Monday, March 24, 2014

Property Investment - 5 Tips to Maximise Your Buy to Let Investment

It is still possible to make a good return on buy to let investment however this is not always as easy as portrayed in the media.  An investor will need to carefully plan their investment, ..... to have any chance of achieving a good return

With property prices starting rise in many parts of the UK and with the Bank of England making noises about when (not if) interest rates will start to rise, anyone with property or considering buying property will be watching closely to see what happens.  The property market in the UK has proved difficult for many over recent years due to the global economic downturn, a consequence of which is property prices consistently falling in the vast majority of areas within the UK. Many have found themselves in negative equity (this is where the value of the property reduces to a point where it is worth less that the amount that is outstanding on a mortgage loan), and are faced with the dilemma of being ‘cocooned’ within the property market and waiting for things to improve or making a financial loss (sometimes significant), in order to be able to move.  In fact BBC News Online recently reported ‘Negative Equity currently afflicts over half a million households in the UK.(Link)

Despite the difficulties discussed above, property in still portrayed as a ‘safe investment’ within a number of popular TV programmes and has no doubt contributed to the rise in private property investors. These programmes have helped to paint a picture that anyone can invest in property and that anyone can maximise an investment and make large sums of money.  Whilst this is partially true, this message is also misleading as to maximise a property investment takes knowledge, skill and money.   Property can be a sound investment, which can provide exceptionally good returns, but only if you know what you are doing!  Like myself I am sure you have read/heard of many examples of those who have listened to this message and decided to ‘dip their toe in the water’, without any real knowledge or experience and have ended up losing large sums of money, which in some cases has sadly led to repossession and even bankruptcy. Below I offer a few tips for consideration for those who are thinking about entering the buy to let market for the first time.  I appreciate that some will consider buying property, refurbishing it and then selling it on (something referred to as ‘flipping’), however for the purposes of this article I want to focus on the buy to let investor.

1. Undertake an Investment Appraisal  

Careful consideration should be given to your objectives with a focus on what you are trying to achieve.  Ultimately, this should be to maximise your return.  New buy to let investors may often not understand the importance of this basic objective and that they are now in the World of business and are therefore trying to make a profit.  Before taking the plunge to invest, careful consideration should be given to weighing up or calculating what the likely costs (outlay) will be, balanced against the likely return.  Failure to undertake this initial assessment or be tempted to ‘take a chance’ is extremely unwise and can result in significant losses being made.  For more information on investment appraisals see my previous article ‘Property Investment – Why an Investment Appraisal is crucial for Buy to Let Investors’ (Link)

2. Research the Market

It is important to understand the property market in the area that you are planning to invest.  Nowadays there is a vast amount of information at your fingertips, just by undertaking simple internet searches.  Gather information on local property values and rental incomes to give you an idea of the type of investment that you might want to make.  Websites such as Righmove and Zoopla are good initial sources of information for property prices, as well as websites for local Estate Agents and Letting Agents to provide more local information.  The information you find during your research will help you to establish the likely investment value and give you an assessment of the likely rental returns, which you can feed into your investment appraisal. If you decide to buy at auction, this research will be crucial in deciding what your maximum bid limit will be.

3. Condition of the Property

The condition of an investment property can have a significant impact on any likely return and therefore needs to be carefully considered.  There are bargains to be found, however, in general terms you normally get what you pay for.  Always undertake a thorough inspection of a property before committing to purchase to establish its condition, particularly auction properties.  This is because buildings have a habit of concealing a variety of nasty surprises, which you want to find out about before you purchase, not after!  Rectifying problems within a building that you were not aware of and not budgeted for have the ability to completely wipe out any profit and in some case can result in a loss. Surveyors should pick up any significant issues during the conveyance process however this is something to be particularly cautious of when buying at auction, where sufficient inspection may not have been undertaken.

4. Keep Control of Repair/Refurbishment Costs

It is worth continually reminding yourself that you are planning to let the property and therefore you must ensure that you spend money appropriately/efficiently.  The specification for any repair or refurbishment works should reflect the area, type of property and tenants that you likely to attract.  You must expect tenanted properties to accommodate some wear and tear so durability should be considered along with how the building will look. If you are investing in an area where rental incomes may be on the low side, then spending money on expensive fixtures, fittings and finishes will not be cost effective.  On the flip side you may be required to provide a high specification in certain locations to attract high rent paying tenants.  The point here is to know your market based upon doing your research above and control repair and refurbishment costs appropriately in order to try to maximise your return. Do not be tempted to do a high specification finish, to your own tastes, where this is not warranted.  Remember, this is a business and wasting money unnecessarily just eats into your profit.

5. What Permissions/Approvals are required?

Something that is often overlooked by investors is the impact of obtaining various permissions/approvals and how this can increase costs.  In most cases issues arise due to a complete lack of awareness by members of the general public. Awareness of statutory approvals such as Planning Permission and Building Regulations approval seems to be improving, however, other types of approval such as Party Wall approvals are less understood.  The type and extent of works proposed will determine which permissions will apply, which can often run into may thousands of pounds especially when you factor in professional fees. 

With regards to Planning Permission, an investor may consider scaling down a proposed extension to utilise permitted development right.  This will reduce costs and save time by not going through the formal planning process.  It is always worth obtaining professional advice in respect of whether or which permissions/approvals apply.  This may generate a consultancy fee, however, this could save a lot of money further down the line and will therefore be money well spent.

In summary, it is still possible to make a good return on buy to let investment however this is not always as easy as portrayed in the media.  An investor will need to carefully plan their investment, taking into account some of the points discussed above to have any chance of achieving a good return.  Buying property and rushing into the property market on the assumption that you cannot lose is dangerous and completely incorrect.  I am sure that there are many who can bear testament to this fact, who have lost considerably more than money after investing in property. Successfully investing in property takes hard work, knowledge, money and often a good dose of luck! If you are thinking of investing in property in the near future please make sure that you take on board some of the suggestions above before taking the plunge.

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