Seasoned property investors will be able to tell you their favourite tips and strategies to keeping returns high and risk low. And now is as good a time as any to listen to the advice of those who have negotiated the real estate landscape in Britain with success.
We’ve outlined 5 timeless rules that investors should be aware of when conducting their operations in 2019 and beyond. You might find these methods second nature already, but it can’t hurt to remind yourself of the essentials now and then!
Buy from a motivated seller
Looking for motivated sellers who are more likely to be flexible when it comes to price and sale terms is a much better property investment strategy than identifying the properties you like and trying hard to negotiate for a better deal.
The buying process is complicated enough and having a party who is willing to work with you will save you precious time and money.
You might even be lucky enough to pick up a substantial discount if the seller is hoping for a quick sale. And as you’ll already know, even an extra 5 or 10 per cent discount is an important factor when it comes to calculating the overall profit you’ll be able to make on the property.
This is especially important if you are operating during a falling market. What you save on the purchase of the house can then be used as an important buffer (more to come on this later) to offer yourself extra safety and security in your investment.
If the price is already good, you may not need to haggle for a discount. But knowing that your seller is just as eager to hand over the property, as you are to take it, is certainly a great dynamic to work with when you’re in the property game.
Buy in areas with strong rental demand
There are various costs associated with owning an investment property such as mortgage payments, insurance and various taxes. One of the best ways to cover these is to generate cash flow from your purchased property.
Your aim should be to find an asset that will perform well as a rental property, with the income you gain from tenants supporting your investment and contributing to your overall profit.
The best way to look at it is to consider the costs of holding the property without tenants in place. If you buy a property investment where it’s difficult to rent, then the void periods that are likely to apply could cost you a significant sum in the long run.
To identify areas with strong rental demand, do your research into the local market and dig deeper into social factors such as employment, future developments and transport connections. In the end, your evaluation of the property price should factor in its potential to generate positive cash flow for the majority of the time that you own it.
Buy for cash flow
If the rent on your property isn’t enough to cover the monthly costs of owning the asset, this is called negative cash flow. This is something all investors should try to avoid. Admittedly, some investors with large portfolios will have a few properties that don’t exactly generate positive returns in the short term, but still retain these in the hope that when the market changes, these properties will make back their money.
For the average investor, however, choosing properties that offer positive cash flow is a must. If you’re having to subsidise the property in any way with your own capital or from the income generated by other properties, this isn’t a great position to be in and will reduce your overall gains.
A good way to put this into action is to calculate all of the costs associated with the property including mortgage payments, insurance and management fees and weighing this up against the income the property is likely to generate month on month.
Invest for the long-term
Short term profit is great, especially when you’re hungry to see the fruits of your labour. However, the profits you make will always be capped once you sell up. Long-term investments where investors buy and hold for prolonged periods of time have the added benefit of rental profit to match capital growth.
Strictly following this rule will depend on your strategy, your portfolio and how you plan to manage your working capital, but it’s clear that longer-term investments can add more to your overall profit margin.
All this is only possible if you can afford to hold the property for the kind of duration we are talking about. This will depend on whether you need the capital tied up in the asset for other purposes, as well the potential for it to generate positive cash flow through incoming rental payments while you own the property.
Keep a cash buffer
As mentioned before, a buffer, or a ‘cash buffer’, is something that can become incredibly useful for property investors. This spare cash can be incredibly important when you need to pay for necessary repairs or improvements to the property.
Not having a buffer could also lead to a greater risk of void periods and loss of profits if you have to wait to get the money you need to make important changes.
Having a cash buffer is also likely to allow you to buy and hold a property for a longer time, and make the most of rental profits. If you’re forced to sell for a lower price for instance, you may well lose all of the positive capital tied up in the asset that made you so keen to purchase in the first place.
Despite what the name suggests, a cash buffer can also come in the form of a credit card or money that a friend or family member is willing to lend you if necessary. The important part is having a contingency in place that allows you to avoid selling your property below its potential.
What do you think?
We’ve tried to cover some general principles that can apply to almost any investor, but by no means is this an exhaustive list of all the strategies and tips that investors rely on to turn a healthy profit each year.
If you think we’ve missed something important or if you have your own golden rules that we should know about, then by all means, get in touch!