Blog ← Welcome to the investment property for sale blog. Here we will keep you up to date with the latest property investment news. We will also have helpful articles giving top notch advice and tips.
When to market your property.
If you are new to buy to let you will find this free property investment advice helpful to help manage your property. When a property is vacant, it will not only fail to generate a rental income for the owner, but it will typically mean the investor is making a loss. This is due to all the holding costs that still need to be paid on vacant properties. This means, very investor should strive to need to minimise vacancy periods, which requires effective and timely marketing. It is essential to specify a decent notice period, usually at least one month, in the tenancy agreement. This means that the current tenant must tell you that they wish to vacate the property one month ahead of doing so. If they leave the property early, they will still be liable to pay rent for the remainder of the notice period. If they fail to do so, you will be able to retain the security deposit. Landlords should start marketing their property as soon as they receive notice that a tenant wishes to leave. This will maximise their chances of finding a new tenant as quickly as possible.
Some properties, such as student lets, can be marketed far in advance, due to fixed term contracts and guaranteed dates on which they will become vacant. This is because student typically only rent a property for one academic year. During the summer vacation period, they often travel home, then rent a new property the following September. While this can be an advantage as it allows the landlord to start marketing early on, it is often a problem filling the property during the summer months. Also, regular marketing is required, as the contracts usually only last 9 months on student lets. Landlords may be able to find tenants to take the property on a short-term let basis over the summer; this will usually be someone who has come to the area to work a temporary contract. Again, this will require additional marketing.
How to market your property.
There are many different channels that a landlord can use to market a property and ensure periods of vacancy are minimised. Each method has pros and cons, and they range in price from free to fairly expensive.
Word of mouth marketing.
One of the most traditional forms of marketing is relying on word of mouth. This is particularly effective in the modern era of social media. In the past, word of mouth marketing only gave access to a very limited market, as the only people who would hear about the property and be able to contact the landlord would be members of their physical social network. This meant that letting a property could be very slow, if word of mouth was the only method of marketing employed. However, today landlords can reach a much wider network, due to social media platforms such as Facebook and Twitter. A savvy landlord can post updates on properties they have available to let. A large network of friends and acquaintances can then share this information on their own pages, thereby reaching a far wider audience that has traditionally been possible through this method. An advantage of word of mouth marketing is that the tenants can usually be vouched for by someone you know and trust.
There are many websites aimed at marketing properties, which often allow landlords to post details and images of their property for free or at a very low-cost. These websites are accessed by millions of people and allow prospective tenants to search for properties that meet their specific requirements, in the area they wish to live. This means that any ‘bite’ you get through this means has a high chance of being turned into an actual tenancy. The tenants already know that the property meets their specifications and have seen photos. Usually, viewing the property is just to ascertain that there are no major flaws that were not shown in the marketing material. A lot of prospective tenants have already made up their minds that they want a property, before they even view it. Foe landlords, this is an advantage, because it mean they have to waste minimum time scheduling appointments and showing interested parties around. The downside of internet marketing is that it is difficult to ‘quality check’ prospective tenants, without access to resources such as credit checking software. Further to this, there is a lot of competition online. Many properties are marketed in this way, so unless yours really stands out in some way, it may be some time before anyone calls to arrange a viewing.
Placing an ad in the local newspaper tends to be a little more expensive than using an online resource, but on the up side, there is usually far less competition. The target market is limited to the readership and their social connections, but this can still be a significant amount of people. Tenants who find properties to rent in newspapers are often more mature or more professional, meaning there is less risk of them defaulting on rent payments, failing to take care of the property, or causing problems with neighbours. Of course, this is a massive generalisation and cannot be guaranteed.
The most expensive method of marketing a property is through an estate agent or letting agent. Fees can be as much as two months’ rent. The huge advantage of using an agent to market your property is that it takes all the hassle out of it. They will do the work for you. They will advertise online and at their offices, schedule appointments, show people around and take care of all the admin and paperwork. Agents also tend to have access to resources that are not available to the general public, such as credit checking systems. They are professionals that deal with tenants on a daily basis, so will be adept at showing the property in its best light and answering any queries that interested parties may have. Another plus is that tenants come to them; they have a large pool to choose from, consisting of previous tenants at other properties, tenants in flats on which the agreement is due to end, and new customers who walk through their door or visit their website. We hope you have enjoy reading our free property investment advice and it helps you when marketing your property.
Buy to Let Investment
The first things to consider when deciding the level of rent to charge on a buy to let investment property are the costs involved with owning that property and any profit you stand to make. Buy-to-let investments should be seen as long-term investments, with the main return coming from capital growth and eventual resale. Letting the property will generate a rental income, but a take-home profit cannot always be made through this means. At the very least, the amount you charge in rent needs to be enough to cover all the costs associated with the ownership, maintenance and insurance of the property. In some cases, it is possible for landlords to pocket up to 6% of rental payments as profit. It is unlikely that you will be able to achieve a higher profit than this.
Be careful of setting the rent too high or too low; both will be equally effective in putting prospective tenants off viewing the property. A rent that is much higher than that of other similar properties in the same area will be viewed as unfair and greedy. Tenants will simply not be interested, as they can get an equally good property in the same location for a lower price. It may seem surprising, but prospective tenants will find rents that are too low equally off-putting. If you set the price at a much lower rate than other properties in the area, people will assume there is something wrong with the property and choose not to find out what. To get the most from your investment, you must calculate the perfect price.
The process of deciding this price is fairly simple. You must undertake market research in the form of monitoring the rents of similar properties. These can be found by checking local papers or using online resources. Keep track of which properties remain on these websites for several weeks, whether any put the rent price up or down and the effect this has, which properties go most quickly, and whether any extras such as inclusive bills are generally offered. Make sure that the properties you monitor are similar in size, location, and condition to your own. Set your rent at a price that falls in line with the rents charged on the properties that are let quickly.
Methods of collecting rent.
Cash: Accepting rent as a cash payment is ill-advised. One problem stems from the need to physically collect rent that is paid in cash. You will either need to set aside time to visit the property when rent is due, or trust the tenant to deliver the cash to you, either at home, at work or through the post. Collecting rent personally is time-consuming and it can often be difficult to find a time that is convenient for both you and the tenant. Having the cash delivered or left for you can lead to disputes over the amount paid. If the amount you receive in cash is less than expected or required, it is a matter of your word against the tenant’s. Such disputes can be very difficult to resolve.
Credit card: You will have a record of payment made if a credit card is used, so this will avoid disputes. However, there is often a charge applied to credit card payments and funds can be recalled by the tenant for several days after the payment is made. If a receipt has already been issued, the tenant could claim the payment was fraudulent and have the funds paid back onto their card.
Standing order / electronic transfer: Having tenants set up a standing order or pay via electronic transfer means there is a record of the payment, funds cannot be recalled and a charge is rarely applied. The downside of this method of payment is that you need to give your bank details to the tenant. This can be risky as the tenant could impersonate you and withdraw funds from your account.
Online services: There are specialised websites set up for rent collection online. Landlords can subscribe to these websites, and then simply give the tenant details of the online account. The tenant can pay the rent each month by logging on and arranging an electronic payment. There is no need for the landlord to provide their personal bank details when using this service.
Property management companies: If you choose to have a management company take care of your flat, they will collect the rent on your behalf, as well as dealing with any problems a tenant may have. The fees charged by management companies can be quite high though, reducing the chance of being able to make a profit from rental income.
When to collect rent.
You need to decide for your buy to let investment when rent will be collected. This can be on a weekly or monthly. If rent is set at a weekly amount, but paid monthly, tenants will typically pay an amount that is equivalent to four weeks’ rent every month. This means you may have to adjust rent that is paid weekly to bring it in line with the monthly payment, giving tenants a rent free week in five-week months.
The date each month or day each week that rent is due to be collected should be specified in the tenancy agreement. This should also set out whether you are willing to allow any grace period and what penalties will be applied if rent is late. A grace period is usually five days or less. If rent is not paid after this amount of time, it will be considered late and a reasonable charge may be applied as a penalty. If rent is not paid at all – tenants may be evicted after one or two months of non-payment.
The Harlequin Property Story
Harlequin Property was one of the UK’s leading overseas property investment firms. Endorsed by celebrities, they offered incredible investment opportunities, manly based in South America and the Caribbean. Though the company was unregulated, they attracted many investors with their ‘too good to be true’ deals on luxury properties in beautiful locations. The company became the centre of a scandal, after reports in the national media revealed that investors had stopped receiving income payments and several of the proposed developments that should be nearing completion had not even been started. The Serious Fraud Office launched an investigation and around 9000 investors made claims against the company, having been left substantially out-of-pocket. However, further problems arose when it was discovered that the only contracts that existed were between investors and the overseas development companies, so Harlequin had not signed any formal contract with the investors. It remains to be seen if any of the claims will be successful.
How to Avoid Risky Investments
One of the major issues at the root of the problem was that Harlequin Property was an unregulated company. Many forms of overseas property investment are not regulated by the Financial Services Authority (FSA), as are other investments, such as ISAs and pensions. This means that when things go wrong, there is no governing body for these investors to turn to. It also means that there is no agreed set of standards with which companies offering these investments must comply, so there is nothing to say that they must be party to a contract or abide by any specific terms. Unregulated investments are therefore high-risk investments. They should not be entered into lightly by inexperienced investors.
If you are thinking of making an investment with an unregulated company, you should first seek professional advice from an independent financial advisor (IFA) whose practice is regulated by the FSA. Independent financial advisors are experts in investment and will be able to give informed advice regarding the level of risk an investment involves. More importantly, they are regulated by the FSA. This means that they are accountable and investors have recourse to a higher power, should things go wrong. In other words, if you invest based on the advice you receive form an IFA and it turns out that this advice was flawed, you can make a complaint to the IFA themselves, or to a regulating body such as the FSA or the Financial Ombudsman. Regulated independent advisors are required to have suitable indemnity insurance in place to protect them against such claims. This means that if you lose money due to receiving bad advice, it will be able to be recouped through the financial advisor’s insurance.
When investing in property in the UK, most investors would not dream of parting with any money until proper due diligence has been undertaken with regard to the property and any company involved in the sale. Due diligence is the act of carrying out research to ensure that a property will be a sound investment. This includes the procurement of surveys, searches, valuation reports, environmental reports, plans, title deeds and any other document containing information about the property. Enquiries are submitted to the party selling the property and all the documents are examined in detail. Further to this, all the companies that an investor chooses to deal with will generally be checked out before their services are engaged Investors will obtain quotes, look up testimonials from previous clients, ask people they know if they have experience with the company and even attend meetings with the staff before deciding to use the services the company provides.
