An investment property is a property that is bought solely to make money. It might be a residential property such as student accommodation, a commercial property like a shop or an office, or mixed-use property, for example, a shop with a flat above.
Property is an attractive investment for many people because it is more than just a piece of paper. It is something they can see, touch and understand. Property prices dip and rise, but over the long-term, they tend to increase which makes bricks and mortar an attractive investment.
Are you starting out as a property investor? Most people new to property investment make mistakes, which is simply due to a lack of experience. Here we share 10 common mistakes… and how to avoid them.
1. Not having clear investment goals
Are you investing in property so you can make a wage and leave your job? Are you looking to build a retirement fund or are you investing for your children’s future? Your long-term goals are the driver of your investment strategy. Once you know your goals you can work out what you need to do to achieve them.
If you are investing to build up a pension fund, how much money do you need to make? Have you considered how changing mortgage interest rates or day-to-day running costs for the property might impact your income? Have you factored in the cost of refurbishing a property that you plan to keep for many years?
If you are investing in property for your children, have you sought the advice of a tax specialist? By doing so you can minimize tax liabilities from the outset. Will you be able to pay off the property mortgage before you retire?
2. Not purchasing under the market value (UMV)
Buying property that is under the market value offers you some protection if property prices fall. It means you may be able to remortgage later to take out your initial deposit and increase your cash flow.
However, just because a property is being sold for under market value does not mean it is a great investment. If the property is in an area where it is difficult to sell or there is a weak rental market, then it is not a bargain.
How do you find a property selling for below market value? One way is to advertise locally through social media. You may find somebody who is desperate to sell quickly due to a change in their personal circumstances.
3. Not prioritising rental yield
In the economic recession in 2007, many property investors struggled when house prices fell. This is because the health of their businesses depended heavily upon capital appreciation. Although property prices tend to rise in the long-term a healthy rental yield is the lifeblood of a successful property business.
For both residential and commercial property, it is advisable to aim for a rental yield of at least 5%. Rental yield is calculated by dividing the annual income of the property by its value and multiplying the total by 100.
4. Inadequate financial planning
When buying an investment property, you may need a buy-to-let mortgage or a commercial investment mortgage. Within these two categories, there are different products to choose from. An independent mortgage advisor will help you to find a mortgage that aligns with your investment goals and financial circumstances.
You need to plan for the cost of buying and running an investment property. Stamp duty land tax (SDLT), professional fees and mortgage and valuation costs are all initial expenses. Ongoing costs include landlords’ insurance, gas safety certificate, utility bills, council tax and other taxes associated with running a business.
5. Failing to carry out due diligence
It is important to carry out thorough research before buying a property, even if you purchase through an investment company that appears to have done the homework for you.
Check sold prices of properties similar to the one you are considering buying in the area you are targeting. You can use property portals such as Zoopla and Rightmove and the HM Land Registry sold prices as a guide. At the same time check rental rates so you can calculate the rental yield you are likely to achieve.
Think about the kinds of tenants you want to attract. Are you considering buying student accommodation, a family home or a commercial property? Look at the facilities, schools and transport links nearby – will these appeal to the type of person or business you wish to rent your property to?
Can you identify a gap in the market? If you are considering buying in a student area, is there a demand for accommodation or is the area well served already? Is it difficult for young families to find suitable homes near to good schools?
Before you buy a property walk around the area, research the crime statistics and find out what developments are planned nearby. Is there anything that would put off or attract potential renters or future buyers?
6. Having no cash for contingencies
It is important to have a healthy cushion of cash. We recommend setting up a contingency fund to meet unexpected costs such as replacing a boiler or covering the mortgage when your property is empty.
Consider putting aside 25% of your gross annual rental income to cover such costs.
7. Buying a property with title defects
Experienced investors can make money buying properties with title defects as they are often sold under market value. However, title defects can be confusing which can lead to costly investment mistakes.
Title defects can include:
- No legal title. For example, the owner of the property has used a nearby piece of land for many years but has no legal claim to this piece of land.
- Lack of planning permission, listed building consent, building warrant or completion certificate for any alterations or building work on the property.
- Lack of access rights. The owner of the property does not have the necessary rights of access over a crucial piece of land because it is owned by somebody else.
If you decide to invest in a property with a title defect our solicitors can advise you how best to protect your interests.
8. Emotion-led buying
When you buy an investment property it is a business decision. It is very different from buying a property that you are going to live in yourself. A beautiful kitchen does not necessarily mean you will achieve a high rental yield or that you will make healthy capital gains on the property in future.
It is important to think with logic and not emotion.
9. Over-spending on refurbishment
Buying a property that requires refurbishment can lead to a higher return on your investment. However, if you overspend by purchasing high-spec kitchen appliances and an expensive bathroom suite that will dent your profit margin.
When buying a property that needs refurbishing it is important to shop around and to get quotes and recommendations. Sometimes a cheap quote can lead to a poor standard of work and greater expense in the long run.
As a rule, it is best to overestimate the price of refurbishments.
10. Not taking the time to learn
Learn as much as you can about how to successfully invest in property by reading, taking courses and talking to experienced landlords. Keep informed about the latest news in property development such as changes to tax laws.
When you start investing, continue to learn. Always seek advice from other people whenever you need it especially from those who understand property investment and the local area well.
How can a conveyancer guide you?
Choosing an experienced solicitor is the key to making a successful property investment. By instructing a conveyancer early you will receive crucial advice right from the start.
Your solicitor will advise you about whether there are restrictions to renting out a particular property and what the implications are in terms of tax, planning laws and environmental laws. They will answer any questions you have and offer you advice tailored to your investment goals.
It is important that you instruct a property solicitor who is proactive and works efficiently throughout the conveyancing process. Legal documents must be drafted, executed, verified and lodged in a timely manner. If a document is missed or is late this can be detrimental to your investment.
Why choose Insight Law property solicitors?
Buying an investment property is different from purchasing a home for yourself as there are unique legal and financial considerations. Our specialist commercial and buy-to-let property lawyers can help you to make the best investment whether you are a new or an experienced landlord.
We can advise you throughout the conveyancing process on everything from mortgages to tenancies, from title issues to planning and licensing issues. Our specialist team of lawyers can help guide you through the process.
To talk to our lawyers about your investment plans please call us today on 02920 093 600.