25 Property Investment Tips for Beginners
Investing in property has long been a reliable and smart way to accumulate wealth and meet financial goals. After all, an extensive property portfolio is something many of the world’s richest people have in common. However, to successfully manage investment properties - that’s to say, make a profit from your investment - you’re going to need to do some research prior to making any decisions. It’s important to understand that like all investments, property acquisition carries certain risks. By following these 25 property investment tips from PropertyData, you’ll help yourself to be more well-versed when it comes to making property purchasing decisions.
Understand what an investment property is
An investment property is, quite simply, a property that has been purchased for the purpose of generating a return on that investment. This can come from capital gains following the sale of the property, rental income, or both. Investment properties can be domestic (apartments, houses, flats) or commercial (office buildings, retail space or any other property which can be used for the purposes of commerce).
What is the 5% rule in real estate investing?
The “5% rule” dictates that a property investor should expect to spend no more than 5% of the value of their property portfolio each year on expenses like maintenance (redecorating, servicing/replacing appliances like boilers, ensuring gardens are kept neat and tidy) and Capital costs (the cost of equity, and the cost of debt).
Ideally, maintenance costs should amount be no more than 2% of the property value. Capital costs should be around 3% of the overall value of a property.
As an example, let’s imagine you are interested in purchasing a home that costs around £300,000. By calculating 5% of this figure, we arrive at £15,000. This provides you with a rough estimate of how much of your annual investment in the property is available to cover taxes, maintenance and cost of capital.
Now divide this value by 12, and you’ll have a figure of a monthly investment which can be directed towards the property (£1,250 in our example). If you can accrue more than this figure in monthly rent, the property will be profitable, and thereby the 5% rule applies.
Understand the risks of owning a property portfolio
Like all investments, property isn’t without its risks. Although unlikely in the current UK market, property price fluctuations could place you into negative equity if the value of the property drops below the price you paid for it. Likewise, buy-to-let investors could find themselves up against changes in the rental market or falling foul of unreliable tenants who pay to meet their rental agreements on time.
How do you successfully invest in property? 10 simple property investment tips
Real estate investment can be challenging yet rewarding. It requires knowledge, organisation, the ability to network and the perseverance to regularly keep an eye on the market. These ten pointers are worth bearing in mind if you want to make your investment a success:
- Make a long-term business plan.
- Understand how the market works, and how geography plays a role in ROI.
- Be honest: it is more effective to be fair as opposed to seeing what you can get away with.
- Develop a property investment niche, like multiple-occupancy housing, rural refurbishment or high-end residential rents, to name just three examples.
- Respond to tenant complaints and concerns: attention to detail is key.
- Be prepared to constantly educate yourself on the latest regulations and property investment terminology.
- Understand the risks involved with real estate management.
- Utilise the services of an accountant to help save on tax.
- Find help: use tools and online support to make more informed decisions.
- Don’t be afraid to network: strong working relationships can help yield better deals.
According to the UK House Price Index, property prices look set to continue rising throughout the remainder of the 2020s. As a capital investment, it’s definitely worth considering buying property.
However, it’s important to do research and check out property investment tips by postcode, as housing in some geographical areas is set to outperform others over the next decade. Currently, areas in the North of the UK including Leeds, Liverpool, Manchester, Newcastle and Edinburgh are all likely to outperform properties in the South in terms of capital growth.
What is the most profitable way to invest in real estate?
The most profitable way to invest in real estate will depend on what sort of investor you intend on being. The most common way to make money via property investment is through appreciation – this is when you purchase a property, allow it to increase in value and enjoy the return on investment when you sell.
Developing a run-down property can be a great way to increase its value, although it is important to balance the amount spent on the improvement of a property with its potential post-refurbishment value.
Alternatively, if you want to be more hands-on, you might find that becoming a buy-to-let landlord offers more suitable regular income. Regardless of which option you choose, location is incredibly important when it comes to generating revenue from your investment.
What is a BRRR method?