However, due diligence all too often goes out the window when it comes to overseas property. It is more difficult to visit the property and see for yourself whether it looks like a good site. This, however, is really a crucial step in evaluating the potential of an investment opportunity. Investors should do everything they can to see a property or the site on which a development is planned before agreeing to invest any funds. Location can make or break investments, so even if the development has not yet begun, a visit to the site can give the investor a good idea of the chances of success. This allows them to see what local amenities and attractions are available. Another excuse for limited due diligence is the difficulty of dealing with foreign companies. The language barrier and different policies and procedures can often be confusing and lead to investor agreeing to overlook things that they ordinarily would not. Not carrying out thorough due diligence is the biggest cause of costly mistakes. If anything, it is even more important to ensure this is done on overseas, unregulated investments and the companies offering them.
Don’t Fall For False Promises
The deals offered by Harlequin Property looked too good to be true. In fact, they were. Avoiding deals of this sort is the golden rule of property investment. It’s rare that you get something for nothing and chances are if a company tells you that it’s possible, they are probably trying to sell you nothing for something. The easiest way to spot a scam is to listen to your gut instinct. If it sounds like an impossible dream come true, don’t let yourself be fooled. There is no gold at the end of the rainbow. The gold goes to those who keep their heads, do due diligence and base their investments on solid logic and fact.
Bridging loans are a form of short-term finance, aimed at ‘bridging a gap’ between a time when funds must be paid out and a later time when further funds are received to cover this expense. Bridging loans are typically used in connection with the purchase of property, though they can be taken out for other reasons. The terms associated with bridging loans are typically 12 months or less. There is some availability for loans of this nature to be taken out over a period of up to three years, in certain circumstances. Bridging loans are generally issued by specialist providers, who use different methods of underwriting to those of mortgage lenders or other loan providers. The decision to lend is often not affected by adverse credit ratings or low-income in the case of bridging loans, as it is based on the value of the asset used to secure the loan and the exit amount of an investment. In other words, if the loan is used to purchase an investment property that will be resold or refinanced quickly, the availability of the loan will depend on the amount that is expected to be made through the sale or refinancing.
In what circumstances can they be used?
Bridging loans have traditionally been used by people involved in a broken chain conveyance. A conveyancing chain is broken when the sale and purchase of any party involved in the chain are not ready to complete at the same time; either the sale is ready before the purchase, or vice versa. In some cases, the transaction that is ready to complete must go ahead independently of the linked transaction, as waiting for the related sale or purchase to reach the same stage of completion would result in a breakdown somewhere else in the chain. If it is necessary to complete on a purchase ahead of a sale, a bridging loan can be an invaluable source of finance. The loan provides funds to cover the purchase, allowing the transaction to complete, and can be repaid when the finds come through from the related sale. This is a great tool for investors who are developing a property portfolio or involved in flipping property. Should a great investment opportunity arise whilst an existing asset is still being renovated, the investor can purchase the new property using a bridging loan and pay this off when the existing property in their portfolio is renovated and sold.
More and more, bridging loans are being used by investors in cases where a property does not qualify for a mortgage or where it is being purchased for planned renovation. If a property is in a rundown state and needs a lot of work doing to it, it may not be possible for an investor to get a mortgage secured against it. For instance, if a property does not have a plumbed bathroom, it would be considered uninhabitable by mortgage lenders and a mortgage application would be rejected. Underwriting for mortgages is done on a check-box basis, meaning applications are rejected without question if they do not meet any one of a list of the required criteria. This means that plans to renovate the property (e.g. to build bathroom) would not be taken into consideration and the application would fail. Underwriting for bridging loans is generally done on a more bespoke and individual case basis. The lender would look at the plans for renovations, associated costs, the final value of the property and the investor’s exit strategy, making a decision based on these factors. This allows investors to use a bridging loan to purchase and renovate a property, which can then sold. If the investor would prefer to keep the renovated property and either reside in it or let it out, they will have the option to refinance with a mortgage lender, once the renovation work is complete.
Due to the underwriting for bridging loans being done on a case by case basis, relying only on the value of the property and planned exit strategy, it may be possible for an investor to successfully apply for a bridging loan, even if they cannot get a mortgage due to low credit score. A detailed plan would be necessary in this case, to convince the lender that the property is a sound investment. This provides a good alternative form of finance for those who may struggle to get a mortgage due to factors like self-employment, recent change in workplace, lack of savings or poor credit rating.
Bridging loans can be a fantastic resource for investors looking to buy properties at auction. Properties can be snapped up well below market value at auctions, as they are often repossession or distressed sales. However, once the hammer falls on an auction sale, things move very quickly and the full balance of the purchase price is usually required within 21 to 28 days. It can be difficult to get a mortgage offer approved in this time, even if lenders have been approached upfront. Bridging loans offer the advantage of flexibility and convenience. They can be arranged very quickly – often with funds being deposited within 24 hours of the application being approved. This means that a bridging loan can be used to pay the balance of the purchase and complete on the property in the required limited timescale, giving the investor time to arrange a mortgage and refinance the property at their leisure.
The final advantageous use that a bridging loan can be put to is to make you a cash buyer. Funds can be obtained upfront, before making an offer on a property. With funds from a bridging loan already in your account, you are effectively a cash buyer, even though the money is loaned. This can put investors in a powerful position to negotiate excellent purchase prices. Many sellers want to deal with cash buyers, as this can both speed up and simplify the conveyancing process. Once the purchase is completed using the funds from the bridging loan, the investor is again at liberty to arrange a mortgage and refinance the property.
Are there any risks?
The downside to bridging loan is the cost. The interest rates are typically high when worked out as an APR. This can be considered misleading though, as the high interest is balanced out by the short-term nature of the loans. The only time this is a real problem is if an investor misses their exit. If the investment fails, interest keeps increasing and investor must find money to repay the loan from some other source or lose the asset put up as security. Care should be taken to ensure the planned exit is as certain as possible before considering a bridging loan.
Why should I invest in commercial property?
Commercial investment property is a great option for anyone looking to grow and diversify their investment portfolio. Typically, commercial property can generate longer, more stable leases; higher rental yields; and greater capital growth than residential properties. The initial capital outlay is usually higher than in residential markets, but the returns can be fantastic if you have access to the necessary funds and a good eye for spotting an opportunity.
What kind of commercial properties make the best investments?
The best kind of commercial property investment for you depends on your circumstances, resources and goals.
Industrial properties include warehouses and factories. These are usually large specialised properties, so can command a high purchase price. They offer a fairly sound investment, as the needs of most people renting such properties are unlikely to change in the long-term. As long as an industrial property has plenty of floor space and good transport links, it is likely to be a lucrative investment. Leases on these properties are typically the longest of any commercial property type. Even as manufacture decreases in the UK, imported goods increase, so despite the closure of factories and manufacturing plants, the need for warehouses and distribution centres means the industrial property market remains buoyant.
Offices also tend to generate long leases – typically around ten years. Office buildings can offer very secure investment prospects in that a large building can be rented to several different companies at once, reducing any risk involved with vacancies. Rental yields are generally high for this type of property. Many offices are rented by civil servants and government departments, which means that the lease is not dependent on economic success. In today’s economic climate, this can be a great comfort to investors. The downside of office buildings as investments is that their value is linked to the ability to let them. If development, such as the building of a major road, in the surrounding area means that they are in an undesirable location, the resale value can drop to almost nothing.
Retail and Leisure
Retail and leisure investments include shops, restaurants, hotels, sports centre and any other similar property. The biggest advantage of investing in this kind of property is the high rental yields that tend to be generated. These are also the highest risk commercial properties, especially in an unstable economy. These kind of businesses are more likely to fail, meaning the investor has to find new tenants. The risks can be worth taking though, as large rewards are possible. These are good investments for experienced investors with a strong portfolio offering a cushion should things go wrong.
Should I invest through a commercial property fund?
Property funds can be a great way to invest in commercial property. A property fund works by pooling money from several investors and putting it towards building an investment portfolio. Property funds can either invest directly in bricks and mortar ventures, or in development companies. Investing through a commercial property fund is a good option for any investor with limited experience and knowledge, who wants to make the move into commercial property. The beauty of property funds is that they are a completely hassle free option. You front the capital and it is invested on your behalf.
Are there tax advantages associated with investing in commercial property?
There can be significant tax advantages to investing in commercial property. For example, in some cases you can avoid paying Stamp Duty Land Tax. There are many different ways in which commercial property investment can provide tax benefits. The best idea is to hire a professional financial advisor who specialises in this area. They will be able to offer expert advice on all the opportunities available to you.
Is additional due diligence required on commercial properties?
Due diligence should be carried out on all properties and companies involved in investments. Commercial investment property may require a higher level of due diligence, because the value of the properties is tied to their desirability. You need to carry out more in-depth checks on the economic structure of the surrounding area and be aware of how future development could affect the use of the property. For instance, if a large industrial property is in an area of high employment – it is unlikely to be a sound investment. Companies that use large industrial properties such as warehouses and factories usually require a lot of unskilled workers based within a close proximity. If an area has risen in employment ratings and most of the people in the area are now skilled workers, it is unlikely that an industrial property will be easy to let out.
Why is property a good investment?
Property is a long-term investment. It can be great for pensions or for those that want to leave something behind for future generations. The returns on residential property investment are typically much higher than those that can be expected from no-risk investments such as ISAs and savings accounts. Property investment is also one sort of investment that you can have a lot of control over, as opposed to stocks and shares.
What is the best strategy for investing?
The answer to this question is completely dependent on your circumstance and your goals. Different types of property investments suit different budgets, personal circumstances and needs. The three main types of property investment are detailed below.
Buy-to-let properties are long-term investments that rely on capital growth for a return to be made. Though an income is generated through renting the property out, any profit made from this is typically modest. Good deals can be had on buy-to-let mortgages, and there are some tax benefits associated with this sort of investment, particularly if it is a holiday home. This sort of investment suits someone looking to buy with a mortgage and who wants a long-term investment with large returns in the future. Buy-to-let investments are suitable for investors with a lot of time to focus on the property, as well as those with other commitments that mean they need a more hands free investment; landlords can choose to manage the property themselves or make this the responsibility of a lettings agent or management company.
Flipping property involves buying property significantly below market value, renovating or refurbishing it to increase the value, and then marketing it for a quick resale. This is the most short-term form of property investment, although the process of flipping a property is still likely to take a minimum of several months. This is a good sort investment for cash buyers or investors looking to build a large portfolio and generate quick returns. This type of investment is only suitable for investors with a lot of time and resources to commit to their investment.
