Make Money With Residential Property Investment
All about building your own residential property portfolio
Although not a short term solution, land property investment should be looked at like any other aspect of real estate investment. In my opinion, it is best saved as an investment tool until your portfolio is cash rich and you are looking to reinvest your profits.
In the UK, which ever government is in power is always calling for more residential building starts, but the land available is not in the “right place” for the new buyers in the market. The inner city areas, or Brownfield sites, are not where the middle classes are looking to buy their first home or to move up their own property ladder to house number two or three. These areas may be suitable for what is known as affordable housing designated for key workers, but they too will want to move on and up away from the area in the future.
Most people are looking for a leafy suburb in which to invest which usually means the outer reaches of the major cities. The problem here is that this type of land is usually designated Greenfield, meaning no new development is allowed. The Government is therefore continually being questioned by developers to release parcels of land in these areas which is then challenged by the environmentalists and local pressure groups.
So what is the solution and in reality is there one? The developers will keep pushing for green belt land to be released to meet the government’s new housing requirements. The problem here is that no-one thinks or considers the impact of these new properties on the current infrastructure. When a developer builds, say, a 200 house estate, is he responsible for ensuring the additional water is available? Is he responsible for ensuring the existing sewage system can cope with the additional load? Of course not and then once he has departed with his profits, the local authority is left with trying to plug these gaps in the infrastructure as the problems arise.
Councils have released land near waterways in the past 20 or so years to get more housing and vast estates have been built there. Now, with increasing rainfall and rising river levels, these dwellings are being flooded out nearly every year. Here who picks up the tab for the increasing insurance costs, not the developer, but every person in the country who has insurance on their property will pick up a small part of these costs by increased premiums.
But land is still, and always will be, an important and valuable asset for the professional real estate investor. To look for the best opportunities in the UK, for southern land investments real estate opportunities will always be possible as this is the part of the country where the majority of people want to live and work.
Remember though the best way forward is always to use other people’s money (OPM). Using this for capital property investors can continue to build their portfolio, but without the need to invest any, or at least not much, of their own money. And also remember that, at the end of the day, a balanced financial portfolio consisting of, say, a land company investments real estate and other multiple streams of income will ensure that you can ride the highs and lows of the current and future financial markets. Land property investment becomes one of the aspects of a balanced financial package and must be considered as such.
This is the second part of my top tips on residential property investment. If you haven’t read the first part click here to be taken directly to the article.
Top Tip Six – Control and Understand Your Cash Flow
Having a large equity in a property is great, but neglecting your cash flow will bring a swift end to your residential property investment portfolio. Negative equity is not to be ignored, but ignoring cash flow will bring you down so quickly.
Every month you will need to pay the mortgage on the property from the rent received, but there are also other items that need to be budgeted. If these are not taken into account then your cash flow will not be accurate.
You will need buildings and, possibly, contents insurance and this is usually an annual cost, but should be budgeted monthly to give a more accurate assessment of your cash flow.
No matter the age of the property, there will be a need for maintenance and this should also be taken into account when calculating a monthly cash flow. I estimate that you need to have a reserve of one month’s mortgage payments in a deposit account to cover these maintenance costs. I try and move 8-10% of the rent per month into this account as a means of controlling cash flow.
The final item to consider is voids. Most property will experience voids so again putting 8-10% of the rent into this deposit account will give you some peace of mind to cover these costs should they occur.
Top Tip Seven – Understand Your Target Audience
As with any commodity, you need to know who is interested in your product. For residential property investment, you either decide on your strategy and find the areas in your chosen area which makes that work or you match your property purchases to the requirements of the area.
Quite simply, if the area is predominantly student lets then trying to rent out a 3 or 4 bed property in that area to a family unit would be a very difficult proposition.
This is an area where the correct research before you buy will ensure that the property you buy is suitable for the target market for whom you are aiming.
Top Tip Eight – Do Your Research!
A good starting point for any new area is to do a demand report to see the different opportunities that are available for that area. This is not done by the new or amateur investor, but professional investors will have this type of information available probably before they even visit the particular area.
You are always looking for an area that is improving and that come sometimes only be seen when you do visit particular streets and areas. One quick way to determine if an area is on the way up is to see how much work is being done and count the number of properties where skips are parked especially in your targeted areas.
One good resource to access is the local council as they can let you know of any public works being carried out or, more importantly if CPO’s are being instructed.
