Thinking about purchasing an investment property?
Property Investment has the capacity to provide a lucrative income and has produced many of the world's wealthiest people, so there are plenty of reasons to think that investing in property for rental purposes is a sound investment.
Many experts will agree, however, that as with any investment, it's better to be well-versed and really take the time to do your research before diving in with thousands of pounds and commitment!
Here we list some of the factors and challenges you might want to consider before making an investment.
KEY LEARNINGS:
Investing in a property can be lucrative, but it can come with many challenges and additional financial commitments which are not always accounted for!
Borrowers usually need to secure at least a 20% deposit payment for a rental property mortgage.
Being a registered landlord requires a broad array of skills, commitment and time: from understanding basic tenant laws to being handy or having those connections, finances or required to fix a leaking pipe.
Experts always recommend having a financial “buffer” in case you experience an unforeseen issue with your property: such as no regular tenant income, a break or a leak!
Make sure you have a financial buffer to cover the costs relating to your mortgage, and talk to an independent financial advisor about mortgage insurance and any financial guidance or support you might need!
Is Being a Landlord For You?
Being a landlord is not all that easy! There can be a lot of administrative work, paper work, regular phone calls and arranging for third-party contractors for repairs. The more properties you acquire the increase in this type of work!
Important considerations are:
Your responsibilities to your tenants: financially, in maintenance and general support
The maintenance of your property on a yearly basis
Property guarantees and liabilities (if newly built)
All fees related to your property: parking, community fees e.t.c.
Are you capable of maintenance work or know someone who is, are you aware of these costs in advance?
Are you able to gather a team of great contacts you might need to employ in relation to your property for example cleaners
Do you know any reliable and quality furniture suppliers who can provide home staging services to attract potential rental clientele?
Do you have a strategy? A long-term property investment plan or goal mapped out with time-lines?
Personal Circumstances
Property Investors may carry debt as part of their investment portfolio strategy. Avoiding personal debt is highly recommended. If you have student loans, unpaid bills, or dependants, purchasing a rental property may not be the right move for you right now! Do not put yourself on the position where you lack cash to make payments on your debts!
Find the Right Location
The last thing you want when making the financial commitment is to be stuck with a rental property in an area that is declining rather than stable or growing in value.
It is worth investing in the time into the prospective place are you are planning on buying your property and taking a look if there is future investment within this area which will lead to property growth and attract rental opportunities.
Important considerations are:
School catchment areas are key within rental areas.
Facilities available for your rental market: restaurants, gyms, shopping, parks
Low crime rate statistics
Calculate Your Margins
On average Property Investors that purchase distressed properties aim for returns of between 5% to 7% because, among other expenses, they need to pay contractors for the maintenance to the property.
Individuals should set a goal of a 10% return. Maintenance costs can vary between 1%-5% of the property value annually. Other costs may include Landlord Insurance, property insurance, property taxes, monthly expenses such as landscaping, along with regular maintenance expenses for general repairs.
Invest in Landlord Insurance
It is vital that you protect your new investment: In addition to property insurance, rental property owners should always purchase landlord insurance. This type of insurance generally covers property damage, lost rental income, and liability protection—in case a tenant or a visitor suffers an injury as a result of property maintenance issues. Keep in mind that standard homeowners insurance policies may not cover losses incurred while the home is rented out. Contact your insurance agent to make sure you are adequately insured.
To lower your costs, investigate whether an insurance provider will let you purchase a bundle landlord insurance with a homeowners insurance policy?
Factor in Unexpected Costs
It's not just maintenance costs that will eat into your rental income. There is always the potential for an emergency to ensue—burst pipes, flooding e.t.c. Plan to set aside at least 20% to 30% of your rental income for these types of costs so you have an emergency fund to pay for timely repairs.
Property Features
It is always very tempting to look for a property at what you think may be a bargain, which can be transformed easily in a heart-beat, like all of these well versed TV programme’s do: which are heavily staged and have access to every resource and tool required to make good TV!
Unless you have these types of skills to hand or know available contractors whom can fulfil the required repairs. Think carefully about the time, cost and commitment a property in need of renovation may ultimately cost you in the end.
Calculations in Advance
Have you worked out or estimated in advance what the calculations might be to you on a monthly basis? On average a property will be between 35% and 80% of your gross operating income. If you charge £1,500 for rent and your expenses come in at £600 per month, you're at 40% for operating expenses. For an even easier calculation, use the 50% rule. If the rent you charge is £2,000 per month, expect to pay £1,000 in total expenses.
Determine Your Return
For every pound you invest, what is your return on that pound? You need to consider if the return on your investment is worth the commitment, time and effort of the investment.
The Value of your Purchase
It is obvious the more expensive the home, the greater your ongoing expenses will be. Some experts recommend starting with a £150,000 to £300,000 home in an up-and coming neighbourhood. Remember-research into the area is absolutely key!
Do You Know Your Legal Obligations?
Are you familiar with the laws in relation to landlords and your obligations?
Are you part of a landlords network or property investors network group whose wisdom could help you on your property investment journey?
Did You Know You Could Hire a Property Manager?
Hiring the services of a Property Manager can be a hard decision to make because property managers typically charge between 8% and 12% of collected rents, which can really eat into your profit margin. .
If you have prior commitments and the services of a property manager are required, a property manager can help you with things such as:
Know how to market the property
Understand the local rental market and ensure you price the rental accordingly
Show the property to potential tenants (so you don't have to)
Screen tenants (for example, conduct credit checks and verify references)
Collect rent on your behalf and deposit the money into your bank account
Handle late rents
Handle tenant complaints
Arrange maintenance and repair work
Pay property-related bills, such as property taxes, utilities, and insurance
To decide if hiring a property manager makes financial sense for you, ask yourself these questions:
Do I have time to manage the property myself? If you have another full-time job, you likely won't have the time or energy to manage a property on your own. This is especially true if you own multiple properties.
How close is the rental property to my home? Being far away from the rental takes more time out of your day and makes it more difficult to manage routine and urgent issues.
Am I willing to deal with tenants? Even if you do a good job of screening, it's likely you'll have to deal with unreasonable tenants, late rents, and evictions at some point. Is that something you're willing to do?
Is my rental property for short-term or long-term tenants? It might be easier to self-manage if you are looking for long-term renters. But if it's a short-term rental, you will be dealing with many different tenants—and potentially a lot of complaints and maintenance issues.
Do you need to be in control? If you will have a hard time handing over responsibilities such as choosing tenants and performing maintenance tasks, you may be better off managing the property yourself.
The Bottom Line
Be realistic in your expectations. As with any investment, rental property isn't going to produce a large monthly paycheck right away, and picking the wrong property could be a catastrophic mistake. Still, rental properties can be a lucrative way to invest in real estate. For your first rental property, consider working with an experienced partner. Or, rent out your own home for a period to test your proclivity for being a landlord.