This is the ultimate form of hands off investment. It is suitable for investors with a decent sum to invest, but with little time to research opportunities, market and maintain properties. Basically, property funds pool the money of several investors and use this, either to purchase bricks and mortar investments or to purchase stakes in property development companies. This kind of investment is good for those with limited knowledge and experience within the property investment industry, or those with limited time and resources to commit to their investment.
Is a return on my investment guaranteed?
Residential property investment does not offer a guaranteed return. There are some forms of property investment that are involve a lower level of risk than others, such as off-plan developments with guaranteed exit strategies. However, all property investment involves some form of risk. Market values can go up or they can go down; this is very hard to predict. If the property market goes into a slump, investors may face a long wait before prices start to rise and the value of their asset grows. However, property offers the advantage that it can be rented out to generate an income in the meantime. As with any investment, the higher the risk involved in the investment – the greater the possible gains.
How can I minimise risks?
As mentioned previously, developments that offer guaranteed exit strategies are a great way to reduce risk. These are typically off-plan developments, which means you buy the property before it is built. The developers use the money from investors to fund the build, then guarantee to buy the properties back at an inflated price (usually 150% – 180%) at a specified date after completion. The only danger with this is that the development company may go bust before the build is complete, or before they are able to make good on their guarantee.
Buying below market value is another common tactic used in attempting to guarantee good returns. This means that investors do not have to rely on market values rising, but can control the increase in property value by renovating the property and re-selling at a higher price. Below market value properties can often be found at auctions or where a lot of work is needed to make a property habitable.
For all investments, risk can be minimised by carrying out due diligence. This means thoroughly checking the credentials of the property, as well as any company involved in the sale or development.
Investors should always carry out their own market research, as well as seeking expert advice from professionals within the industry.
What is the best way to finance my investment?
There are advantages to investing in property as a cash buyer and with a mortgage. Cash buyers are often able to negotiate better purchase prices, especially if a vendor wishes to sell quickly or a property is distressed. This can be a huge plus for investors, as the lower the price of the property, the more likely they are to get a good return.
However, even if you have the funds available to buy a property outright, it can still sometimes prove advantageous to split the funds and use the money as deposits on numerous mortgaged properties. The total capital growth of four properties will yield much greater returns than a single property and the rental income generated can usually cover the mortgage repayments. There is also added security, as if one property is vacant, an income is usually still generated by the remaining properties, which may cover holding costs.
Property investments can be generally separated into two types: passive and active. Active investments are those in which the investor takes full responsibility for all aspects of the investment. This means they source the property they wish to invest in, negotiate a purchase price, are involved in the conveyancing transaction, take responsibility for renovating, selling or letting the property, deal with tenants and maintain the property. In other words, an active investor is in full control of the success or failure of their investment. They commit to their investment or investment portfolio as a full-time job. They put not only money, but time and energy in to getting the most from their assets. While this method of investing can be very rewarding, particularly for experienced and motivated professionals, it certainly isn’t the best sort of investment for everyone to undertake.
Many investors are looking for a more hands-off approach. Perhaps they are looking for an investment opportunity that will allow them to grow a pension, while working a full-time job. Others may have a family to look after, other demands on their time or feel that they lack the experience and know-how to properly manage an active investment. There are a multitude of passive investment opportunities available in the world of property, which are suited to such investors. A passive investment is any in which some or all of the work is undertaken by a third-party and the investor only has to put up the money for the investment. Passive investments range from investment funds to hotel room investments or student lets.
Types of Passive Investment
There are many forms of passive property investment. Some companies will take your money and offer to build and manage a portfolio on your behalf. Investment funds pool your money with that of other investors, then invest either directly in property or in property development companies. Another kind of passive investment comes in the form of managed properties. Managed properties include student accommodation, holiday homes, hotel rooms, French lease-back properties and ski resort investments. In all cases, the investor purchases the property, but then hands over responsibility for maintenance, marketing and tenant relations to a management company. Off-plan investments can also be considered passive investments, particularly if they come with a guaranteed exit strategy.
The main advantage of passive investment is the lack of stress and hassle the hands-off approach involves. Of course, most property investments are going to be long-term, so it is essential that whichever company you choose to control your investment (be it an investment fund, a letting agent or a property management company) is one with a good reputation and with which you can build a stable working relationship. It is necessary to undertake due diligence when selecting passive investments, but once the work has been done and they are happy with the company, investors can typically step back and enjoy the returns with little further effort or input required.
Inexperienced investors entering the market for the first time can benefit hugely from passive investments, as they will receive input from experts. Investment funds and property management companies make a living from controlling investments. They need to know what they are doing and be able to do it well, otherwise their companies would fail. By engaging the services of professional companies with a solid reputation, investors can be sure that they will get expert guidance. Many companies are happy to include investors in communications and meetings, offering advice on the choices they are making and allowing the investor to learn from them.
The risk inherent in passive investments is the lack of control that the investor has over the success of the venture. In a passive investment, the investor must put their faith in the management company or investment fund. The decisions on where to invest or how to maintain or market the property are taken out of their hands. If the company makes a decision the investor disagrees with, there is often little they can do about it. This is particularly true if the money has been pooled together with that of other investors in a fund. If the decision turns out to be bad, the investor loses out. For this reason it is essential to conduct due diligence on any company you choose to work with. Only ever trust well established and reputable companies. Companies with little experience or lacking testimonials from satisfied customers are extremely high risk options and should be avoided.
A further downside of passive investment could come from the establishment of a long-term relationship with a company or fund you turn out not to like working with. Make sure that the company is easy to access and has good customer service. You will need to be able to communicate with them effectively. Chances are you will be working with this company for a period of years, so it is worth making sure that their business practices are one you agree with. Don’t just look at the returns they report. You need to ensure they offer a personable service and terms that you can accept. If they are often rude on the phone or difficult to get hold of, chances are things won’t improve in the future. Be sure only to invest your money with a company you trust and have a good relationship with.
Conclusion For Passive Investments
There are distinct advantages to both passive and active investments. For those with little time or experience, passive investments offer a great opportunity. Care must be taken when choosing the right investment for you and the right company to manage it. If due diligence is completed, chances are that a very successful, hassle-free investment is possible.
It is important to properly assess your finances before entering into any sort of investment. The only reason to purchase an investment property is to generate a return. If you are not completely aware of every aspect of your financial situation, it is difficult to assess the potential of any investment to issue a profit. Without taking the time to make a careful and detailed analysis of your finances, you could end up in deep trouble, even losing money on an investment.
The first thing to take into account is what existing funds you have available. Work out the balance of any savings and debts you have. If at all possible, pay off debt early and leave yourself with only a positive figure. This may take a significant chunk out of your savings, but it will make your position more secure. Work out your discretionary income. This is the amount left over after paying taxes and deducting the cost of personal survival items such as food, rent and utilities. Lenders will want to know the amount of monthly discretionary income you receive when assessing mortgage or loan applications. Mortgage lenders do not just look at the gross or net salary of applicant, but consider all regular outgoings and any outstanding debts to ensure that borrowers have a realistic likelihood of being able to meet scheduled repayments. Working out the total amount of savings you have put away and your discretionary income will tell you how much you can realistically afford to contribute to the investment both as initial capital and in terms of monthly payments that may have to be covered while a property is being renovated or marketed. Using this information you can work out a budget based on your earnings, savings and any mortgage that is likely to be obtainable.
How Much Will Your Investment Really Cost
Calculating the cost of an investment means taking into account much more than just the purchase price of the property. There will also be fees payable to conveyancing solicitors and estate agents, Stamp Duty Land Tax, Capital Gains Tax, Income Tax, the cost of hiring a management company, any costs involved in renovating or furnishing the property, Land registry fees and various other amounts associated with property sales and purchases. All of these costs must be added together to give you the total cost of an investment. Only if the total cost falls within your budget should you consider going ahead with the investment finance.
Cushioning Your Investment
If the worst case scenario becomes real and your investment fails – how much of cushion do you have? It is always wise for investors to ensure they have an amount set aside in case their investment falls into difficulty. There are always holding costs associated with a property between the time that it is bought and its subsequent rental or sale. These costs include mortgage payments, utility bills, council tax and maintenance costs. Similar expenses will be incurred by the investor during any period that a buy-to-let property stands vacant. It is always wise to ensure you have an amount set aside to cover these costs, not only during the time you expect to hold the property (e.g. whilst it is being renovated or marketed), but also for an extra six months – just in case there are delays and the property stands empty longer than expected. The consequences of not being able to meet these costs are dire; not only do you stand to lose the property and anything else put up as security against a mortgage or loan, but there will be substantial damage done to you credit rating if you default on a mortgage. This will make it impossible to obtain funding for future investments.
Your Ability to Secure Finance
Before you can invest in property, it is likely that you will need to obtain funding in the form of a mortgage. Your ability to secure this funding and how much you are able to get will depend on a number of factors, but all the costs mentioned above will be taken into account. The first and most important thing you will need is a deposit. At the height of the property boom, mortgage lenders were known to 100% or even 125% mortgages, which required no deposit from the borrower. However, with the economic crash came stricter regulations and much greater caution being exercised by lenders across the board. In the current economic climate, a typical deposit required for a mortgage is 25% of the purchase price of the property. The extend of your savings will largely determine the size of the mortgage available to you, as these will be used as your deposit. However, mortgage lenders will also need to know your discretionary income, to ensure that you will be able to make repayments. They may also require a business plan detailing all the costs involved in the investment, your plans and the timescale for making a return on the property, and any contingency plans and finances you have in place if things go wrong. The more detailed information you can provide, the more secure the lender will feel in making a mortgage offer. You will also need a good credit rating.
Distressed Property Investment
Distressed property is property that is in danger of being or has been foreclosed upon. Foreclosure is the legal process through which a lender attempts to recoup the balance of a loan, if and when the borrower fails to make scheduled repayments. The process involves the legal seizure of whatever asset was used as security against that loan, in order to force the sale of the asset. In the case of mortgages and very large loans, this asset will typically be property. Distressed property investment is therefore any property that is being held or sold by a lender as a result of foreclosure. In some cases the term can also be applied to property that is up for a quick sale by the owners, as a result of them being unable to meet the costs of a mortgage or other loan. They may be attempting to sell the property in order to pay off the balance of their loan, before it is officially seized.
Why do Distressed Properties Make Good Investments?