BRRR is an acronym that stands for:
It is a powerful property investment method that can be used to rapidly grow a portfolio, even with a small initial amount of investment capital. This strategy allows investors to enjoy high returns, as fresh refurbishment means there should be a reduced cost in maintenance in the following years.
Choose an investment style that suits you
There are two main types of property investment strategies: buy-to-let and buy-to-sell. Both have their advantages: buy-to-let allows you to rely on rental income to make a regular small profit, while buy-to-sell is a longer-term strategy that involves allowing your property to appreciate in value before selling it. Sometimes buy-to-sell involves refurbishing before selling on at an increased value - this is sometimes known as “flipping property”. If you’re hands-on and happy to engage with letting agents and tenants, buy-to-let might be your preferred option.
How do you leverage a rental property to buy another?
Leveraging involves the use of debt or borrowed capital to increase the potential return on investment. For example, let’s imagine an investor wants to buy a property for £200,000 and puts down 20% of the purchase from their own funds (£40,000) while borrowing the rest. The buyer essentially uses a small percentage of their own funds while turning to a lender for the remaining 80%.
Now let’s imagine the same property appreciates at 5% each year. Within 12 months, the net worth of the borrower will have risen to £210,000. This net worth can then be used as collateral against other properties, allowing the investor to grow their portfolio and buy multiple properties with ease. However, it’s important to ensure there’s a steady rental income on each property to ensure the mortgage costs are covered. This brings us to our next tip…
Look for high rental yields
Rental yield is the term given to the amount of profit you make on a property after subtracting the overall costs of purchasing/maintaining the property from the rental income you receive. The North West of the UK currently offers the highest rental yields in the country. To ascertain whether a property can offer a rental yield that covers costs, try using the free PropertyData Rental Yield Calculator today.
Take geography into account
Property investment tips by postcode can vary. For example, London has the biggest house prices in the UK 2021, although houses further North of the capital are likely to appreciate the biggest capital growth and rental yields over the next decade. When investing, it’s important to consider whether there is any regeneration planned for the area. Cities like Newcastle, for example, are undergoing serious investment from technology companies. As a result, there’s an influx of professionals moving into the area, which is creating a demand for rental properties in close proximity to new commercial developments.
Consider investing in off-plan property
Off-plan properties are homes that are still in the construction phase but are available to purchase now. Developers often list these properties below market value, and as new developments, these homes are often attractive to tenants. Off-plan properties are also a great way to maximise capital growth, as they are usually worth significantly more by the time construction is complete.
Find the right tenants for each property
Targeting the right tenants is crucial to maximising rental income. For example, a large terrace in a university town might be suitable for multi-tenancy occupancy, where each tenant has a separate rental agreement. Most students receive subsidies and loans to help cover rent costs, making them reliable tenants.
Likewise, an apartment in a central location might appeal to young professionals who want to live amongst the excitement and bustle of the city. These tenants are often earning significant sums but not quite ready to get their foot on the property ladder. As such, there’s a huge rental market for this demographic.
Consider using a property management company
If you lead a busy professional life, you might find it hard to strike the right balance between your 9-to-5 and your role as a property investor, especially if you’re going down the buy-to-let route. If you’re going to struggle with time management, you may find it beneficial to utilise the services of a letting agent or property management company to oversee everything from maintenance to tenant liaisons.
If you do employ the services of a property management company, it’s important to consult the balance sheet to ensure that your investment is still going to deliver a profit. Remember to include any potential administrative costs when calculating rental yields.
Create a detailed budget
Before even thinking about purchasing an investment property, it’s essential to create a detailed budget. Having a defined budget will help you find the most suitable property investments.
It’s vital to calculate your budget based on regular outgoings like bills, daily living costs and mortgage repayments. You’ll also need to factor in potential outgoings associated with property investment, like maintenance costs or letting agent administration fees.
Turn to PropertyData for useful tools and information
PropertyData offers a wealth of tools, real-time information on property values and opportunities to make outright purchases. With a free two-week trial, you can gain access to analytics that could help you make more informed investment decisions. Whether you’re an experienced portfolio holder or completely new to property investments, your first step to making the right choices begins here.