Top Tip Nine – Understand the Tax Regimes
There are a number of different tax issues that affect residential property investment, some on purchase and some on sale.
Stamp duty applies on purchases of property and will need to be paid. More details can be supplied by your solicitor as these tax bands change regularly and some areas of the UK have special status meaning that stamp duty is reduced to try and assist the market. There is no way that this can be avoided as your solicitor will collect the money in his charges and pass it on the revenue. But if you are buying two or more properties from the same developer, you can reduce the stamp duty by purchasing each separately.
On the sale of a property, capital gains tax (CGT) will, hopefully, be due if you have bought well. If you are selling to raise money, consider a refinance of the property as this will not incur a tax charge as it is a loan.
If you are selling because you have decided to leave the residential property investment world then you will have CGT to pay. This is when ALL the costs incurred in buying the property can be deferred against the tax due so keeping good records for each of your properties is very important. Also by spreading the sales over a couple of years, if you can, will allow you to make the most of your annual CGT allowances.
Top Tip Ten – Don’t Overpay For The Property
Although this is the last tip, in many ways this is the number one mistake for novice investors. Their enthusiasm on trying to get into the residential property investment will make them allow themselves to be persuaded to pay too much for the property.
Again this is where the research you have done prior to making your purchase will stand you in good stead as you will know the prices to pay in your chosen area.
The ideal price to pay is below market value (bmv) and this can be done by finding distressed sellers who have a need to sell quickly and, with good negotiating skills and the money already in place, you are ideally placed to take advantage of these deals.
I thought that it might be interesting to show you how I did the deal on my first property so you can see that the process is easy if you do the work. When I decided to start investing in property, I did not know what, or even where, my first property would be, but I knew that I would make sure that it met my pre-determined criteria thereby ensuring it met my long term financial goals. From my trainings with a property company prior to packing in my permanent job to become a full time property investor, I then had to determine these criteria. After much deliberation I felt that I would best be suited in purchasing my first property using the following criteria.
In the search for my frst property, I partnered with another guy whom I met during my trainings and we went up to Middlesbrough for three days in the search for my frst property and, of course, for his!
We set up base in a local hotel and then started walking the streets visiting estate agents on the first morning, reviewing the vast numbers of leaflets we had been given over a few coffees and then setting up house visits later for that day. We had selected about 15 houses to view in the hope that one of them would be my first property and that made for a very busy afternoon chasing around the one way systems of Middlesbrough. For a hectic few hours, we walked into so many houses that we were totally confused on which was which, but we took lots of photos and hoped that we could sort things out over a meal ( and a few beers) that night.
That evening we set down to work the numbers and make sure which of those we had visited would stand up to investigation so I could find and purchase my first property. Our first cut during the morning review had indicated the probable best deals so the afternoon visits were to get a good feel for the properties and see what work was needed.
Early next day we contacted the estate agents and arranged a second visit later that day and spoke with our mortgage broker about the most suitable deals for the properties. We were therefore in an ideal position to put in an offer on the most appropriate property that very same day.
Suffice it to say that evening I made an offer on my first property which was accepted and, although the property needed a full refit, with my low purchase price, a well managed refurbishment and a sympathetic mortgage deal, I hit all my purchase criteria.
This gave me the confidence to do it again and again so my portfolio has grown both in number and value since that day!
I hope this artice will help give you the confidence to start your own property portfolio. My first property got me started and I hope the same for you
Whenever I am talking property with interested possible investors, the first question I am usually asked is “When is the best time to buy property?”
My answer is that today is a good day, tomorrow would be OK, but the best time to buy property was probably yesterday!
The important thing is to always be ready for when the deal comes along. You need to be aware of the best mortgage rates available, your mortgage broker should have all your details on file, your solicitor needs to be aware of your need to act quickly and you need to know
Property buying is not a simple cut and dried matter and finding the best time to buy is almost as difficult to predict as finding the right property although you can “attract” the right property by doing your research thoroughly. When you have found the right property, it then follows that this becomes the best time to buy.
Remember that the most important thing in any property purchase is to set your property criteria up front and then do your research based on this criteria so that you are not jumping from one style of property to another and wasting time. By focussing clearly, you will find more properties matching your requirements and bringing the best time to buy closer
Finally, in my opinion, property is still a very good investment for the medium to long term (8-15 years) so worrying about the best time to buy is less important than determining your property strategy and following this. It is more important to start the work into developing your prospective property portfolio than worrying about the best time to buy!