Distressed property tends to be sold at a discounted price, often one that is well below market value. In cases where the owners of the property are trying to sell quickly in order to avoid foreclosure by lender, they will often accept very low offers from buyers, particularly cash buyers and first time buyers. These categories of buyer are preferred, because a sale will usually complete much more quickly if there is no mortgage or no chain. Cash and first time buyers are therefore in a very strong position to negotiate price on such properties. Distressed properties which have already been seized by the lender are also usually up for a quick sale. While the lender has a duty to get the best possible price for a property, there is no set period of time which they should allow for the sale. Most lenders will want to re-sell property very quickly, in order to eliminate costs involved with holding it and to ensure it doesn’t fall into a state of disrepair, thereby reducing the value. Distressed properties are often sold cheaply at auctions. Their below market value price tags often make them great opportunities for investment.
What Situations Can Lead to Distressed Property Sales?
Repossessed Property Sales
Repossessed properties are simply those on which the foreclosure process is complete. They are fully owned by the bank and up for quick resale. If looking at buying a repossessed property, it is important to have a full survey done prior to bidding at auction. The winning bidder in an auction is legally obligated to buy the property they have won and a 10% deposit is usually required upfront on the day of the auction. Repossessed properties have often stood empty for long periods of time whilst foreclosure was taking place, so the risk of them needing serious renovation is high. The costs of renovation can eat into any profit made through buying below market value.
Financial distress generally comes about due to a change in circumstances. This may be redundancy, a pay cut, a long-term medical condition leading to an extended period off work, or any other factor that may result in a loss of or drop in income. Properties that are distressed for financial reasons are usually up for sale by the owners, who are normally looking to sell as quickly as possible, before missing a mortgage payment.
Properties in Poor Condition
Properties in a state of disrepair need work doing to them before they become habitable. This can often lead to them falling into the category of distressed properties. If the condition of the property is too poor for it to successfully attract tenants, a landlord may need to sell quickly due to an inability to meet mortgage repayments without a rental income. Properties are sometimes bought by investors or developers with the intention of doing them up and reselling them at an increased price. However, occasionally the budget for renovations is used up and work remains to be done on the property. In such cases, the owners are usually looking to resell quickly, as they are unable to let out the property until it is habitable and are losing money on mortgage payments every month that they hold on to it. These properties may also be seized and resold by lenders if the owner is unable to sell quickly enough.
The most common way that death leads to a forced sale of a property is when the property in question is owned on a basis of tenants in common and one of the named owners dies. The deceased’s share of the property passes to whoever is named in their will or through intestacy where no will exists. In cases in which the remaining owner is unable to buy out the estate, they will need to sell quickly in order to release the equity of the property and ensure the estate is settled.
If a property is owned by two parties on a joint tenancy basis and one passes away, the remaining owner may not be able to continue to meet mortgage repayments on their own.
If a property is owned by an individual who passes away, if they do not have a will or the beneficiary of the will cannot afford to take on the mortgage, the property must be resold as an estate sale.
Couples going through divorce or separation often need to sell a property quickly for financial or emotional reasons. In some cases, one party may leave the other unable to make mortgage repayments, leading to foreclosure.
Relocation for Work
If someone needs to relocate for work, they usually have a deadline by which to sell their property based on the start date of their new job. The owner of the property will usually wish to sell quickly, so as to avoid having to pay two mortgages on different properties. In some cases, the owner will be unable to sell before the relocation goes ahead, leading to them being unable to keep up with mortgage payments on both their old and new property. This may lead to foreclosure by a mortgage lender.
These are just a few of the reasons that properties may be under threat of foreclosure. In each case, it is likely that the distressed property investment will be sold below market value, so looking out for distressed sales can lead to great profit-making opportunities.
The choice of materials that you use when renovating a property can make a real difference to the resulting value of the property. As an investor, the number one rule for renovations is that you should never make a major or expensive change to a property if it will not increase the property’s worth. There are certain materials that can be used in visible part of a renovation that are proven to increase the sale-ability and value of a property far more than other choices.
Exterior / Cladding
The best choice for exterior walls on most property renovations. The material is tough and durable, requiring little to no maintenance. It is also fire-proof, adding to the overall safety of a property. The aspect that really makes it a good choice for investors though is the value it adds to the property. Up to 87% of the cost of fitting fibre cement cladding is recouped from the rise in market value it provides. This kind of cladding looks good and will likely attract buyers.
An alternative to fiber cement cladding is vinyl cladding. This can be simple vinyl cladding or foam-backed vinyl cladding. Both look great, offer easy maintenance and will increase the value of the property. Foam-backed vinyl cladding also adds extra insulation, something that many potential buyers will be looking out for due to ever-increasing energy costs.
More and more people are choosing to have wooden window frames fitted to their properties. Wooden windows may seem like a thing of the past, with many people remembering flaky, splintered or rotting frames of old. Wooden windows do require more maintenance than other materials, but statistics show that they are popular with buyers, adding a timeless look to a property. Modern treatment methods mean that wood is more durable and should not need replacing too often.
The quality of vinyl windows has increased greatly in recent years. Requiring little in the way of maintenance and lasting for uncountable years, this material is a great choice for lasting quality and will add real value to a renovation property.
The choice of flooring will depend on the overall value of the property and which sector it is being marketed to. High end properties aimed at attracting professional tenants or families will require higher quality flooring than student lets or mid-range properties. It is important not to overspend on flooring, as it will only add value to certain properties.
The best choice for flooring in high-end properties is hardwood floorboards, plush carpet or luxurious stone tiles. The quality of flooring will make a real difference to the impression of the property that high-end buyers or tenants receive. Buyers and tenants looking in this range of properties expect top quality in every aspect, particularly if a property has been recently refurbished. Anything but the best will have a significant negative effect on their chances of buying.
While the choice of flooring in these properties is of some importance, functionality rather than luxury is key. Generally bought by families and young professionals, flooring should be good quality, but not overly expensive. These sectors of the market typically do not have a lot of money to splash out on extra luxury. Wooden flooring, good quality laminate, good quality carpets and ceramic tiles are all good choices for a mid-range property.
Low-end properties tend to be student and local authority lets. Tenants are often unlikely to take good care of these properties. Investors buying such a property or tenants looking to rent one will usually have a limited budget and will not want to pay extra for good quality flooring. Durable or replaceable are good words to keep in mind when making your choice. Laminate or tiles are good for wet rooms, while wood effect flooring or cheap carpet is good for living areas.
There are many choices of material for counter-tops. Each has some advantages and disadvantages. Choosing the right counter-top material for the look and feel of a room can really add value to a renovation property. Some of the most common choices are listed below.
Granite is available at a range of prices, so it may be possible to get a very good deal (although it can also be very expensive). It tends to be durable due to the hard stone being unlikely to get scratched or chipped. It is also resistant to heat, fire and mildew. Granite is available in many colours and patterns. So long as it is sealed roughly twice a year, it will not stain. Granite is relatively brittle and may crack if too much weight is put on it. Seams tend to be visible if multiple slabs of granite are used to make the counter-top.
A soft stone that is resistant to heat and water, marble offers functionality coupled with a beautiful, elegant and timeless look. The surface of marble remains cool, making an excellent choice for kitchen in which a lot of baking is done. Due to its porous nature, marble stains easily and must be sealed several times a year to prevent this. It is also an expensive material.
Stainless Steel / Chrome
Stainless steel is a popular choice for a modern, minimalist look, popular with young professionals. This material is heat and mildew resistant and does not harbor bacteria, meaning it is an excellent choice for kitchens. Stainless steel comes in a variety of prices, but good quality counter-tops in this material may prove expensive. Chrome plating is often a cheaper alternative, with a similar look and characteristics. Stainless steel can give a cold or clinical feel that may not be popular with families or high-end buyers. It can also scratch easily or dent if it is too thin.
The main advantage of laminate counter-tops is their affordability. These are ideal for lower end properties, as they are resistant to heat and stains – as well as being easy to clean. Available in a wide range of colours, these are great for student lets. Laminate is not heat or scratch resistant, so it may need replacing between lets – but the affordability makes this feasible.
Personality Traits of Successful Property Investors
If asked, most people would probably say that the things someone needs to become a successful property investor are a decent amount of capital in the form of savings and a good credit history. They may also pick out traits like building know-how, an eye for interior design, or ruthless negotiating skills. The majority of people would probably not say, however, that property investors need to display any particular characteristics in terms of their personality. After all, when you are dealing with bricks, mortar and banks, where does personality come in? In fact, to achieve success in the world of property investment, there are several character traits that can prove to be very helpful, if not essential. There is definitely a personality type that is conducive to successful property investment.
Top of the list, you need to be a people-person. This means that you need the ability to strike up conversations easily and persuade people around to your way of thinking. It is very useful to be able to adapt your style of communication depending on who you are talking to. Investors who can switch between cool professionalism in a bank, hard negotiation when discussing price and chatty welcoming ease when showing around potential buyers will go far. As with most things in life, who you know will get you a lot further than what you know. If you are skilled at dealing with people in a manner most appropriate to their personality type or position, you can quickly establish a large network of useful contacts. You will also be able to turn almost any situation to your advantage. Being shrewd, knowing how to read people quickly and respond appropriately, is a great skill for an investor to have, if they want to get the most out of property investment. You will have to deal with many different people, such as estate agent, solicitors, bank managers, contractors, tenants and buyers.
You must have confidence in your investments. If you are afraid to fail, chances are – you will; it will become a self-fulfilling prophecy. An investor who ensures they have contingency plans in place and takes set-backs on the chin will go far. Buying and selling property is a complex process, with many things that can potentially go wrong. Investors need a plan, but equally they need enough confidence to continue smoothly when things fail to go to plan. If they can approach any situation with confidence in their ability to deal with any problems that may arise, chances are they will find solutions and alternative plans spring to mind quickly. Almost any situation can remain more or less stress free when handled with confidence. On the contrary, if it is in your nature to worry about every little detail and you find yourself completely thrown when things don’t go to plan, than property investment is unlikely to be a fruitful option for you to pursue. Even if the investment makes a good return, chances are you will be under constant stress and unable to appreciate the money.
You absolutely must be self-motivated as a property investor. It is not a 9 to 5 job and you never completely switch off from it. You always need to be available when new opportunities arise, as it is often appropriate to act fast. You need to make yourself get up and get out there, looking for new opportunities and increasing your network on a daily basis. You also need to stay on top of property maintenance and any issues that tenants may have if you are a landlord. If you find it hard to motivate yourself to do the things that need to be done and often find yourself procrastinating instead, property investment may not be the best route to take. No one is going to make sure you do what you need to except yourself. Motivation is a key characteristic for successful property investment.
