You’re thinking about investing in property and you’re keen to start building a portfolio. Whilst it's very exciting, investment decision are best made with the head not the heart. So what questions should you be asking yourself to give you the best chance of securing a good return on your property?
1. What are my financial goals?
It’s good to be objective, but always consider the long term view. When choosing a buy-to-let purchase, think about how much income it is likely to generate over 10 or maybe even 20 years? Consider the kind of return you might reasonably expect from the property. Think about whether a new build or existing property would be best for rental income. Only then can you work out how much capital you are likely to need to achieve your goals. Consider setting short-term goals that feed into your longer-term ambitions, and make sure your investment property is capable of delivering on your targets.
2. Will this buy-to-let property help me achieve my goals?
With goals set, you can begin to create an investment profile. Adding the right purchases to your portfolio in line with your goals is essential. However, your research should be considerably more thorough than falling for photographs in a glossy estate agents brochure!
Drill down into the detail and consider the following fundamentals that underpin the perceived investment potential.
- local leisure and retail facilities
- the local economy, job creation and work opportunities
- Transport and education infrastructure and municipal developments
- urban regeneration and not urban sprawl
- prepare a cash-flow forecast to determine the capital need and the likely return
- Calculate the impact of interest rates rises on your cash forecasts
- The longer-term outlook for properties in the area
3. What will my cash flow look like over the next two years?
A change of government or legislation, interest rate movements, new infrastructure projects, big employers coming and going, can all have a major impact on property prices and rental income. Therefore it is prudent to calculate your cash flow for no more than 2 years at a time but resist the number annually. Don’t forget to factor in void costs and regularly review the following:
- Mortgage costs
- Property management fees
- Maintenance and repairs
4. What if my property moves into negative cash flow?
For most investors, a buy-to-let property investment strategy is based upon positive cash flow, but you should be prepared for it to unexpectedly move into a cash flow negative situation. Many external factors can temporarily disrupt cash flow, so it is advisable to build up a cash reserve that will enable you to cover any shortfall in income.
5. What can I do in times of turbulence?
Occasionally, external events can severely disrupt the property market. Wise investors build sufficient cash reserves from positive cash flow to enable them to weather the storm.
Following the 2008 crash, companies collapsed sending shock waves through the property market. Many poorly prepared property investors saw their thriving portfolios collapse. Those who had properly researched their investments and built up cash reserves came through relatively unscathed and actually saw the value of their investments rise shortly afterwards.
Expect the unexpected, build up a good cash reserve and develop a strategy for when your property occasionally goes into a cashflow negative situation.
6. How am I going to make money on this buy-to-let investment?
If your property is in constant negative cash flow, the only way to make money is through asset appreciation. Generally, the value of property will rise, but there is no guarantee. In this case, your investment controls you.
By investing in properties that generate positive cash flow, whilst being prepared for periods of negative cash flow, you maintain control over the investment.
7. Is it worth investing in an independent review of the property?
Finally, before investing, have an independent assessment of its potential. Be sure to check the following; Verify all the details, including:
- Rental potential
- Property management fees
- Landlords insurance costs
- Stamp duty
- Mortgage interest payments
- Local property fundamentals that will underpin your investment in the long term
This final step, should give you the confidence to proceed. Like a driving test that confirms your ability to drive, an independent verification will confirm your chosen investment will deliver against your short and long term goals.
Contact the team at Fairview International on 020 3011 0177 to discuss your plans or questions.