7 tips for first time property investors

The reasons for investing in property are as compelling as ever. Most of these reasons hinge on the fact that property, overall, is one of the most reliable investments there is. It can also be one of the best performing.

Even so, it is important to approach it with the right strategy. With that in mind, Mark Burns, Director of Pure Investor shares seven tips for new property investors.

Make sure that you are in a position to invest

If you are carrying high-interest debt, then it generally makes more sense to pay it down than to invest. Property investment can generate excellent returns. It is, however, unlikely to match the sort of rates charged on personal loans and credit cards.

What is more, carrying personal debt is likely to count against you when it comes to getting a mortgage. At a minimum, you can expect to be charged a higher rate of interest. What is more, you are now unable to offset mortgage interest against tax.

Get a support team in place

If you are investing in residential property, then it is highly advisable to work with a reputable letting’s agency. If you are investing in holiday lets, then you may find it a lot easier to work with a reputable management agency.

In both cases, the main advantage of this is that it will ensure that you stay on the right side of the law. The secondary advantage is that it relieves you of the “hands-on” work of running investment property. In other words, if your tenants/occupants have issues, they will take them to your representatives rather than to you directly.

It is also advisable to find an accountant. An accountant will make sure that your taxes are paid in full and on time. They will also advise on what you can do to minimise your tax liability. At some point, this may involve switching to a limited company structure. An accountant can guide you through the necessary process.

Decide whether or not you can pay cash

Paying cash has the obvious advantage that you can avoid the cost and administration of arranging mortgages. On the other hand, paying cash does tie up your cash. Sometimes using a mortgage is worth the time and cost to ensure you always have cash in the bank.

If you are going to use a mortgage, then you need to decide if you want an interest-only mortgage or a repayment mortgage. Interest-only mortgages are still widely used for investment property.

On the one hand, they have the advantage of affordability. On the other hand, they do effectively commit you to selling the property. They can also work out more expensive overall than repayment mortgages. This is because you never pay down the amount borrowed so you always pay the same interest.

Define your investment goals

As a starting point, you need to decide if you want to aim for income or capital appreciation. You may get both. In fact, which is very common in property investment. You can, however, only have one main priority.

Define your investment horizon

The costs of buying property mean that it generally needs to be treated as a “buy-and-hold” asset. Ideally, you should be prepared to commit to a purchase for at least five years. If this is too long for you, then there are ways to invest in the property market without buying property directly.

Probably the most obvious and accessible option is to invest in commercial property. This approach is essentially the same as investing in bonds. You invest in a building and are guaranteed a certain income for a certain time. At the end of that time, you sell your stake back to the management company.

You also have the option to invest in property-related shares and bonds. For example, you could buy shares in construction companies. These investments have much lower transaction costs than property. They can also, usually, be bought and sold more quickly. Keep in mind, however, that they can also be a lot more volatile than property.

Define your exit strategy

If you buy investment property, then you really only have one exit strategy and that is to sell it. This means that “defining your exit strategy” actually translates to “defining your target buyer”. If you own more than one investment property, then you need to decide whether or not to sell them as a portfolio.

If you sell them as a portfolio, then you are effectively limiting yourself to investment buyers. Realistically, this means that you can expect to achieve a relatively low price. On the plus side, you can also expect to be dealing with an experienced buyer. This means that the transaction process should be as quick and simple as it can possibly be.

Breaking up your portfolio can allow you to target both investment and residential buyers. This can net you higher profits. On the minus side, you will need to be sure your estate agent qualifies buyers thoroughly. Even if they do, you are still at higher risk of delays and potentially of transactions falling through.

You might also want to consider setting up a limited company and selling your property to that. This is a relatively complex exit strategy. Again, you would probably find it helpful to have an accountant guide you through it.

Define a strategy for acquiring property

Defining a strategy for acquiring property usually starts by answering two key questions.

• What location(s) are you interested in?
• What demographic(s) do you want to target?

These questions are often intricately linked. For example, if you want to buy property in a university town then students are your most obvious target market (and vice versa).

As a first-time property investor, you may feel safest buying property in established markets. Keep in mind, however, that these markets tend to have the highest prices and the lowest yields. If preserving your capital is your highest priority, they may still be good options. If, on the other hand, you want to go for growth then “up-and-coming” areas may be a better choice.

It can take a bit of research to find these areas. An effective way to start is to look for areas on the outskirts of established markets. For example, if central Manchester is too much of a stretch for your budget, look at areas such as Salford, Stockport, and Wythenshawe.