So, you have worked out how much you must spend and where you are going to buy, now the hard work begins. Here are the property investment ideas to think about when searching for the right property for your circumstances.
Property Search
When you are searching for your investment property it is important to cast your net far and wide. Search all the different portals, websites and agents and make sure you are doing a complete search of your target location(s). Things you should think about when you are searching for your property are:
- Speak to letting agents too – don’t just speak to property agents and search on portals for property – make sure you speak to leasing agents and property managers too. They will be able to give you a good sense of what the local market is like, what tenants are looking for and most importantly how long it will take to rent out and for how much.
- Who are you paying? – make sure when you are looking at various properties understand who you are speaking too and what is their relationship to the property? In an ideal situation you want to be dealing directly with the developer or their directly appointed sales agent. If you are dealing with anyone else, it is likely they are simply a referrer or third-party marketing agent. These third parties are likely to be adding to the cost of you purchasing the property – if you are not sure ask! Sales fees are between 1% – 3% if the agent is getting more than that you are paying too much!
- Check review websites – use the internet and other people’s experiences to your advantage. There are many websites such as Trust Pilot which people have written reviews of buying property from a developer or dealing with them post sale. Chances are if they have bad reviews, you too will have a bad experience.
- Marketing Costs – how much did it cost for you to find out about the property and who pays the cost? Well the costs are paid by you! How much you pay depends on how where you buy the property from? Property exhibitions and slick marketing materials add significant costs to the price of property – which is paid by you the purchaser. You need to work out if you are happy to pay these costs then that’s fine, but to us it makes more sense to find ways to purchase property without all this needless expense.
Selecting the Right Property?
Just as important as the search itself picking the right property also equally as important. There are several things you need to consider when selecting the right property to invest in.
- House or Apartment? – there is a lot discussion around changes in the way we live and that more people will be working from home in the future. As a result, many more investors are thinking about buying a house rather than an apartment. We believe the proposed changes in tenant behaviour are overplayed in the media and we do not believe this represents a long-term structural change. For most investors an apartment with some outside amenity is the best bet. However, if you are thinking about buying a house bear in mind the cost of maintaining the building and property will be significantly greater than that of an apartment.
- Location in the building – you need to think about the location of the apartment in the building, particularly in taller buildings. Whilst having a great view or being at the upper part of the building is likely to be great for the occupants. It is unlikely that a tenant will pay significantly more in rent for the view – leave these apartments for owner occupiers.
- Building Amenity – it is possible now to buy an investment property with just about every amenity possible from sky pools to cinema rooms. You need to give some serious thought to how much these amenities will increase the rent relative to the significant increase in services charges.
- Specification – just like building amenity you need to make sure you have the right specification. Fancy audio, lighting, and wine fridges, etc all sound great. However, the typically cost a lot of money to maintain and replace when something goes wrong. Not only does an over specified property add a lot of additional cost to your property it is unlikely to materially impact the rent.
- New or Second-hand – buying a new build or second-hand property is also a decision which investors will have to grapple with. It is true that it is more expensive to buy a new property than a second-hand one. This is because they come with warranties, generally require significantly less ongoing maintenance and are much more energy efficient. We think for most investors buying a well-priced new build makes more sense. However, if you are thinking about buying second-hand, we recommend you have a building professional inspection done and allow for annual maintenance costs of circa. 5% of the annual rental income.
Market Check
Now that you have selected the right property. You need to ensure that the assumptions you are making about the performance of your potential investment are correct. We think as a minimum you need to consider the following.
- Price – the price you pay for your investment property is the key determinant of the financial performance of your investment. You need to check you are paying market price or less for the property. Importantly, do not pay today for tomorrows growth.
- Rental – you need to check your assumptions about how much rent the property is likely to achieve. Importantly, you do not want to set any records for rental levels. You need to consider what rent you are assuming relative to other competing properties. Additionally, you need to see how many properties are available in the market for rent.
- Service Charge – an increasingly important aspect of generating a strong investment return. You need to ensure the service charge is as low as possible and importantly not more expensive than other properties for rent in the market. You also need to check and see how the service charge is reviewed.
- Ground Rent – ground rents have received a lot of press attention in the UK recently, with many leases incorporating un-commercial review provisions. You need to ensure the ground rent is inline with other leases in the market and more importantly how the ground rent is reviewed. You should not accept any review mechanism that increases the rent by a measure greater than inflation.
Aanalyse before you Buy
Before you buy a property, it’s important you analyse how a given property will perform. The only two outcomes of an investment which you should consider are:
- Cashflow – both before and after tax
- Capital Appreciation – both before and after tax
In order compare investment property in different countries, you’ll need to set out the following for each property and forecast over the next 5 or 10 years (don’t forget to convert to the same currency too).
- Fee cashflow (before tax)
- Tax on income
- Free cashflow (after tax)
- Equity Position
- Net income if the property sold
Once you have calculated these figures, you’ll have all the information you need to compare investments in different countries. This will be invaluable in determining which investment, in which country is suited for your investment goals.
Stress Test!
Things don’t always go to plan. So, when you’re running your analysis, make sure you stress test an investment by running calculations based on ‘worst case scenarios’ such interest rates increasing or rents or property values not increasing by as much as you forecast, or not increasing at all? If the investment still works when you run the stress tests, it’s probably a good investment.
Important notice: Proptech Pioneer and its associated companies seek to provide real estate investors with guides, information and tools, but we cannot guarantee this information to be accurate or perfect. You use the information at your own risk and accept no liability if you rely on this information. Proptech Pioneer is not a tax advisor, accountant conveyancer, lawyer, financial advisor or mortgage advisor. You should seek independent advice from independent professionals before making any investment decision.