In the world of property investment, the game can change at the drop of a hat. Problems can and do crop up completely unexpectedly, often at incredibly inconvenient times. Opportunities also seem to lend themselves to limited windows that are not always easy to access. Taking a long time to make decision, or constantly second-guessing what might have happened if you had done otherwise are traits that will not get you far in property investment. Failure to act quickly means missing opportunities that present themselves. Second guessing your decisions will only wear you out with stress, because there are so many decisions to make. You need to be adaptable and you need to be able to think quickly and take charge, in order to enjoy success in this field of investment.
Property investments are generally long-term investments and by their very nature they are illiquid. This means that capital tied up in property cannot generally be released quickly or easily. There will be a period of at least month between deciding to part with an asset and the sale actually going ahead. This means you have to be absolutely sure and one hundred percent committed to your investment. If you think you are likely to change your mind after a couple of years or you are not sure you will be able to afford the investment whilst the capital grows, walk away now. Not only do you need to be committed to seeing the investment through, you need to be committed enough to making the most of the investment to put in all necessary time. This is linked to motivation in that no one is going to make this work for you, so you have to be willing to make sacrifices and give your all to ensure the success of your investment.
French Leaseback Investment
The leaseback scheme was introduced by the French government to help boost tourism and improve the quality of tourist accommodation. The scheme gives investors the opportunity to buy properties in desirable locations in France and then lease them back to management companies. To investors, his provides a hassle-free investment with guaranteed income and fairly good returns. In return, investment funding is secured for new, high-quality developments in tourist resorts – bolstering the tourist trade in the country.
How Does French Leaseback Investment Work?
Properties are bought by foreign investors in holiday resorts, and then leased back to management companies. The properties are often bought off-plan and the money made through the investment is used in the actual building of the development. The management company will lease the property from the investor, paying a monthly rent for a period of typically nine to eleven years. During the term of the lease, the management company will take full responsibility for maintenance and rental of the property. The investor can just sit back and rest assured that any issues with the property will be taken care of. The scheme provides great peace of mind for investors, as they know that they will get a monthly income through monthly rental payments, regardless of whether the management company has successfully let the property or not.
What are the Benefits of French Leasebacks?
The rent paid by the management company is not subject to the property being let. This means that even if the property stands empty for a significant period, rent will be paid by the management company to the investor. Few investments provide a guaranteed rental income, so this is a huge advantage. In most cases, rent is paid by the tenant of a property, so if the property is vacant for any period of time, it generates zero income or even makes a loss. This never has to be a concern for investors who take advantage of the French leaseback scheme.
The management company takes care of all maintenance issues relating to the property. They will normally ensure that the property is well furnished, arrange for it to be decorated, and deal with any repairs that are needed. The management company is also responsible for marketing and letting the property, as well as dealing with any issues raised by the tenants. The investor has little to no involvement with the day-to-day running of the property. This is great for people looking to invest in property, but who have little free time to commit to carrying out the duties of a landlord.
Properties that are eligible for the leaseback scheme are generally in very popular tourist destinations, such as central Paris, the French Alps or the Cote d’Azur. Owners get rights to stay in the properties for so many weeks per year, and special rates if they wish to spend more than their allotted time at the property. The desirable locations in which these properties are found, means they are great holiday homes. Most leaseback properties are also located in resorts with private pools and leisure facilities.
If an investor holds a leaseback property for twenty years, the French government will rebate the TVA (Taxe sur la Valeur Ajoutée) paid in the purchase of the property. TVA is basically the equivalent of VAT in the UK. It is paid on almost all commercial goods, including properties. A TVA rebate can be very significant, as TVA is paid at a rate of 19.6%.
Chance of Good Returns
Yields on French leaseback investment properties tend to be between 3% and 5%. This is fairly high in comparison with high-interest savings accounts or other long-tern low risk investments. More and more people are turning to leaseback properties instead of traditional pensions, for this reason.
You can sell a French leaseback investment property at any time. The remaining lease simply passes to the new buyer and the management company pays rent to them instead. The tax benefit also passes to the new buyer, so the original investor is not liable to pay back the VAT saved.
Are There Any Risks?
The rental income is only guaranteed so long as the management company is in business. If for any reason the company struggles to let the properties they control or are otherwise badly managed, the company is at as much risk as any other of going bust. If this happens, the investor is left with all the responsibility for the property, whether they wish to keep attempting to let it or sell it. You will be responsible for both maintaining and marketing the property, unless you can find another management company to take up the lease.
Tax Benefits Lost if Early Sale
If you sell the property before 20 years have passed, you will no longer be eligible for the TVA rebate. The tax breaks will pass to the new owner. You will not have to pay any extra taxes, but nor will you receive any money back.
Short Notice Visits Difficult
Because the letting of the property is controlled by the management company, despite owning the property and generally having rights to visit for between one and eight weeks each year, you will normally have to book your visits well in advance. Otherwise, it is likely the property will already be rented by another tenant.
Little Control Over Design
The management company will normally take control of decorating and furnishing the property. They will probably do this in such a way that the property fits in with other properties on their books. The owner will usually have little control over the appearance or functionality of the interior design.
It is difficult to find chalets or luxury buildings on the leaseback scheme. Typically only apartments in resorts are available on this scheme, as these benefit from access to amenities and facilities within the apartment complex, such as swimming pools or fitness suits. This means that the investment required is usually smaller, but choice of holiday homes is limited and an apartment may not be suitable for a family or large group holidays.
Over recent years, the financial crisis that began in 2008 has seen market values drop dramatically and investors hit hard time in all economic sectors. The housing market has been no exception, with sale prices dropping year on year and many owners of freehold properties finding themselves in negative equity. Green shoots are starting to emerge in the construction and property sector and many investors are once again looking to turn their money into assets in the form of property. The rental market is currently thriving and sale prices seem to be on the up. However, investors would be forgiven for approaching the market with some trepidation still. Property is an liquid asset, meaning that if there is further disruption to the economy or the construction market, it can be difficult and time-consuming to sell your assets on. There are some schemes increasingly being offered by housing developers that savvy investors can take advantage of to provide themselves with a certain level of peace of mind.
Assured Buy Back
What is assured buy back?
Assured buy back, sometimes called an exit guarantee or assured appreciation, means that the developer of a property sells to an investor, guaranteeing to buy the same property back at a later date for an increased price. This means that an investor can purchase a property happy in the knowledge that a significant return is guaranteed further down the line. This guarantee is written into the sale contract, so the developer is legally obligated to uphold it.
How does it work?
Assured buy back may sound too good to be true, but really it is a win-win situation for investors and developers. This deal is normally only offered on off-plan properties, typically abroad. The developers require money from investors in order to get the build off the ground and realise the development plans. The properties are often sold at a significant discount, in order to entice investors and convince them to put their money into a project where uncertainty and risk exists based on the property they are purchasing not yet being built. The developers only make an offer of assured buy-back if they are almost certain that they will be able to make a profit by selling the property on at the specified date. The investor is guaranteed a healthy return on the property (usually around 150% of the purchase price) and the developer is able to complete the project, hopefully also making a profit through re-sale of the property when the development has become established.
Are there any risks?
As with any off-plan purchase, there is the risk of the development company going bust. If this happens before the build is finished, the investor is left with an undeveloped plot of land, which is usually very difficult to sell on. There is the added risk of the developer going bust at a later date. If the company does not stay afloat, they will not be able to honor their agreement to buy the property back. Due diligence should always be carried out on development companies before an investment is considered. Only deal with well-established companies that have good track records.
The other risk that should be taken into account with assured buy-back is that when the time comes, you may not wish to sell the property to the investor. Prices may have risen sharply, meaning that an investor may be able to get a better price through independent re-sale than the price agreed in the contract with the developer. Unfortunately, unless the guarantee was optional, the investor will be obligated to sell to the developer at the agreed price. Where possible, look for optional buy-back agreements. This means that the developer will be obligated to offer to buy the property back at the agreed price and time, but the investor retains the right to refuse. This sort of agreement means the investor gets the best of both worlds: peace of mind and the chance to make a greater profit.
Rental Guarantee Schemes
What is a rental guarantee?
Rental guarantee means that a management company or developer agrees to pay the landlord of a rental property a set amount of rental income for a fixed period of time. The term of a rental guarantee schemes can range from one year to fifteen years. During this time, the landlord will be guaranteed a rental income even if the tenants fail to pay their rent or if the property stands empty for any amount of time. Investors can use these guaranteed rent payments to pay off a mortgage or as a form of income. The management companies that provide rental guarantees also take care of all maintenance and repair issues relating to the property. Again, rental guarantees are often offered on off-plan blocks of flats as a means of enticing investors. They are also regularly offered on hotel rooms.
How does it work?
Every investor knows you cannot get something for nothing. Management companies do not provide rental guarantees purely for the investor or landlord’s peace of mind. Normally, management companies only offer rental guarantees if they are confident that they can achieve a higher price in rental income from tenants that which they are paying under the terms of the guarantee. The investor gets peace of mind, knowing that they will receive a rental income no matter what and the management company gets to keep any excess made through renting the property out for a higher price than they pay the investor.
What are the risks?
The risk involved with a rental guarantee is that rental prices in the area may rise steeply, leaving the investor earning only a fraction of the potential rental income of the property through the guarantee. In this case, the management company would make a great return, as there would be a large excess of rent each month after they had paid out the required amount. Even though the investor owns the property, they would be unable to receive an increased rental income. This risk should be balanced against the risks involved in marketing a rental property independently without a rental guarantee. If an investor chooses to go down this route, they will be responsible for finding tenants, negotiating rent, maintaining and repairing the property (with all associated costs), and meeting any required payments on the property even if it stands empty for a period of time.
Property Investment Advice
Entering into the world of property investment can hold many advantages for clued up investors. More and more people want to turn their money into tangible assets in the current economic climate. The housing market is less volatile than traditional stocks and shares investments. Investors have more control over the successful growth of their investment. However, the market is relatively liquid and if things go wrong it can be very difficult to sell property assets quickly. As an investor, you will therefore need to be very sure of the potential of any investment you consider making and have a good exit strategy in place. Investors who are new to property or have limited knowledge of the sector should seek advice from experts in the field. There are a wide range of options available to invest in property and many factors that can affect the success of an investment. Informed advice can make all the difference. However, it might not be easy to know who to turn to for advice, as there seem to be many sources willing to offer it and much of the information being dished out seems contradictory. In this guide we will look at who to turn to and what questions you should ask them.
