Choosing The Right Property And Investment Style

Property

Choosing the Right Property

Out of the properties that you might find, which one(s) do you actually purchase? In short, the ones where the figures stack up.

To explain this further it is essential that you view your property investment as a business and not just some form of gambling, although the property market contains a number of elements of risk, as do most types of investment. Just like in any kind of business you need to know that you will be making money and not losing money, it is the bottom line that tells you if you are running a profitable business or not. However, there are at least two different high level categories of ways to profit from investment in property, these are explained here.

Investment Types

Capital Growth – Appreciation

This is the most common way that people think of earning money from property, usually because it is the property that they own and live in. This type of investment is the act of buying property for one price and selling it later on for a higher price, the difference is often referred to as Appreciation. This method of profit usually takes time over which the value of the property increases. However, you can add value to the property by doing some kind of work to it, like refurbishment or an extension. In other instances you may be lucky enough to buy something for less than it is worth and sell it the next day for market value thereby making a profit on the ‘turn’ or ‘flip’. You will normally have to pay Capital Gains Tax on the increase of the property’s value when you sell it.

Positive Cashflow – Income

This is the type of profit usually made by Landlords where the overheads of owning and letting a property are less than the income generated from same. What this means is that if you add up your mortgage payments, management fees and cost of repairs the total should be less, across the same period, as the rent paid by the Tenant. For example, if you pay out £500 per month on overheads, you would want to be letting the place out for at least £550 in order to make a profit, or Positive Cashflow. You will normally have to pay Income Tax on the profit made from rental.

The above two types of investment are not the only two and they are not necessarily mutually exclusive, that means it is possible to find a property that represents both types of investment. In fact most property will have some kind of appreciation, although there are areas that have had zero growth over the past few years and, indeed, some areas that have had negative growth, that means the value of property has actually dropped Niseko Property for Sale.

Similarly, Positive Cashflow is variable and can rise and fall with market conditions, you can only make your best, informed decision on the day, for the day, with all the available information. Historical trends may point towards a potential future, but this is not any kind of guarantee.

Plan for Voids

You must build Voids into your cost structure or overheads. Void Periods, referred to simply as Voids, are the times when your flat is not let out but you must continue to pay the mortgage and associated costs like Service Charges, in the case of a Leasehold property. This is why the most common Buy To Let mortgage is worked out on a factor of 130%, the Lender expects Voids and incidental costs and is building in a simple safeguard for their financial exposure to you. By anyone’s standards the factor of 130% is a good rule of thumb, this means that your actual rental income should be 130% of your mortgage payments.

Many Investors and Landlords have been caught out by not accounting for Voids and suddenly running short of money when they have to pay their mortgage with no rental income to balance the outgoing cash. In areas of high competition your property may be empty for several months. It is a good idea to have around three months worth of mortgage payments set aside for your Buy To Let property in case of Voids.

The more properties you have in your rental portfolio the less chance there is that you will run short of cash for the mortgage payments, as you balance the risk of Voids across the entire portfolio and not just on a single property. However, this assumes you have sensibly spread your rental properties across various different areas to avoid loss of income if one particular area is impacted for some reason. For example, if you have five flats in one apartment building, they will all suffer from the same local market conditions. In times of low demand and high competition you will have not one but five Voids to contend with. If you had five rental properties in different suburbs of the same town or city then you have reduced your chances of having all five properties empty at the same time. Better still to have these five properties in different towns altogether. As the old saying goes, don’t have all your eggs in one basket.

It is important to remember that no matter how many properties you have and no matter how spread out they are, there is always a slim chance that they might all suffer Void Periods at the same time. You should have a plan in case this happens, but you can lessen the chance of this happening by staggering your Tenancy Periods so they don’t all start and end in the same month. This would normally happen anyway as various Tenants come and go at different times.

Yields and Profits

There are many methods that people use to calculate what they call the Yield. Yields are essentially the ratio of income generated by a property in relation to the initial capital input and costs associated with obtaining and letting the property. Yields are normally represented as a percentage figure and depending on the area and the person you ask you will get a different story as to how much of a Yield is worthwhile. Some people assess the potential income from a property by performing a series of complicated calculations and arriving at this Yield percentage, they already know their personal limits and may accept an 11% Yield but reject a 10% Yield.

But when you look at the big picture most Yield calculations are really a waste of time as the conditions they have based their calculations on will change tomorrow. Furthermore, the idea in business is to make money and not lose it, therefore, generally speaking, any income is good income even if it is only 5%. Obviously there are practical considerations but you have to remember that these figures can change from day to day and are completely dependent on how you calculate your Yield.

The preferred method of establishing the viability of a Positive Cashflow type of investment is simply looking at how much profit you have after your costs. If your flat costs £500 per month to run then an income of £490 per month is Negative Cashflow, but an income of £550 is Positive Cashflow. It all comes down to what you are comfortable with and how much you need to establish a Void buffer as mentioned above.

Try not to get bogged down with hairline percentage variances where 10% is bad and 11% is good, instead focus on real income and what this means to your property business.

One way of improving your income is to have an Interest Only mortgage, as opposed to a standard Repayment mortgage. This can mean considerably lower repayments each month, but beware, at the end of the mortgage you will have to repay the principle loan amount in full. This is often an ideal method when you only plan to have a property for say 5 to 10 years of a 25 year mortgage, as when you sell it you would hope to repay the principle mortgage amount anyway, but in the meantime you have had to pay less each month. If the Capital Growth in the property is good then at the end of the mortgage term you may well be able to refinance or sell it and pay the principle back with enough left over to reinvest in something else. It very much depends what your long term plans are, but Interest Only mortgages can be a valuable tool for Property Investors and Landlords.

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