First Time Investors: What makes a good investment?
Next in our instalment of blog posts for first time investors, we take a look at how to invest the smarter way. Buy to let property has proven to deliver the best returns over other investment options such as ISA’s, stocks and shares and for many years has produced annual returns over 16.3% (when investing using a mortgage), in comparison to just 6.5% if the same amount was invested in the stock market.
Knowing where to begin can be the most difficult part of the process. Investing in property should be a business decision and will need to be treated completely differently than if you were buying your family home. Consideration will need to be given to a tenants wants and needs, not necessarily your own.
If you’re a first time investor considering a buy to let purchase, take a look at our helpful tips on what exactly makes a great investment:
The Right Location
One of the golden rules of property investment – invest in locations with a high rental demand. While it may seem advantageous to own a property near to your own home, there really is no major benefit to this as a hands-off landlord. In fact, in some cases it can serve as a hindrance depending on where it is that you live – not all popular residential areas produce the best rental returns. Have a think about the sort of tenants you want to attract to a property, i.e. graduates, young professionals etc.; this market generally desire properties close to transport links, near bars, restaurants and shops. If you live in the suburbs or the countryside, this may only appeal to a small market of people looking to rent, narrowing down your choice of tenants and leading to void periods (a period of time where your property is empty whilst you find tenants). Purchasing in locations with excellent transport links and with amenities appealing to your target market will naturally increase your chances of long term tenants and high yields/returns.
Carrying out the correct research and due diligence prior to investing is essential. Speaking to investment consultants and property experts will also give new investors a better idea of what to expect and can provide guidance on the best locations to suit your investment needs.
Whether you’re investing to produce a secondary income, as a means for retirement, or to leave something for your children/loved ones, there are many reasons why investors turn to buy to let as a way of creating extra capital. Buy to let has outperformed all major asset classes over the past 18 years and the high yields combined with capital growth is certainly a main attraction.
By looking at both capital growth and rental yield, landlords can achieve a steady monthly income as well as watch their assets grow in value over a number of years too. As well as being a tangible asset, it’s also flexible. You can invest and reap the financial rewards for the foreseeable future, or you can hold the property for a few years, collect the rental income and then dispose of it – leaving you with the rental income and a profit on the sale due to capital growth.
Leveraging also allows investors added flexibility by utilising a mortgage. If you had £100,000 to invest, you could either purchase one £100,000 property outright, or purchase four properties at the same value with a buy to let mortgage (utilising a £25,000 deposit for each property). You could either collect the income and capital growth from one property or four. Either way, both are viable options and the right one for you would be entirely dependent on your future financial goals.
Being smart with your investment naturally allows you to generate higher returns, so calculating your figures and evaluating different possible scenarios before you invest will act as an added advantage.
Taking A Step Back
Should you be a hands-on or hands-off investor? While buy to let is lucrative, the way your property is managed can have an effect on its performance as an investment.
Hands-on: You (the investor/landlord) will be responsible for everything. From finding tenants, referencing and compiling inventories, to collecting the rent, maintenance repairs, and keeping up-to-date with your legal obligations as a landlord.
Hands-off: You appoint a managing agent to handle your asset and your tenant so you don’t have to. Aside from the general duties an agent will carry out, a good agent will also hold regular rent reviews and will ensure that your returns are maximised.
Being a hands-on landlord may have its benefits to some, but is really only plausible if you have the time and resource to dedicate to it, or if you are looking to turn it into a full-time occupation (for example, if you intend on building a large portfolio). The demand that is required from tenants and property management as a whole is huge and sometimes much more than people realise. You will be solely responsible for your tenant and the property, and need to make sure you are not only compliant with the law, but that your property is well managed and your tenant is happy and living in a suitable environment. Everything from structural issues to broken boilers need to be accounted for by the landlord.
Hands-off landlords however don’t have to give up quite so much in order to make money from their assets. By utilising a lettings and property management agent, they can take care of all of the day to day property dealings for them and are often in a better position to negotiate a higher rent, resulting in even stronger returns.
Our team of experienced property consultants at Sequre are always on hand to help with any buy to let questions or queries you may have. Our team are experts in their field and have years of experience in the property investment sector and always keep up to date with the latest market trends. To find out more, call us on 0800 011 2277.