A good starting point, and one that you are likely to already be at if you are reading this blog, is to look for information about property investment online. The internet is a wonderful tool that has opened up vast amounts of knowledge to anyone who is looking for it. There are literally hundreds of sites that will offer advice on how best to invest in property. Investors can find information on any form of investment they may be considering. There are some problems with relying on online research alone for investment advice though.
The first problem is that it can be extremely time-consuming to find good quality information on the topic you are interested in. Investors may have to spend hours trawling through articles that offer little relevant advice, before they find what they are looking for. Secondly, it is difficult to be sure of the accuracy and quality of the advice being offered. Many companies are biased and will try to paint certain investment choices in a good light, based on their either offering that sort of investment themselves or receiving commission from a company that does so. Checking out companies to make sure they are well-established and have a history of helping people make good investments can help avoid the problem of biased information, but this will take even more time out of a busy schedule. The Final problem is that internet articles are written for every reader. They do not offer specific advice tailored to your needs. Every investor’s circumstances and goals are different, so looking up generic advice on the internet can only get you so far.
Family and Friends
Many investors will turn to family and friends for advice, particularly if they know someone who has already enjoyed success in the property investment field. Taking advice from family and friends is unwise and can be detrimental. Even someone who has successfully invested in property is not an expert. They only have their own experience to go on and their circumstances or the prevailing market may have been very different to yours when they made their investment. Whilst you may think these people will have your best interests at heart, it is wiser to trust an independent expert. Over cautious family members may advise you to stay away from a good opportunity, based on their own fears for you. Contrarily, someone who did well from property in the boom years may encourage you to take the same risks that worked for them in a very different market where this may lead to trouble. Avoid asking family and friends for advice, other than to recommend an expert who can help you further.
Estate Agents and Letting Agents
The first thing you need to think about when investing is your exit strategy: are you looking to sell the property on fairly quickly or rent it out as a long-term investment? The best people to offer advice on this matter are estate agents or lettings agents. Book an appointment to meet with these experts and discuss the current and projected markets in the area local to the office. These experts will deal with either sales or lettings on a daily basis and will be able to tell you everything you need to know to plan the best exit strategy. Visit different agents and get advice on both sales and lettings. Compare the advice given before making your decision.
Mortgage Brokers and Financial Advisors
If you need finance for a property purchase, the best professional to advise on this is an independent mortgage broker or financial advisor. If you approach banks directly, you will often be subjected to the hard-sell, particularly if you are in a good position to make the most of an investment. You may have to pay a fee to a mortgage broker (although often they make their money from commissions), but you can rest assured that you will get the best advice regarding products that will really suit your needs. Be sure that your mortgage broker is truly independent and not linked to any particular bank or lender.
You will need to instruct a property solicitor to carry out all the legal work involved in the conveyancing process. These professionals will be able to offer advice regarding any potential legal issues or problems resulting from title deeds, leases, contracts or searches.
Whilst all the above professionals will have knowledge of the market, the financial products on offer and the legal ins and outs of conveyancing, they may deal more regularly with residential purchases than investments. It is therefore wise to also speak to an investment specialist. If investing directly in property, look for an investment agent. These can often be found online. Usually, someone from an investment company will be very happy to talk to you and discuss your investment options. Look for a company that has a range of different properties and investments available, as they will be more likely to listen to your specific needs and tailor their recommendations to you. If looking to invest indirectly through a property fund, contact different fund providers to discuss the options available.
Property Investment Exit Strategies
Having an exit strategy is absolutely essential in terms of property investment. Different people take exit strategy to mean slightly different things, but the best way to think of it is in the most basic terms: a strategy regarding what to do with the property after purchasing it. Your exit strategy should be a method of generating a return on the property in order for your investment to be a success. The obvious exit strategies are to sell the property on immediately, to renovate the property and then sell it on, or to rent the property out. This cannot be the extent of your strategy, though; an exit strategy must be well thought out and researched in order for an investment to achieve its full potential. It is usually best to plan at least two realistic exit strategies, just in case anything happens that makes your initial plan unfeasible.
Why Do You Need to Plan Your Exit?
Investing in property without an exit strategy is like trying to start a business with a rough idea of what you want to do, but with no plan in place for achieving your goals. In both situations, you are unlikely to be successful. Just as a bank would be unlikely to offer a business loan to a company without a business plan, lenders will be unlikely to lend on investment properties where there is no exit strategy in place. Further to this, the only reason for investing in property in the first place is to make a profit. Without a well thought out exit strategy, you will be unlikely to generate the best possible returns on your investment. Developing an exit strategy really just means doing thorough research to make sure your investment will be solid. It allows you to identify possible pitfalls and truly evaluate whether to go ahead with the purchase, before it’s too late. Often it can show up dangers that may not have at first been apparent and demonstrate that a seemingly solid investment is actually dependent on a precarious variant.
For example, someone may look at buying a property in an area known to be good for student lets. Their basic exit strategy is to rent the property out to students. The property seems to be ideally situated near the university campus. The rental market in the area is strong, but about 70% of lets in the area are rented by students. Taking a perfunctory look at the information relating to the property, a careless investor may snap it up, thinking that their exit strategy is secured. However, if they had conducted proper research, they would have found out that the university is moving its campus across town in the following year. The current university buildings are to be demolished and the area is no longer going to be at all convenient to students. Not only this, but the area that the property is in is situated an inconvenient distance from the city centre or local amenities, as students had everything they needed provided on campus, but this was at an out-of-town location. Suddenly, the investor is left with a massively depleted rental market and little chance of selling the property on at a profit.
Do Your Research: Exit Strategy Checklist
Doing thorough research to build up as clear a picture as possible of your target market is essential in getting the most from an investment property. Below is a list of the major aspects that an investor should consider before committing to purchase a property. Do this research with an open mind and rely on your head, not your heart. Don’t be afraid to walk away from an opportunity if your research shows up the potential for problems. There will always be more great opportunities.
Popularity of Area
Try to find out how popular property is in the local area. Check websites and windows of local estate agents to keep an eye on how quickly properties tend to sell and which kind of property seems to go before others. Look for the factors that drive the popularity. Is there a single factor driving popularity such as a large employer, university or major attraction in the area? Or is popularity based on a good mixture of positive aspects to the location? If it does rest heavily on a single attraction, what is likely to happen to the area if unexpected changes occur with regards to whatever drives the popularity? Only when you have answered these questions can you start to be sure that the popularity of an area will remain steady and get an idea of whether your property will constitute a good investment.
Supply and Demand
Check facts and figures to see what supply and demand is like. It may seem that the property market in an area is booming if there are many properties available for sale or rental. It is possible though, if not likely, that in an area where there are a lot of properties on the market, there is an oversupply. If there is a greater supply than demand, this is unlikely to change over time and means that prices will constantly be driven down by competition. This could make it incredibly difficult to realize a good return on your investment.
Try to discover if there is strong demand from more than one buyer market. If the area is popular both with locals and tourists, for instance, this puts an investor in a strong position. This means if one market is disrupted or slackens, there will still be another market available to which to sell or let the property.
Some properties – particularly off-plan developments abroad – off guaranteed exit strategies as part of the sale contract. This means that the developer guarantees to buy the property back at a specified time in the future for an inflated price. Developers do this only if they are confident that the value of the property will have risen by a higher percentage than they pay to buy it back. Investors have peace of mind, knowing that a return is guaranteed. The best of both worlds is to be offered an optional buy back guarantee. This means that the investor will be given the choice of accepting the developers guaranteed offer, or selling the property on independently to try to get an even higher price.
Off Plan Property Investment
In basic terms, buying off-plan means the purchase of a property that has not yet been built. Off-plan properties are bought directly from the developers, before the building work on them has commenced. Investors have access to plan for the buildings, but are unable to see an example of a finished building. Buying off-plan might sound like risky business, and it certainly isn’t for the faint hearted. However, savvy investors stand to make a great profit by investing in credible off-plan projects. There are various advantages to buying an off plan property investment, especially if you invest very early on in the development. There is a high level of risk involved too, but this can be substantially reduced by taking the time to do some research before buying and obtaining advice from an expert at a reputable property investment firm.
Why Buy Off Plan Property?
The main advantage of buying off-plan properties are the discounts that are offered by the developers. The disadvantages of committing to buying a property before you have the chance to see what it will look like are obvious, so it is not easy for developers to sell plots at the very early stages of a build. Many people would prefer to sit back and wait to see if others invest before putting up any money of their own. However, developers need to secure funding in order for work to progress. This means that they offer incredibly good deals to try to attract investors. It is possible to get discounts of up to 20%, just by signing up early. The more ‘real’ a development gets, the less discount will be offered, as it becomes much easier to sell properties once people can see them coming together or look around a show home.
It is possible to find off-plan properties before the official launch of the development through large investment companies that are often offered these properties at vast discounts pre-launch. Properties are then offered to individual investors at the launch. Estate agents will occasionally get pre-launch properties on their books and will usually offer these to serious investors they already have contact with. It is worth developing relationships with estate agents that regularly deal with new developments and off-plan properties, in order to find out about new opportunities as early as possible.
As investments off-plan properties are excellent as the discount obtained at the time of purchase and any rise in market prices during the time the build takes combine to mean that the properties can be quickly re-sold for a profit. If purchased as buy-to-let, off-plan properties also have advantages, as they have to be built in line with current regulations. This means all safety checks will be carried out and the properties will have high-performance locks, security alarms and spotlights fitted a standard. Investors also know that no work will need to be carried out on the property as everything in it is brand new.
Where to Buy Off Plan Property Investments
Unless you are able to buy for a serious discount, it makes little sense to buy off-plan properties in a flat or failing market. The property will likely be on a development site with many others making competition fierce when it comes to resale or rental opportunities. Further to this, in a failing market prices may fall in the time the property is being built, thereby cancelling out the benefit of any discount. Instead buying off-plan is only advisable in markets that still have significant room for growth. Many people buy off-plan properties abroad, usually in parts of Europe where property prices are still rising. Be very careful of buying in the UK at this time, as it is unlikely that prices will increase significantly for some time.
What Are The Risks With Investing Off Plan?
The main risk associated with buying off plan property investment is that the developer may go bust and be unable to finish the project. In this case, investors are left in a particularly difficult situation, with nothing to show for their money. For this reason, most properties are paid for in stages, with certain percentages of the purchase price being paid off at different intervals throughout the build. However, any money that has been paid towards a property that is not completed will be lost and this can be substantial amounts, even early on in the build. This is particularly difficult for investors who have taken out a mortgage or another sort of credit to finance the purchase. They will be responsible for paying this money back, despite not being able to sell on or rent out the property to generate a return.
