Property Investment: How To Invest In Property?

1) Why Invest In Property?

The only asset class there is that has been showing continuous growth from decades in UK, is property.

The data from decades suggest that the value of property has been doubling every decade leading to unmatched capital growth.

In the equation of demand and supply, property is always going to have demand in UK given we are living in finite space with increasing population.

Additionally:

Follow the method to investment madness, you can even take your money out once you invest. It allows us to invest the amount you have to invest in multiple assets.

i.e.

If you have £80000 you are able to invest in 4 houses with £20000 each, instead of £80,000 on one house. The rest £60000 of each property coming in the form of mortgage.

Property assets are tangible and you can see and feel them unlike other forms of investment like share trading, mutual funds or otherwise.

Here is a quick view of how property has been growing since last few decades.

Disclaimer: This graph is provided for reference purposes and is based on data from national statistics. This blog nor its author does not guarantee this will be the case for decades to come. Please use your own judgement on if this investment is right for you.

Now that i have put the necessary disclaimer, lets move on.

2) What Makes A Good Investment Property?

Personally a property is a good investment property if

1. Cash: It is able to generate cash over a period of time in form of capital growth
2. Cashflow: It is able to generate at-least £200 or over at a mortgage interest rate of 5%
3. Liquidate: You are able to liquidate the property easily either by selling or refinancing and are able to take your money out which you invested when you want.
4. Potential: Has potential to add value or alter the property to add/convert into a bigger living space.

3) The Property Investment Cycle

If you ask a question on why majority today invest in property, the answer that comes out without any hesitation is “Financial Freedom”.

Whilst I cant see that as freedom (because you work more after you built your portfolio) here is a typical cycle I learnt investing in property.

Build Portfolio:

This is a phase where an investor builds his/her portfolio buying houses suitable to their requirements. This typically goes for 3 to 4 years or more depending on how your appetite and resources drives you to invest.

Strengthen Portfolio:

A phase where an investor has accumulated enough properties that he/she thinks they are making good cashflow to at least quit their job or majority of their expenses covered.

This is the time when an investor has to get rid of the bad apples i.e. properties that are not cash-flowing and pump that cash from selling them to take off the debt on the good apples i.e. the cash-flowing properties.

Eventually one would achieve a state where there is no debt but has a cash-flowing portfolio i.e. passive income.

Achieve A Lifestyle Of Choice:

The key reason why we all invest in property is to achieve that lifestyle for ourselves that we desire and our future generations desire.

Here is the fact:

Do not fall when anyone tells you that you can achieve financial freedom investing in property in 2 to 3 years.

Yes, you will achieve financial independence but you do end up working to manage your portfolio and that is no less work than what you do currently. You sure will have a choice to work or not but don’t base your investment decision on financial freedom.

Its not all gloomy though if you do it right and if you are able to invest with your head over heart. Refer to below post to understand the strategy behind how you can achieve your goals of from your investments.

4) What should I Invest For Cash or Cash flow?

Its natural that anyone who invests will either of two requirements or both. Do I invest to achieve a lump sum cash in one go or get monthly flow of cash over a long period of time?

This is where you decide on what your investment strategy is going to be. Your decision at this point will determine what type of property investment you would go for.  Ex: Buy to let, Flips, Sourcing, HMOs, Serviced Accommodation, Commercial or otherwise.

Between myself and Ravi we decided to go for Cashflow all day long when we started but soon we realised that we need cash along with cashflow. A mix of both is advisable if this is the only stream of income you are after.

However,

Your strategy of cash versus cash flow will change as you go and will have to be flexible and interchangeable depending on the deal thrown at you.

5) Choosing Your Property Investment Area

Investing in multiple areas may sound palatable given you will have access to a lot of deals that you can work through.

But:

Such scattered gun approach investing in multiple areas will lead eventually to management overhead and having to become an expert within all areas.

Additionally, You will have to build multiple trustworthy teams to look after your portfolio.

If you are planning to invest on a longer term and want to invest in multiple properties in 10s, 20s and 30s or over then it makes sense to choose an area that is suitable to your situation.

i.e.

The general advice in the industry is to choose an area near to your residence or under one hour journey. However, we managed to break that first rule.

We chose an area which is 4 hours away from where we live and is driven by availability of funds to invest. House prices near where we live are way higher to what we can afford.

So fact is:

Choose a property investment area that is suitable to your personal situation based on your cash and time availability.

Please read below guide on how to choose your investment area when you start investing.

Must Read: 10 Powerful Checks To Pick Your Best Property Investment Area

6) What Should I Look For In Properties

Investors do get into looking for properties in their investment area but mostly without a purpose or a steer on what value their portfolio has to offer.

