Buying a property is a great way to diversify your investment portfolio and make passive income. Although there are so many upsides, don’t dive headfirst into the first property that you see.
Our experts have outlined the ten most important things to consider before investing, to ensure that you choose the right strategy and maximise your ROI.
So, what must you consider before investing in property? Consider the following before buying an investment property:
- Personal aims & objectives
- How you will finance your investment
- The time you are willing to invest
- Legal responsibilities
- Licenses you might need
- The type of property to invest in
- Location of the property
- Your ideal tenants
- How you will manage your finances
- Who will manage the property on an ongoing basis
Read on for advice on property investments, what to look out for, and property investment top tips from our experts.
10 Things To Consider Before Buying an Investment Property
1. Aims & Objectives
Most landlords measure their ROI (Return On Investment) with gross yield. This is calculated using the following: Annual rent + costs / purchase price (as a %)
This is one of the first aspects to consider to ensure your investment is profitable. As a guide, a good rental yield sits between 7-8%.
However, this isn’t the most important thing to consider. You should also think about other aims & objectives, so ask yourself the following questions:
- How much time do you want to commit on a monthly/yearly basis?
- Do you want one larger investment property or several smaller ones?
- How much risk are you willing to take on?
- Would you prefer to have someone guide you through the process, or are you doing this on your own?
- Will this investment make up your main annual income or will it be a smaller sum on the side?
If you aim to grow your investment portfolio, and you’d like some top tips from our team, read one of our recent blog posts – ‘How To Grow Your Property Portfolio’
Before you start looking for investment opportunities, you first need to consider how much you can afford to invest and consider the risks. You don’t want to stretch yourself thin, you never know if any unexpected costs may appear.
If you’re a cash buyer – great! You could buy a property outright. If you don’t want to invest all of your money into one property, or if you aren’t a cash buyer, you may want to consider a buy-to-let mortgage. These are different to your traditional mortgage. We’ve outlined the differences below:
|Residential VS Buy-To-Let Mortgage
As a general guide, you should expect to put down 20%, if not more, as a deposit for a buy-to-let mortgage. If you aren’t able to afford that, you should consider a smaller investment to start with or save for a few more months.
3. Time Commitment
Managing multiple, or even one investment property can be time-consuming. Some types of properties (HMOs especially) can take up more time than others. You have to process paperwork, arrange viewings, make repairs, and that’s not even half of it!
Decide how hands-on you would like to be with your investment property before you start looking. If you want minimal time invested, consider choosing a family-sized property that has been newly renovated.
If, on the other hand, you don’t mind buying a cheaper property that needs renovating, then a hands-on investment would be worth your while.
4. Legal Responsibilities
When you rent out a property, as a landlord you are legally responsible for several things:
- Keeping your property safe from hazards (i.e installing and regularly testing smoke and carbon monoxide alarms)
- Ensuring gas & electrical equipment is installed properly and maintained as needed
- Providing an Energy Performance Certificate for the property
- Protecting the security of your tenant’s deposit (using a government scheme like the TDP scheme)
- Checking if your tenant has a right to rent in England
Of course, many of these you can outsource, but this may decrease your net profit.
As of October 2018, landlords are legally required to have a license if they rent a property to five or more people from two or more separate households. This license only really applies to HMOs (Houses in Multiple Occupation), but it is important to consider when choosing the type of investment property to go for. We cover this in more detail below.
You must also consider ‘selective licensing’. This will differ depending on your local authority. They have the power to assign their own licensing requirements, so double-check before you start looking for properties. Ensure you check this periodically to ensure you remain compliant.
6. Property Type
Investment properties come in all shapes and sizes. We’ll deep dive into buy-to-lets, as this is the most popular with property investors. Each property type comes with its own pros and cons, and can massively vary in terms of risk and reward:
- HMOs & student properties (find out more about HMOs and if they are a good investment in our recent blog)
- Flats & studios
- Single-family houses
- Luxury, high-end properties
- Short-term rentals / holiday homes
Speak to one of our property advisors if you aren’t sure what you’re looking for.
7. Location, Location, Location!
Location is so important, but it is an aspect often overlooked by investors in a hurry. First, consider the type of property that you want to rent. For example, if you are going to buy an HMO, consider looking at areas near a university campus. If you are buying a house to rent to a young family, consider areas with top schools and plenty of green space for children.
Location will also play a big part in how much you can charge for rent. Sure, a neighbourhood without transport links, high crime rates, or low-rated schools may be cheap to buy in, but that will limit how much a tenant is willing to pay in rent. You’ll be surprised how much more someone will pay for a ‘good’ location! Find a balance that works for your budget and long-term goals.
If you are going to be managing a property yourself, consider that you may want to purchase in an area nearby so you can quickly access the property for things like viewing or repairs.
Our estate agency team can advise on the best places to live in the Leeds and Bradford areas.
9. Finding Your Tenants
Finding a new tenant can be difficult, especially when you are looking for a tenant who guarantees to pay rent on time every month and keep your property in a good condition. You can advertise your property through several outlets:
However, these are often complicated to set up and time-consuming to manage alongside viewings and administration. Instead, why not consider a specialist estate agent like Valor Properties? We can manage everything from listing your property to marketing, finding the perfect tenants, and handling all of the paperwork involved.
For more tips & advice on finding the right tenant for your investment property, get in touch, or read one of our insightful blog posts.
9. Financial Organisation
If you’re thinking about becoming a landlord, consider the costs associated with buy-to-let properties:
- Stamp duty, if you already own a property
- Income tax on your rental (20-45%, depending on earnings)
- Estate agent & property management fees
- Capital gains tax if you sell later down the line and your property value has increased (read one of our in-depth blogs for more information on capital gains tax)
- Ground rent (if applicable)
- Repairs & maintenance costs
- Landlord insurance
You must stay organised with your finances – you don’t want to face any unexpected fines from your local authorities. Luckily, we can help! At Valor Properties, we have an accountancy team specialising in property investments. We can help you with tax returns, rental calculations, and so much more.
10. Property Management
When you’ve found your property and first tenants, then the real work starts! As a landlord you are liable for any repairs and maintenance as needed, collecting rent, paperwork, and finding new tenants if needed.
If you’re looking for a hands-free investment property, consider outsourcing your property management. At Valor, we offer a Property Management and Maintenance package that helps you to easily keep on top of your property with services like facilities management, repairs and maintenance, and health and safety compliance.
If you’ve never invested in a property before, and you’d like to get started, read our most recent guide: Property Investing For Beginners. Our comprehensive guide will help you create your very own property investment strategy, and hopefully equip you with most of the knowledge that you’ll need to get started.
Tailored Investment Opportunities From Valor Properties
If you’d like to dip your toe into the lucrative world of property investments, get in touch with our team. Our experienced property investment specialists offer a complete turnkey solution, creating a hassle-free source of passive income for you.
With our wealth of knowledge and experience in property rentals and investments, you can rely on us to help build your portfolio. We’ll handle everything from sourcing suitable properties to property development, accountancy, property management, and everything in between.
To start your journey, get in touch with our team.