Because of the risks involved in buying a property before it is built, it is necessary for an investor to carry out thorough due diligence checks. The first thing to ensure is that the development company they are purchasing from has a proven track record. It is amazing how many people willingly part with large sums to purchase property abroad from a foreign company they know nothing about. Sometimes, this might pay off. However, it is much better to research the company and make sure they are well established, in order to be fairly certain that they are not likely to go bust half way through the project.
Checks should also be made with regards to the value and investment potential of the finished property. Obviously, you cannot check any physical aspect of the property until it is built. However, searches can be done to ensure there are no environmental factors or local development plans that will affect the value of the property in a negative manner. Further to this, you should speak to local estate agents to find out about prices in the area. Check that the property has good transport links and is close to local amenities. All these things will make a difference when it comes to selling or letting your investment property and all can be checked upfront.
Self Storage Investment
Self-storage is a concept that started in the 80s, in London. Basically, self-storage units are safe and secure structures that can be rented out on short or long term basis for the sole purpose of storing goods. Self-storage units are usually rented by individual people, rather than goods or businesses. They are usually used to store excess household items, such as furniture. People rent self-storage units for many reasons; they may be downsizing, getting divorced, making room to start a family, going travelling, waiting for a house purchase to complete, or many other reasons. Demand for self storage investment units has been consistently high over the last three decades and often outstrips supply.
What are the benefits of self-storage units as investments?
Self-storage unit can make excellent investments for someone who knows what they are doing. The yields are typically high, averaging around 8% and there is generally a good demand for this type of property. Because the units are used for storage and not lived in, there is usually little maintenance required for their upkeep. This is especially true if the units have been recently built. It is possible to hire a management company to let and look after the storage units, so investors typically do not need to be involved in a very hands on way.
How to find a good opportunity for self-storage investment
Several years ago, it was possible to invest in self-storage almost anywhere in the country and have the investment pay off. In recent years, more research is required, as some areas no longer enjoy a lucrative self-storage market. There are some simple steps that can be taken prior to investing to ensure you get the most out of your self-storage unit investment.
When you have found a location you like the look of, first ring up any existing self-storage facilities in the area. Find out if they have any vacant units. If they have plenty of vacancies, think about looking elsewhere. Vacancies indicate a lack of demand in that area. On the other hand, if you find out all units are full and there’s a waiting list, this indicates a thriving market.
Assess the competition
Check with the local council to make sure that there have been no recent requests for planning-permission to build a new self-storage facility in the area or significantly develop an existing facility. This is important both if you are planning on building a self-storage facility of your own from scratch or just purchasing a single unit. If the competition looks set to grow, chances are you will find it more difficult to rent out your storage unit(s).
Assess the potential yield
Work out the amount of rental income the unit is likely to generate and calculate the yield. It is easy enough to find out typical rental charges in the area by ringing round existing self-storage facilities and getting quotes. Try to get at least three quotes and compare prices. To work out the percentage rental yield, offset the annual rental cost against the overall purchase price of the unit.
Getting a mortgage for a self-storage unit
Things can become tricky if you will require a mortgage in order to purchase your self-storage unit or facility. Lenders will not usually agree to provide a mortgage to anyone who does not have previous experience letting out this type of property. The reason for this is that there is greater risk involved. Terms of leases for self-storage units are typically very short compared to residential leases or rental agreements. This means there is constant and active marketing needed to ensure the unit is consistently let. Self-storage letting is much closer to a retail business than a traditional passive property investment. If you do not have experience in this area, the risk is high that you will fail to let the unit and be unable to make the mortgage repayments. There are some options available to new investors entering the market though.
Re-mortgage your residential property
If you cannot obtain a new mortgage for a self-storage unit, but you are confident of making a good return, the option of re-mortgaging your current home is always available. This is a risky option in that it means that your home will be used as security against the investment. If you are unable to let out the unit and fail to meet the repayments, your home will be at risk. You must be very certain of the investment potential of the self-storage unit before making this decision.
Hire a management company
It is possible to hire an experienced self-storage management company to take care of your investment. These companies will have been running self-storage businesses for a long time and will have the experience needed to find a steady stream of renters. However, just planning to hire a management company may not be enough on its own to convince a mortgage lender to lend. The management company will not be responsible for the repayments, you will. An inexperienced investor may have problems controlling the management company and is still a high-risk customer in the lender’s eyes.
Big-up your retail experience
If you have substantial experience in the retail industry, particularly if you own or manage a retail company, it is worth highlighting this on your mortgage application. Self storage investment is much like running a retail business, due to the short-term nature of the rental agreements and the need for constant marketing. Any relevant experience you have can make a difference.
Partner with an experienced investor
If you don’t have the required experience, it is worth considering partnering with someone who does. Not only will this reduce the risk of you getting out of your depth and the investment failing, but it will increase the likelihood of your obtaining a mortgage.
Hotel Room Investments
Hotel room investments are an increasingly popular alternative to traditional buy-to-let investments. Investors are able to purchase a single room or suite in a hotel. This room is then maintained by the hotel rented out to guest as usual, but the investor receives a percentage of the income generated from each rental. This percentage is usually up to 50% of the room cost. In addition to the rental income, the investor typically acquires rights to stay in the room free of charge for up to 52 nights a year. They tend to range in price from £50,000 to £250,000 depending on the quality of the hotel. They often provide high yields, a guaranteed income for a specified period and there is little responsibility for the investor. Hotel rooms also make good SIPP investments.
What are the advantages for investors?
The main advantage that often attracts investors more traditional buy-to-let properties or holiday homes is the lack of money and effort required from them in maintaining the investment. As a landlord or an owner of rented holiday accommodation, investors have a duty to make sure the property is well maintained, meets current safety standards and is secure for tenants. They will be required to meet the cost of any repairs that are needed at the property and for replacing any damaged furniture or white goods. On top of this, they will likely have to pay out for landlords’ insurance, in case of any legal disputes. All these costs can add up and sometimes maintaining a buy-to-let investment can seem like a full-time job. Hotel investments take the pressure right of. After the initial investment, there are no further maintenance costs to be met. The hotel management takes care of any onsite maintenance, just as they would with any other room.
A further advantage of hotel rooms is the relatively high yields they tend to generate. If a hotel room is let for 80% of the year or more, yields can be as high as 15%. Compared with rental yields that are on average around 5%, this can be very attractive to investors. Of course, the yield is worked out on percentage of the property value and hotel rooms can be bought significantly cheaper than buy-to-let properties, so it is possible that higher yields does not equate to more money, just a better return on the amount paid out. Many hotels also offer a guaranteed return on investments for a specified period, normally the first two years.
Are there any disadvantages for hotel room investment to be aware of?
They do not usually generate a great deal of capital growth. Whereas other buy-to-let properties will increase in value as market prices rise, hotel rooms will generally be unaffected. The value of a hotel room will only increase if the yields rise, as it is only possible to sell to another investor. It is also difficult to determine the value of a hotel room and therefore difficult to know that you are being a fair price for it. The best thing to do is have it checked out by a professional surveyor, but you should also ask to see rental records for the past few years. Work out what they yield would have been in past years at the current asking price and use this to decide if the price is one you are willing to pay.
It may be difficult to get funding for a hotel room investment. Mortgage lenders will not provide mortgages for hotel rooms. This means that investors are limited to whatever they can afford with their own savings. They could be financed by re-mortgaging an existing property, but this is risky in case the income generated is not enough to cover repayments. You have to be very sure of your investment’s potential to put your home up as security against it.
Resale of hotel rooms can be tricky. If you are looking for a liquid investment, this might be one to avoid. Due to the limited market for resale, hotel rooms can take some time to find a buyer for.
Choosing a Hotel
Choosing a hotel with a good investment potential is not too difficult. As with most buy-to-let investments, it all comes down to location. It is a good idea to choose a hotel in a popular city that has a high level of tourism year round, such as Paris. Permanent features that make the room desirable, such as a sea-view, are also good choices to go for. However, you need to take care to ensure you invest in a room that will not suffer a large drop in rental income should the tourism market take a hit. Make sure that business in the area doesn’t drop off over winter months and choose a location with good transport links and local amenities. Look for a hotel that is consistently popular and one that is used for business as well as tourism. This should help to guarantee your rental income.
Investing in Hotel Rooms Through a SIPP
Hotel rooms can make great SIPP investments. The rental income generates will be paid straight into you SIPP fund, growing it each month. These payments will be tax free. If investing in a hotel room via a SIPP you will not usually be offered the same option to use the room free of charge as you would as a cash investor.
Minimal Risk Property Investment
All investments involve some element of risk. An investment is the purchase of an asset with the hope that it will generate an income or its value will appreciate over time. An asset can be something tangible, such as property, or intangible, such as stocks and shares. In either case, there is no guarantee that the value of the asset will increase and it is always possible for things to go wrong, resulting in the investor losing any money they have put towards the investment. In general, the higher the risk involved, the greater the return if the investment is successful. Investments can be split into three general risk classes.
High Risk Investment
High risk investments are investments with the largest returns, but the most chance of going wrong. The volatility of stocks and shares makes them prime examples of high risk investments. This kind of investment should only be made by investors with a lot of experience and knowledge of the market they are investing in. Typically, high risk investments are only made by investors with a very large budget, who can stand to lose considerable amounts.
Moderate Risk Investment
Moderate risk investments involve a considerably lower chance of things going wrong than high risk investments. The potential returns are generally lower in line with the reduced element of risk, but they can still be considerable. Property investment tends to fit into this category.
Low Risk Investment
Low risk investments stand to make the lowest returns. This kind of investment includes ISAs and savings accounts. There is very little chance of an investment failing to generate a return, but the return that can be expected is substantially less than that which could be earned through investments with higher levels of associated risk.
Having a diverse investment portfolio is commonly cited as the best way to minimise risk. Diversification allows an investor to spread risk across several assets, so that if one asset class hits a slump or starts to perform badly, the negative effects of this will be balanced by the other investments that are performing well. Creating a diverse portfolio can mean investing in several different types of assets, such as property, stocks, shares and bonds. However, it is possible to develop a diverse portfolio containing only property investments, if this is where your skills and interests lie. The effect is the same: the risk will be spread across a diverse range of property assets and therefore be reduced.
Types of Diversification in Property Investment
When investing in property, location is everything. Location sells houses. It has long been said that it is better to have the worst property in the best location that vice versa. However, finding a great location and buying up a lot of property in this area is typically a high risk strategy. There are lots of great locations across the UK and Europe, giving rise to hundreds of property investment opportunities. A wise investor will by several properties in different locations, in order to diversify their portfolio and spread the risk.
