13 Fundamentals to Property Investing For First Time Buyers
If you are considering entering the property market as a new investor, there are certain fundamentals which you should have an understanding of.
This article aims to educate you on the main fundamentals of property investing.
- Overview of property investing fundamentals
- 13 fundamentals of property investing
An Overview of Property Investment Fundamentals
When starting out in property investing as a first time buyer, you may have many un-answered questions which are bugging you, and perhaps putting you off from beginning your investment journey.
To begin with, there are various types of investment strategies, such as a buy to let or commercial investment. The amount of deposit you are able to raise will largely determine which strategy is best for you.
Before we look at the fundamentals of property investing for beginners, you should note, property investing is not a “get rich quick” scheme. It can take years of investing to become completely self-sufficient through property.
The 13 Fundamentals of Property Investment Below you’ll find some of the key fundamentals to help you get started on your property investment journey.
1. Type of Investment
There is not one single type of property investment. Depending on your goals, you should consider whether you are going to invest for capital appreciation, as a buy to let (BTL) or with the intention of “flipping” (renovating and selling at a profit).
These types of property investment could either be rented out to students, as a single family home or as a house in multiple occupancies (HMO), each with their advantages and disadvantages.
2. Property Location
The location of your investment plays a large part in the decision process. The type of property and location will depend on your target tenants. i.e. you should not purchase a multi-£million flat in Northern England in the hopes that you’ll have a pool of tenants lined up to rent.
Further to this, areas which are undergoing large amounts of development and regeneration should be researched.
An example of this would be Manchester and the surrounding areas – property prices are generally well priced and there is a large demand for properties to rent due to an increase in the local economy
3. The Long Game
As stated in the introduction, property investing is not a get rich quick scheme. Unless you are flipping houses or have the funds to purchase a significant number of properties, it will take years to build a substantial monthly income.
Similar to above, if you are expecting the property market to increase, you’ll still need to wait around 5-10 years for the best results; Simply purchasing a property with the hopes of a capital appreciation within a year will not be profitable after all fees and taxes.
Further to this, you should never sell any property in your portfolio (unless they are a liability). The more properties you have which contribute to your monthly cash flow, the better.
You’ll effectively be spreading the liability – if one property experiences a void period, the other properties in your portfolio will cover the mortgage repayments.
4. Leverage / Gearing
One of the most advantageous aspects of investing in real estate is that you are able to leverage your current funds. This means that you are able to purchase a property worth more than your current funds. (also known as gearing)
For example, if you have £20,000, you can leverage this with a mortgage to purchase a property worth £100,000.
As leveraging requires a mortgage, you should ensure that you have the best possible deal. This may mean contacting a specialist mortgage provider.
Again, as you’ll be using a mortgage, you’ll have to pass various financial stress tests as to avoid being in negative equity and having a negative cashflow property.
5. Return on Investment (ROI)
When parting with your hard earned money, you do not want to be entering into an investment with high liability that could be draining your bank account month after month.
You should ideally verify the figures with someone who has experience in the property sector, as to identify whether you will be investing in a profitable property. This will also allow you to determine the ROI on your own money input into the investment.
6. Supply and Demand
Supply and demand in the property market determines whether the market is a sellers or buyers. i.e. If there are a higher number of buyers than property for sale, it is a seller’s market, and vice verse.
In the UK, we are currently in a seller’s market, and have been for the past few years – there is a large demand for new properties to be constructed, however this demand is not met year after year.
However, this can be beneficial to investors, as a shortage of properties will keep property prices generally moving upwards.
7. Cyclic Market
Before investing in real estate, you should understand that the property market is a cyclic market. i.e. There will be periods of price increases followed by price reductions and so on.
However, in the UK, the general trend is that property prices are on average increasing year upon year.
Various factors can affect the property market, such as natural disasters, banking problems and political events such as Brexit.
You may have heard the term “cash is king”. This term is true in property investing. Rather than focusing on capital appreciation, which is directly affected by property prices, the safest investment route in property is to generate the largest monthly cashflow possible.
Regardless of whether property prices decrease or increase, your property will still be generating a monthly income.
However, you should be careful when gearing your property – If you obtain a 95% LTV mortgage and property prices dipped by 10%, you are effectively in negative equity, and could be faced with higher mortgage repayments.
9. Below Market Value (BMV) Purchases
If you intend to go down the route of flipping houses, purchasing property at well below market value is the most viable route.
You’ll effectively purchase a rundown property for say 35-40% less than its possible value, renovate and sell at market value, leaving you with a fairly healthy profit.
Purchasing BMV property is also beneficial to BTL investors – The mortgage obtained on the property will be lower, thus lowering the monthly repayments, equaling a higher monthly cashflow.
Each month when you receive your rental income, after tax is paid, you’ll ideally want to set aside 10-20% of the income in a “pot” which can be used in case of repairs on the property or any other unforeseen circumstances, such as void periods.
It should be noted, that as a portfolio landlord (owning 2+ BTL properties), you are liable for higher tax and stamp duty rates. This should be factored into your plan if you intend to purchase multiple properties in one go.
12. Due Diligence
Prior to purchasing a property, you should appoint a building surveyor or civil engineer to check through property to ensure that there are no major problems which will need addressing.
Due diligence should also be used when determining the area you intend to invest in. i.e. will there be a high number of people in your target area making the property well sought after?
Investing in property can be a very emotional time for some people. However, it is of utmost importance to not let your emotions get in the way of your investments.
For example, if you are emotionally connected to a property that is a complete liability and draining your funds, the only logical option would be to sell the property.
The same goes for a property which you view and immediately think “this is the one” and signing a deal without first “crunching” the numbers and performing due diligence on the area etc.
Always ensure that your logical brain is in working order and take your time when deciding if a deal is worth perusing – don’t feel like that the deal you are after is the only option you have.
Considering purchasing a home but unsure where to start? Check out our guide for first time buyers to gain an understanding of the buying process, along with advice and tips.
Starting out on the property ladder can be an emotional and challenging period of time for many, however with the proper guidance and a well thought out plan of action, investing in property can be an extremely rewarding process.
As keen as you may be to get invested in the market, do not rush anything – the last thing you want is to be 6 months down the line with a property that’s draining your wallet.
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