30 Mar How to Choose the Right Property Investment – Part I: The Basics
How to Choose the Right Property Investment – Part I: The Basics
With property investment, the cheaper or better value your purchase is, the more successful the outcome in the long term. We’ve already covered where to look for investments in the first two instalments of the learning & development series, but how do you define “cheap” or “good value”? Ultimately that will be proved in the fullness of time – for example, for many of us “experts” prime Central London residential properties did not look to be good value in 2010 yet prices continued to rise for another 5 years! However, we’ve outlined some basic dos and don’ts when you’re looking to make your first or next property investment:
- Research the areas you are interested to invest in.
- Evaluate the key characteristics of a local area – is it very reliant on a single employment sector (which then makes it very risky if that industry goes into decline)? Specifically, locations dependant on Oil (Aberdeen) or Steel (Port Talbot) have serious downside risks if those industries leave the town or go into permanent decline.
- Look for areas of growth through infrastructure projects, for example Crossrail 1 (and now Crossrail 2) in London, or central Birmingham (HS2).
- Have your finances lined up before you make an offer or at the very latest, at exchange of contracts.
- Establish your tolerance and appetite for risk – do you just want something that will let easily and enjoy a lower yield income stream? Or do you want something riskier but still income producing (commercial). Alternatively, do you want to roll your sleeves up and refurbish/develop a property?
- Ensure that thorough due diligence is carried out.
- Check any additional costs and charges you might incur, such as service charges, ground rents and maintenance costs.
- Have a survey of your property carried out.
- If buying a new build property, ensure you have the benefit of a National House Building Council (NHBC), or equivalent, warranty from the original developer.
- Research the market you are investing in:
- What are the properties that are comparable to the one you are buying being sold for, and what are they renting for?
- How comparable are they – are you paying the “refurbished” price for a property which is actually unrefurbished?
- What is the rental yield you will receive? Is this a yield that makes the investment sustainable and worthwhile?
- Check if there are tenants in the property.
- If residential, are they employed and do they have a good history of paying rent?
- If commercial, what are the terms of the lease and how secure is the income?
- If commercial, is the tenant paying in full and on time?
- If commercial, is the tenant paying a market rent, if not what will the rent revert to when the tenancy is due for renewal or review?
- Use a good firm of solicitors (we are happy to recommend, we have a series of videos on this subject coming up soon) and do not skimp on the cost. Your solicitor could save you from a very costly mistake.
- Evaluate the viability of your development site. If you’re buying a development opportunity:
- Analyse the forecast sales price of the development (the Gross Development Value – GDV); deduct this.
- Your total costs (excluding the land), including sales costs, planning, build costs, professional fees, marketing etc; then also deduct this.
- The land costs (including stamp duty and legal costs); then deduct.
- Finance Costs; deduct this and then this will enable you to establish:
- Your profit (or loss). If your profit is less than 20% of the total costs (known as profit on cost), including land and finance costs, then you are probably paying too much for the land.
- Check the planning for your target property. If you are planning a development on the site, check:
- What is the current planning status of the property?
- Has planning been refused in the past for the type of development you are looking to carry out?
- Is the site adopted for any use in the local plan?
- Is the current use of the site something the local authority is looking to protect?
- Is the local authority looking to put an “Article 4 Direction” on an area within the borough which might prevent permitted development rights (such as office to residential)?
Do ask us for a recommendation for a planning consultant if you need one and don’t know anyone.
- Factor in service charge, lettings voids, business rates (an absolute killer) and letting fees (plus legals) if you are looking to buy a commercial building.
- Get excited by yield alone – if a deal looks too good to be true, it probably is.
- Buy something you don’t have the risk appetite for. Just because commercial properties offer higher yields than residential, this is to reflect the fact that the holding costs of commercial properties are high. Likewise, if you don’t have the appetite for the hassle factor of development, don’t get involved.
- Rush your purchase. A fool and his money are easily parted.
- Buy without viewing the property. You would be amazed by the number of people who buy at auction without ever seeing the property. This can backfire spectacularly.
- Exchange without having your finances lined up to complete – you could lose your deposit otherwise.
- Ever assume – always verify facts.
- Buy without a survey of the property.
The list is not a comprehensive list and we welcome any other recommendations for investment/development buyers. However, these are key starting points, important for anyone to consider upon making a purchase.
In a fortnight, we will release Part II, where we will provide a more advanced guide. In the meantime, should you wish to discuss bridging finance or alternatively need a recommendation, please do not hesitate to contact us on firstname.lastname@example.org.