Whenever anyone considers the idea that their money could work for them, or they want to make what they have go further, property and real estate is never far from their mind. Indeed, some of the world’s wealthiest individuals reached their current state of wealth through property purchases, and there is no reason why someone with capital invest cannot follow their lead – even at a potentially much smaller scale.
In this feature, we’ll assume that you’re not yet at a level where you purchase entire tower blocks or commercial property. Instead, you want to take your first steps and invest in a property that will yield more income by way of rent than you spend on payments. With that in mind, let’s get into the specifics.
1. Start by Deciding whether Property Investment is Right for You
Sadly, the concept of property investing is not as simple as having cash on hand, buying a house and then living off the monthly income. There are so many investment opportunities out there that property does not require an all or nothing approach. If you do not have plenty of spare time, a well-stocked toolbox and a passion for fixing things in the home, then this might not be for you. There is always the option to pay for someone to help out with these tasks as they arise, but costs can soon add up, and you may quickly find yourself in negative equity of sorts.
2. Pay Off Any Debts but the Mortgage
Investing money to make money is so appealing that many people are tempted to walk before they can run. You need to consider whether what you pay on current debts outweighs the rate of return on property investment – based on what we know of most banks and credit card companies; the chances are that the answer is ‘yes’. As with any other investment, the whole point is that you come out ahead. A mortgage for the rental property is fine as costs can directly correlate with the rent payment, but if you have other outstanding debts, it is best to tackle them first.
3. Get Your Deposit Together
There is no getting away from the fact that mortgages on properties you plan to let out are far more challenging to secure than on your own home – especially if you already have the latter on your credit report. Interest rates and fees are often higher, and the small deposits on homeowner mortgages will not cut it here. You need to have at least 20% of the purchase price to hand before you think about property investment, so you should take that figure and work out whether you can afford it.
4. Interest Rates Remain Higher on Investment Properties
It can be tempting to look solely at the interest rate that affects your current purchase price. However, if you’ve owned your own home for a while, you’ll know that rates can change at a moments notice. While you decide whether property investment is the right course of action for you, you should also take interest rate changes into account and adjust your monthly profit expectations accordingly.
5. Include Margins in Your Estimates
No matter who eventually lives in your property, you are not a charity, and you need to make a profit – otherwise, your money would be better spent elsewhere. Understand all associated costs with your rental property, and then aim for a 10% yield after most expenses. You should also allocate 1% towards maintenance and repairs, although this number can vary depending on whether you plan to do the work yourself.
6. Don’t Start with a Renovation
If this is your first property, it is best to avoid houses that need some work before they can hit the rental market. You need to get your money working for you as quickly as you can, preferably not spending more to get the house into the right condition. This only changes if your plan is not rental but flipping, or if you are in a position to do all of the work yourself. There is money to be made here, but it is best reserved for later on in your portfolio.
7. Always Keep an Eye on Expenses
Financial accounts for a rental property are not tricky, but they are not to be ignored either. Ideally, you want to make 50% of the rental income as profit and should factor that into any decisions you make. This could involve marketing the property yourself rather than using an agent, doing the odd jobs in the home that you’d otherwise pay for or even increasing the rent. Once again, the house and your money need to work for you, and you should plan and monitor accordingly.
8. Always Compare the Rate of Return to Other Opportunities
Your goal may be to build a property portfolio, and you’re willing to sacrifice returns to do so. However, if financial returns are the driving factor, you always need to be aware of alternatives. If your overall yield is 6%, but stocks perform well, and you could get 7%, it may be time to reorganise your portfolio. Fortunately, if you make decisions quickly, it is rare to make a massive loss on resale – especially if you have sitting tenants.
9. Rein In Your Ambitions
If you own your own home already, you have a good idea of the running expenses associated with homes at that value. Think less about a property’s potential and more about what costs will come with it. If anything, you should start cheaper than you can afford – costs rise with house prices, and you need some room to work in.
10. Don’t Ignore Location
Without tenants, your investment is a bust, so ensure your home is in the right place to attract renters. Workplaces with high turnover, low crime rates and growth areas are just some factors that will keep your property occupied.