say to yourself “I’ll rent it!” But because you renovated the property at a high standard, the rent you want will be too high for the market and therefore you need to take a lower rent which gives you little yield, and it only just pays the mortgage you took to buy the property in the first place.
You could turn to HMO, tendering to the professional worker market the area is know for. Although with the regulations, you need to put a lot more work in and money in. Not worth it!
If you noticed, in this story our buyer used the plan backwards. First there is the property, then area and then the strategy. Doing things reversed tends to give bad results, but many of us don’t know better. And that is the reason I am sharing the SAP plan.
Knowing your strategy means you know what the property will need in terms of renovation. The three strategies I mentioned – FLIP, BTL and HMO, have different renovation requirements and those requirements will also dictate how much you should pay to invest in property.
They will also dictate which areas you look for to invest in property and the regulations you need to meet.
Invest in Property – Area
Once you have decided your preferred strategy to invest in property, you have to then look at possible areas where that strategy would work.
Let’s say you chose HMO for professional workers (HMO for students would require a lower standard of renovation and probably will have higher maintenance costs).
With this strategy you need to decide how much you want to pay. An HMO in London will cost you a lot more than one in Glasgow. So when you look for your area, cost of investment also plays a role.
But above all, your area must be good for your strategy. An HMO will not work in a quiet residential area with families or in a high end and expensive area. It will also not work in towns where there are no hospitals or large warehouses or even large construction projects going on. These are areas you need to consider for your investment.
Remember that your area of choice needs to be narrow. Choosing a town is not enough because there are neighborhoods and even streets where one strategy works and another one doesn’t in that same town. So you need to do your research.
Additionally, for an HMO strategy, make sure you apply for licensing and that you know the regulations before you actually invest in property.
Make sure that you have the possibility to travel to the area of choice so you can see the properties before you buy and can oversee the renovation work. Or make sure you hire someone to do it for you and make sure you do your due diligence as not everyone will be looking out for your interests first.
Invest in Property – Property
Once you know your strategy and, through your research, you found the best area to invest in property, you come to the fun part of looking for properties.
When you are looking at properties, remember that you are investing for a financial return. Look at the numbers and let them decide whether to buy or let it go.
Many mistakes happen by buying with the heart and not having the numbers done.
Here are some questions to answer.
- What prices are identical houses selling for in that area? – Use rightmove and zoopla to have an idea but also ask local real estate and sourcing agents.
- What is the rental income in the area? – If your strategy is HMO check for rental income per room on the local housing authority website (for UK)
- What is the state of the house? – Make a second viewing with your builder to have an idea of renovation costs. It will help you making an offer later
- What are the licensing requirements? – for HMO but also speak with local authorities for social housing strategies as they might have specific requirements that differ from other areas
- Is the seller distressed? – Find a bit about the seller, perhaps there is a solution that works for both at a lower cost for you
- What is hidden? – Due diligence! You don’t want to find out that the lease is too short or there is debt associated with the property that you would have to pay off afterwards
This is not a detailed how to guide on how to invest in property. That knowledge is acquired with guidance of mentors, training and experience. But this is a great plan to start your journey as safely as possible and avoiding many mistakes.
The most important is that you start to invest in property and enjoy the experience.
If you are already on the way, take a new look at your investments. Did they all run smoothly? Try something new and follow the SAP plan.
You found useful information! Share it on social media. I would greatly appreciate it if you commented below. and will be glad to answer any questions on the comment box.