Residential Property Investment
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.