How to Choose the Right Property Investment – Part I: The Basics

With property investment, the better value your purchase is, the more successful the outcome in the long term. We’ve already covered where to look for investments, but how do you define “good value”? Ultimately that will be proved in the fullness of time, however, we have outlined some basic dos and don’ts when you’re looking to make your property investment:

Do:

  • Research the areas you are interested to invest in, be laser focused on the types of property that appeal to you. Each type of property come with different type of features and they are not all are the same.
  • 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. You will have a legal obligation to complete on the purchase, so you need to be very confident that you have the money you need.
  • 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? There will always be opportunities. You might even want to take a friend or colleague along with you to keep you in check on the things you want to invest in.
  • 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. Go and view it, get a builder, surveyor or architect to advise on the costs of development and any hidden issues, and read the legal pack. The legal pack is important because it includes information such as searches, title deeds, leases and any relevant planning permissions. The legal packs are available online and can be downloaded free of charge.
  • 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, this is very important as you want to ensure you’ll get return on your investment:
  • 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 not refurbished?
  • 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 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? 

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 and letting fees (plus legals) if you are looking to buy a commercial building

Don’t:

  • 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. 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. You will lose your deposit and the property if you don’t complete the purchase in time and you could also be liable for the remarketing costs.
  • 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. Get a sense of the property’s condition and how well they match the descriptions, and see if this is something you actually want to get involved with
  • 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.

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