With so many options available to look at, so many companies offering what can look like amazing deals, numerous websites and literally 11,000 properties to choose from. How on earth do you choose the one that’s right for you?
After more than 5 years of listening to property investors and asking them what’s really important to them, there is a common thread from those who have been around a long time and have eventually, become successful with real estate investments. They made mistakes too, hopefully, their knowledge will help you avoid those mistakes and prevent you losing your hard-earned cash in the process.
1. Double check your budget – measure twice cut once
First things first. So many times, people will believe they have access to an amount of cash, either built up equity in a property or perhaps a dividend paying out – without actually checking the cash is really available at the amount or time they thought. You’re going to need access to around 30% to 40% of the property value as a deposit on a buy to let, all the adverts you see which say, “Buy now for only 10% deposit!” these are for actual home owners, not you. Check with the bank or the fund, but do check before you start looking for property.
2. Build a plan and stick to it, Rome wasn’t built in a day
How much money do you think you’d need, if you wanted to retire and still enjoy yourself properly for the rest of your life? Once you have that number figured out, you can start to build an idea of how many properties it may take to supply that income to you. It will take time; however, property investments aren’t short term anyway, always consider 10 to 15 years as a time frame to work on.
The UK property market doesn’t fair well for ‘property flipping’ so much anymore and especially not with off plans. There are always going to be ups and downs with any investment, property is no different. Don’t allow a temporary situation to alter your long-term plans, Brexit included!
After all, if you’re a follower of the property cycle idea, you’ll understand that land in the UK, is limited and supply and demand don’t change that much. Rightmove wrote in their recent report https://www.rightmove.co.uk/news/house-price-index/ that home buyers needs outweighed any instability and were buying anyway which has resulted in a price increase. The best time to buy is when everyone else is selling.
Most of the portfolio buyers I’ve spoken with target one bed apartments in and around £150,000 in areas outside of main city centres, areas that have the better potential for growth over the next 5 to 10 years. These sorts of locations aren’t yet established, so although you may not personally want to live there right now, there is the likelihood you would do in a few years.
It’s difficult to remain objective and logical with property, if you become too emotional, you’ll end up buying places you want to live in, which are more likely to be expensive in already developed areas – this will not give you the results you want. Work on spreadsheets, and if the numbers work, go for it.
3. Get expert advice, because hiring an amateur is more expensive
Speak to an independent mortgage broker and ask them to help, the advisors at your bank usually only have access to their banks products, you may not be getting the best rates, so shop around a little.
There are fees to exit a mortgage and banks won’t let you refinance the whole amount, maybe only 70%. You may need an accountant to go through your finances if you’re self-employed to prove you can manage the loan, this will take time and money.
Banks will want to know you are able to service the debt safely, you’ll get better rates if you’re an experienced buy to let landlord (at least 6 months with one property) than someone just starting out.
Don’t buy something just because you like the person, it may sound silly, but a lot of people stick to what they know simply because they like who they’re buying from.
4. If it looks too good to be true…
By now you’ve seen so many adverts on reputable websites such as Rightmove and Zoopla, signed up to a lot of different property pages, forums and so forth. Treat these all the same, be sceptical, be analytical and stick to your guns.
If a project looks too good to be true, it often is! A few examples for you. Care home investments, Student accommodation, Hotel rooms – these all typically have some hook in like “10% for 10 years, guaranteed!”. Spend the money at a horse race instead, you at least have some chance of a return and have a lot more fun doing it! It’s also important to remember, there is not likely a financial director on the planet that would allow any company to guarantee rent for any period, it makes zero business sense to do so.
See below for a typical advert (arrived just in time for me to see it today) and sadly yes, people do fall for these mythical investments.
Projects like this do seem like great deals, so cheap, high yields, apparent demand and hands off! What could possibly go wrong? Check online for the hundreds if not thousands of complaints about income not being paid on time, if at all.
5. How to sort the wheat from the chaff (there’s a lot of chaff!)
Research, research and more research. Don’t take anyone’s word for it, check out everything and ask for proofs of what is being said to you.
Ask for a full legal pack so you can see the lease and the lease terms. Has the land been bought? What happens to your deposit? Is your money safe or is it being used to build with? Can you see the S106? Has the developer got a track record you can see? If it’s a cash purchase, why is that?
As a note on the developers, there are limited numbers of real and good developers in the UK – you’ll question their price once, but never question their quality. Keep that in mind, when it’s time to rent it out or sell, this is when you realise you made a great choice.
You may not need to see these details yourself, the lease can look like gibberish and appears to be written in Shakespearian English, but you do need to know how long the lease is, how much the ground rent is, which should be 0.1% of the property value, how much the service charge is and it should be linked to the Retail Price Index (RPI) and reviewed every 10 years.
Asking for these things will often cause the weaker projects to vanish, as the sales person simply won’t have any of those things to give to you, because the documents don’t exist.
Ask what percentage is reserved for owner occupiers, as a rule of thumb, it should be 30%. Banks won’t lend against a development that is as they call it ‘investor lead’ as it’s too high a risk.
You can buy rental reports from companies like Zoopla too, these are helpful in generating a guideline rental return for the postcode area you want to buy in. Do bear in mind however, post code areas often have a large variation of rental and property values, so it’s just a guide.
Avoid cash only investments on off plan properties, these are one of the most problematic you’ll find out there. Why? Typically, your money is used to build the development with, and if a bank isn’t willing to lend to the developer, why the hell would you or I be willing to?
Often and almost always delayed for huge amounts of time, one or two years and sometimes never at all built, this is because the developer has to wait until a certain number of the off plan has been sold before they will commit to build it, they’ll have what’s called an ‘option’ on the land, which basically means you and everyone else own absolutely nothing until it’s built and at 100% risk to your deposit. We’re then left trying to legally recover our large deposits, which can take years if successful.
Thank you for taking the time to read this article, if you thought it was helpful, do let me know. I’d be happy to help you connect with professionals able to help you chose the right property too.
Feel free to contact Gareth at Baron & Cabot on +44 (0) 203 287 8844 or have a chat to us on the live chat below.