There are many reasons that an investment portfolio consisting only of properties in a specific area could fail, no matter how fruitful and popular that area seems. Consider, for instance, the effects of a major new bypass being built, land contamination being discovered or a local industry on which mush of the local population is dependent for employment closing down. In each case, house prices in an area and the popularity of that area would decease significantly. If an investor’s entire portfolio is built around this location, they could stand to lose a large amount.
One of the best pieces of advice that an investor can choose to heed is to split their budget over several differently priced properties. So for example, if you have £600,000 to invest, it would be better to buy several properties costing between £100,000 and £300,000, than to buy one property with a purchase price that requires your whole budget. Likewise, if you have a smaller amount, for instance £120,000 to invest, it would be better to split this amount up and use it as a 25% deposit on four properties bought with a 75% mortgage. Here’s why:
The first advantage is diversification. Spreading the risk over several properties means that if one fails to generate a return, you will still have returns from the others to fall back on. Secondly, the returns generated are likely to be higher, both in terms of rental income and capital growth. You can earn a rental income from each separate property, which not only means you are likely to receive a higher total rental income, but also means that if one property stands empty for a while, it is not a problem as you will still receive a rental income from the other properties. Further to this, the increase on value of several properties over time is likely to exceed the appreciation of a single property. The final reason diversifying in terms of cost is a good idea is that it allows you to release equity from part of your portfolio if you require a lump sum, for example when coming up to retirement. You will retain your other assets, yet be able to acquire the money you need from the sale of just one property.
The final form of diversification that can be used to reduce risk is property type. Investing in residential and commercial properties will allow you to fall back on one market if there is upheaval in another. It is also worth considering holiday lets, properties abroad, off plan developments, hotel rooms and student lets. Each type of minimal risk property investment has its own advantages and keeping a diverse portfolio will allow you to benefit from the best of all worlds.
Fractional Ownership Property Investment
Originally invented as a scheme for owners of jets and yachts, fractional ownership has begun to spread to the property investment market in recent decades. Fractional ownership allows you to buy a fraction of a property (or yacht or jet). This gives you rights to use the property for certain periods every year and entitles you to a share of the profits if the property is resold. Fractional ownership has been big in the US and Canada for some time, only recently beginning to get off the ground in Europe. The increase in popularity has been put down to the turmoil in the economic market. Fractional ownership allows investors to own assets with reduced risk compared to buying a property outright. As green shoots are being seen in housing markets across the world, now seems a good time to turn money into assets, but at the same time returns are still far from guaranteed. Fractional ownership seems to offer the perfect solution offering targeted coverage with reduced risk.
How does fractional ownership property investment work?
Fractional ownership works by selling portions of existing or new properties to different investors. This means that a property will have between four and twelve owners, rather than just one. The properties available on a fractional ownership basis are usually luxury properties which investors may not typically have access to. A property may, for instance, be worth £1m – but sold off through fractional ownership to eight different owners for £125,000 each. Each owner has a deeded stake in the property and will be able to use it for on average four weeks each year. Fractional ownership schemes usually have a time limit. At the end of a specified period, possibly seven to ten years, the property will be sold off and the proceeds will be split between the various owners. In this way, fractional ownership can be seen as a long-term investment as profit will be made if the value of the property has increased over time.
How is fractional ownership different from timeshares?
Once popular in the eighties, timeshares now have a reputation that borders on being criminally bad. Timeshares were marketed to working classes as a great way to have access to a personal holiday home. There are hundreds of stories available of people being duped into purchasing timeshares in properties that were either very badly maintained, or in some cases, never even built. People found themselves trapped, unable to sell on their timeshare or make any use of it. Timeshares are seen as money traps, and fractional ownership sounds suspiciously similar.
The good news for investors is that timeshares are in fact quite different to timeshares. Timeshares involve buying only the right to use a property for a set amount of time each year, you do not actually owner a share of the bricks and mortar the property is built from. Often when buying a time share, you are only able to use the property for one week in a year. This means that for the other 51 weeks, someone else is using the property – leading to many issues with maintenance and little flexibility. Timeshares begin to devalue the moment they are purchased and it is highly unlikely you will ever make a profit from one. They are notoriously bad as investments. Fractional ownership, on the other hand, makes investors into deeded owners. There are fewer owners and each stands to make a profit on their share as long as property values rise. There is a great deal more security and less risk involved in fractional ownership as opposed to timeshares.
What are the advantages of fractional ownership?
The benefits of fractional ownership are manifold. It represents a real solid investment. This investment is usually in a luxury property that you may not have funds to own outright. As such, fractional ownership investments are usually marketed at more affluent circles of society. Both the fact of ownership and the targeted investors mean that it is likely the property will be well maintained. Often, luxury fractional investment properties come under the care of a management company that will not only ensure they are kept clean and in good repair, but even sometimes go as far as providing personal chefs. The risk of damage being done to the property is further reduced by the fact that there are usually many fewer owners than with timeshares.
Another benefit of fractional ownership is that it offers the chance to invest in several luxury holiday properties. Where they may only be able to afford to own a single holiday home outright, through fractional ownership they could have deeded ownership rights to several properties, resulting in greater flexibility with where and when to take a holiday.
Are there any risks?
You need to be savvy when investing in fractional ownership, especially in Europe. Having been around since the early nineties in the US and Canada, fractional ownership in these countries is well-regulated. However, as it has only recently started to become popular in Europe, no specific regulation covering fractional ownership exists. Before investing, make sure you are dealing with a reputable company. Investors should be wary of any unsolicited marketing regarding fractional ownership property investment opportunities. Be particularly suspicious of anything that markets these properties as an investment with guaranteed profit. It is not unlikely, particularly in today’s market, that fractional ownership will not lead to large returns. Fractional ownership is often less about making money than acquiring a certain lifestyle.
Financing Fractional Ownership Property
It is not possible to get a mortgage for fractional ownership, so finance for properties owned in this manner must either come from personal savings funds or through re-mortgaging an existing asset. Fractional ownership can also be an investment made via a SIPP.
Selling Fractional Ownership Properties
Most fractional ownership schemes have a set time for resale. This can vary from seven years, right up to fifteen years. There are usually exit strategies available if you wish to sell your share in the property before this time is up though. The most common option is to offer your share to the other owners and hope one of them will buy you out. Different countries and companies also have various different resale options outside of this.
A Guide to Leases
What is a lease?
A lease is a legal agreement between the landlord (the owner of a property) and the tenant (the person who rents the property form them). It sets out the rights that both parties have with regards to the property and the terms according to which a tenant is allowed to make use of the property. When talking about a lease, the landlord is the known as the lessor and the tenant is the lessee. The purpose of a lease is to protect both parties. The terms and conditions which both lessor and lessee must abide by are set out I the lease and if either party fails to comply with these, the agreement ceases to be legally binding. Further to this, if the terms of the lease are breached by either party, legal action may be brought against them and a financial penalty may also apply.
How does a lease differ from a rental agreement?
Many people use the terms ‘lease’ and ‘rental agreement’ more or less interchangeably. However, there are distinct differences between these two sorts of agreement. A lease has a fixed term, which is typically one year. During this time, no changes can be made to the terms and conditions contained within the lease. A lease does not automatically renew when the duration of the term is through. On expiry of a lease one of two things can happen: either a new lease can be drawn up and signed, or the lease can continue with a rolling one month term.
In contrast, a rental agreement is a contract set up for a significantly shorter term, usually around one month. At the end of this term, the agreement is automatically renewed, unless it is cancelled by either of the parties that are bound by it. Changes can be made to the terms and conditions of rental agreements whilst they are active, so long as written notice is provided.
It is not necessary to have a solicitor draw up a lease, but it is definitely advisable to involve a property solicitor or estate agent to at least check the document. Leases have no set length or required content; they range from very basic one page documents to documents that are over twenty pages long and full of specific conditions. Basic lease templates can be found easily on the internet and it is fine for a landlord to download one of these and change it to suit the specific property they are leasing out. Having done this, the landlord should ensure that the document is looked over by an experienced professional. An estate agent or solicitor will be able to pick out and potential problems or legal loopholes. Having the lease drawn up or checked by a professional will help the landlord to avoid any pitfalls and reduce the risk of them falling prey to ‘professional renters’ who look to take advantage of loopholes in weak contracts.
Things to Include in a Lease
There is some basic information that should be included in every lease.
The lease should always name the parties that are subject to the agreement it represents. The parties are the lessor or landlord and the lessee(s) or tenant(s). Every party to whom the terms and conditions contained in lease apply must be named on the lease document.
The lease should contain full details of the property, including the building name, the specific flat (where applicable) and the full address. Information defining the property, such as ‘a three bedroom terrace’, should also be included. If the property will be referred to throughout the contract in any abbreviated form (e.g. anything other than the full address), such as ‘the flat’ or ‘the house’, it should be specified that this phrase refers to the property detailed in this section.
The term of the lease is the length of time that the lease agreement applies. The start and finish date should be specified on the lease document, in order to avoid confusion that is likely to arise if a specific duration (such as ‘six months’) is written.
Details of the total amount due in rent for entire term of the lease, as well as a payment schedule should be included. The total amount of rent payable should be broken down into weekly or monthly amounts and the day/date on which payment should be made each week/month should be clearly stated.
The lease contract does not become legally binding until all parties have signed to acknowledge that they have seen the lease document and agreed to be bound by it. There should therefore always be a section of the lease for all parties to sign.
Riders and Attachments
Leases can go into as much detail as the lessor deems necessary. There are often riders and attachments joined to the main document, which set out specific policies. Some common riders and attachments are listed below:
It is up to the landlord whether or not the tenant will be allowed to keep pets at the property. A pet policy will specify what sort, if any, pets are allowed and standards of care that must be maintained at the property. It is wise to specify in the policy that tenants will be allowed to keep pets at the landlord’s discretion. In this case the landlord will be able to ask to meet the animal in question prior to deciding whether to allow it. The landlord then gets a chance to assess how the owner interacts with the pet and whether there are likely to be any issues.
Move Out Form
The move out form specifies what the tenant is responsible for when they come to leave the property. This should include the state that the property must be left and items that must be left behind. This will help to avoid any disagreements about the return of deposits. Only if the tenant leaves the property in a state that does not comply with the details set out on this form, they may not be eligible to receive their full deposit back. Some or all of the deposit may be required to repair the property.
Security Deposit Form
A security deposit form specifies the amount that the tenant must pay as a deposit and details of the deposit scheme that this money will be placed in. This document will mean the tenant can rest assured of having their deposit return, so long as they comply with the terms of the lease.