Assessing Your Finances for Investment
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.