It’s pretty much, you have a property business but you would not know what it does.

This is how we choose our properties

Property With Potential:

Choose a property that has potential to add value even if its a cosmetic renovation that you could do. If you want to liquidate and take your money out via refinance then you will have to be able to add some value.

Appeal To Ideal Tenant You Are After

There are different types of tenants you can have in your property. Ex: Students, Couples, Families, Housing Benefit Tenants, Working Professionals…….

Would you believe over half of the investors would not have patience to design a tenant avatar which in my mind determines what type of property you should look for? Here is the deal:

You don’t have a tenant avatar then you don’t  have a property avatar that you are after.

Our tenant avatar for our buy to lets are families (mum/dad/son/daughter) either working/partially working/benefits tenants with guarantors.

7) Demographics

Characteristics of people living within where an investor wants to invest including all of the below will give an investor a great insights into understanding his area and his tenant profile. 

• race
• ethnicity
• gender
• age
• education
• profession
• occupation
• income level
• marital status 

8) No Off Plan

Ensure that you don’t end up buying properties off plan and specifically apartments off plan (personal choice).

The reason why we suggest to stay away from off plan properties unless you got enough discount as compared to sold house prices is it is difficult for you to refinance such a property and take your money out when you want.

You will end up playing the waiting game of capital growth for years. Additionally for apartments you have additional costs like service charges, parking and like which will eat into monthly cashflow.

Must Read: 5 Killer Ways To Find Below Market Value Properties To Grow Your Portfolio.

9) Understanding The Key Metrics:

Gross Yield

Gross yield is the yield on an investment before deduction of taxes and expenses.

Its calculated as annual return on investment prior to deduction of taxes and expenses divided by property purchase price.

Gross yield = annual rent / purchase price

Net Yield

Net yield gives you a much better understanding as it takes into account management fees, MOE and mortgage payments.

To calculate net yield, you need to deduct all the expenses from the gross annual rental income. You then divide that number by the purchase price of the property and multiply by 100.

i.e.

Net Yield = (gross annual income) - costs per annum/property value x 100

Return On Investment

Net return on cash left in a deal (or Net ROI) is slightly different from net yield as Net ROI only takes into account the money that you put into the deal. It does not take into account the amount on the mortgage (if you are purchasing with a mortgage).

i.e.

Return on Investment = Net Profit / Total Investment * 100

Must Read: 5 Effective Property Deal Analysis Techniques To Analyse Buy-To-Let And HMO Deals

10) Understand The Buyers Market

Do not wait until a perfect moment arrives for you to buy a property. The general sentiment within investor community is “The right time to invest is now”.

Now is definitely the better time specifically if you are in for a long haul.

However, the general market sentiment analysis applies to property as well which can be summarised as below.

Image attribution: goldseek

In an ideal world you invest when your financial opportunity is higher and avoid when your financial risk is higher.

11) Risks To Be Mindful Of Investing In Property

Lack Of Returns

Any investment comes with risk and there are no two ways about it. If everything goes to plan then its smooth sailing but it isn’t usually.

A lot of people enter into property investment thinking of financial freedom but the reality is its a debt business.

Unless you are able to manage yourself and have the mindset to do it the right way, you will lose money.

And, this probably is true for any financial investments let alone property.

Market Fluctuations

You may have done everything right but if market fluctuates, there is little you can do anything about it. However, as a mitigation when you invest ensure you have multiple exits from the property deal.

UK property market has shown stable cycle of fluctuations from decades and hence is a little predictable. However, one has to be aware that there are so many external factors that can influence this stability.

Investment without awareness is money down the drain in all likelihood.

Toxic Portfolio

It is not uncommon, that investors tend to emotionally get attached to the property and buy it irrespective of weather numbers work or not.

Doing so they build a toxic portfolio, which results in investor having to put money each month from his/her pocket instead of earning cashflow.

12) Property Management

Life really starts once you have started investing in property investing in your strategy like Buy To Lets, HMOs or otherwise and comes to a stable stillness (in a good way) after you have bought few deals.

Isn’t it?

Absolutely not….

Life really starts once you have implemented a strategy end to end multiple times. It starts when you start managing the portfolio and get it to cash flow round the year.

You can either choose to manage your properties yourself or build a team who can manage it for you.

I would rather focus my time on expanding my portfolio than manage it and prefer to engage a letting agent and builder who will manage from a tenancy and maintenance point of view.

Here is a great guide on how you should choose your letting agent to manage your portfolio for you.

Must Read:  12 Powerful Tips To Choose Your Letting Agents

And Finally

If you have reached to end of this post that only means you are committed to invest in property. Lets discuss your goals and how we can help you get started investing in property. The best time to get started is N.O.W.