There are many issues to consider when investing in property, some of which are fairly obvious while others might make you think. We will now take a look at some of the more important issues to take into consideration.
Location, location, location
It goes without saying; the location of any property investment is key to the long-term success and maximising return on investment. There are some relatively simple factors to consider which include:
• Local economy
• Demand for property in the area
• Growth drivers including future developments
• Property price ceilings
• Rental value ceilings
In many ways, the process of investing in property should in the early days be a relatively simple tick box exercise. If the relevant number of boxes are ticked then it is time to do more research.
Funding – investing in property
There are very few property investment opportunities today which do not require some form of deposit. It is essential that the deposit does not stretch your finances to a level where you may well struggle in the event of unforeseen financial events.
• Leave yourself some financial headroom
• Ensure monthly payments are affordable
• Remember to switch to lower rates where applicable
• A buy to let property should be self-funding
• Never assume 100% occupancy with buy to let
There are different funding vehicles available for different types of investments so it is worth taking on board the advice of a mortgage specialist. It may also be worthwhile looking at crowdfunding which is gathering momentum.
Cash flow
Is all good and well having the best investments, paper profits but if you do not have sufficient cash flow to cover your short to medium term financial requirements, this can cause major problems.
• Avoid overextending your finances
• Resist the temptation to grow your property portfolio too quickly
• Make full use of equity built up in your property investments
• Ensure your income is always significantly greater than your outgoings
They say that “cash flow is king” and it is only when you are struggling with cash flow that you will realise exactly what this means. Profits on paper are great but if you do not have the cash flow to support them it can cause major problems with fire sales, etc.
Exit strategies
It is bizarre when you realise that the vast majority of people investing in property give no thought to how they will exit and bank their profits. You should always have an exit strategy in mind in the event of unforeseen circumstances or long term changes to your life.
• Tax efficient investment is important
• Whether an outright sale, remortgage or some other option, always have an exit strategy in mind
• Set yourself a long-term target and exit route
• A portfolio of properties with strong cash flow can be easier to sell than individual properties
It is all good and well having significant paper profits but at some point you will need to realise these returns. There will be situations where it is more attractive for investors to buy a group of properties with strong cash flow than cherry pick individual assets. You should also consider how your family might manage your investments when you are no longer capable.