I hope you find this information useful and that it will help you in developing your portfolio!
These days, even with the low mortgage rates, most single let properties are not always”wiping their face”, i.e. breaking even, with their cash flow! The solution to this problem can be multiple occupancy properties.
By turning a standard three bedroom properties into four bedroom, multiple occupancy properties can increase your cashflow on average by around 40% even taking into account the extra bills that come with this type of property. Typically the landlord would be expected to pick up the tab for council tax and the various utilities on the property, but the increased rental income from four separate room rents will more than cover your additional costs.
There is a set of legislation that covers multiple occupancy properties and this can vary from council to council so it is important that you are aware of the way that your specific local council interprets the regulations and enforces them in your own local area. Understanding these can make the business of owning and running multiple occupancy properties a simpler process.
Usually, a two story building containing a maximum of 5 non-related tenants will not require a licence, but three storey properties or properties containing more than 5 tenants will need a licence from your local council.
My experience was to meet with the Environmental Department before starting work on my multiple occupancy properties and agree the work that is required to get it up to a suitable standard to achieve a licence as when all that work is done, on final inspection everything is completed to their requirements.
When letting an individual property in your portfolio, you should always take a deposit from your incoming tenant so that on the termination of their rental period any repairs, etc can be taken from this money. These property inventory tips will help you so read on…
In order to make sure that these deductions are fair, it is advisable to have a full inventory carried out prior to the start of the tenancy which will detail the state of the furniture and fittings in the property and this will act as a starting point for the new tenant. A good inventory will outline the full contents of the property and detail any marks and blemishes that are evident in the property.
The new tenant should then be shown the details of the property inventory and should be asked to sign to agree the state of the property at the start of his/her tenancy. They can then have no objections at the end of the tenancy if there are additional issues that require repair or replacement for which they are asked to pay.
There are a number of professional property inventory specialists who can carry out this sort of work for you for a small charge and the better companies also do the inventory with detailed pictures and possibly in video so that there is very little possibility of errors and mistakes. For small properties, you can often rely on your letting agent to carry out this work as part of their tenant finding fee, but for larger fully furnished property, the use of one of these specialist inventory companies is advised.
Where ever possible, ignore any purchases where substantial building works are required unless you enjoy the hassle and additional unknown expenses that will occur!
Only attempt these works if (1) you have fully covered ALL the costs of the works in your heavily discounted property purchase price, and (2) you have a builder on board in whom you have unreserved trust that he will deliver the work required to budget and to the timescale.
Top Tip Four – Developing your Power Team
Unless you are able to piggy-back onto another investor’s team of experts, your choices here can either make or break your career as a residential property investor.
Developing your own team will take time and you will probably make some mistakes, but you will eventually surround yourself with a group of people who will work with, and for, you to make your portfolio grow.
Key members include a good quality solicitor who has particular specialism with property, an accountant, again with a property bias, and possibly a builder on whom you can rely. Also if using estate agents, find one who understands EXACTLY what you are trying to achieve and will work with you to give you the properties you require.
Top Tip Five – Developers and New Builds
There has been a lot of bad press associated with new build properties. Although some of this can be laid directly at the door of unscrupulous developers and their agents, many people too easily believed all that they were told without doing adequate research.
As with any property purchase, you need to do your own research and check that all you have been told is true and achievable. Otherwise you run the risk of making a poor financial decision that will both impact on your portfolio and on your rental incomes.
This is the end of the first part of this posting. Look out for the second part covering Top Tips 6-10 of Residential Property Investment shortly.
Whether you are buying your first or twentyfirst property, the one thing that most people fail to consider is their exit strategy. When I started there were only two, but recently a third has come into the market.
Option 1 – Retain and use as a rental property, Although this is the preferred method of the majority of residential property investors, they are all aware that they need to take full consideration of an alternative exit strategy.
Option 2 – Flip (or resell) normally as a back-to-back deal. People who work in this area are not looking for the long term growth in property values, but are wholesalers of property and are always looking for the quick way out of the deal. They have usually found the buyer b the time they have agreed the deal with the vendor and take small amounts out of the various deals they do thereby leaving something in the deal for the new buyer who will likely be a professional investor more interested in rental income and long term growth in the property value.
But there is now a 3rd option of a Lease Option which has come over from the States and is starting to take hold here in the UK.
So whenever you are buying a property, consider your exit strategy first!