So many people rent property.
It's just a fact of life.
According to a data sheet put together by The Guardian and published in 2011, all renters accounted for 26.1% of the entire property market – this shows the extent of renting property.
If you’re renting, there are some distinct disadvantages, particularly when it comes to your expenses. Disadvantages of renting are as follows;
- You never see the money you spend on rent ever again.
- You’re not secure in the property, as the owner can ask you to leave.
- You are subject to increases in rent at the behest of the owner.
This is why renting is not the ideal option for many people – in the longer term at least. Investing in property means that you can one day see some return from the money you put into it, this is not achieved when renting.
As a result, the motivation to buy is pretty substantial. But before we explore how to get a good return when investing in property let’s have a look at the reasons why people want to buy – aside from avoiding paying rent.
Why Buy - The Options
Property is a hugely valuable commodity.
There is an amazing array of options that a home owner has, and this leverage is what provides a significant incentive for homeowners.
The options that present themselves when owning property, that aren’t presented when renting, include;
- Buying To Let – This is a popular option, where a property is bought to be rented out. This can significantly reduce the regular costs of a mortgage.
- Property Development – This involves buying a property and renovating it before reselling, this way it is possible to make a profit relatively quickly.
- Living In It – Using a property to live in once buying is the most common use.
- The Combination Approach – Renting out a room whilst living in a property, or renovating it and renting out for a higher price are common combinations approaches that people use.
So these are the motivations for investing in property, and are some of the most common ways that people invest in property. But what different considerations are there when it comes to each type of investment?
Buying To Let
This is a common choice, as people think that simply letting out a property is a good way to make sure that you get a steady trickle of income – and this can mean that there are lots of advantages in terms of additional income. The best thing about this income is that it mitigates the cost of your mortgage, significantly reducing what will most likely be your most substantial monthly expense.
The thing that you must be aware of before entering into this type of investment is that you will essentially be a landlord, and this brings up its own set of issues and concerns. Becoming a landlord is not something to enter into lightly, and you should definitely research what the responsibilities of a landlord are before considering this type of investment. They include;
- Responsibility – You are entirely responsible for the safety and wellbeing of the occupants, so if you don’t take safety precautions and some faulty wiring in the property causes a fire for example you may be accountable.
- Adaptability – You are responsible for many things, not just collecting rent. So you need to be able to adapt to different roles if you’re going to be a successful landlord. For example, you will have to provide maintenance which can be expensive – so doing it yourself may be necessary.
- Legality – Things like insurance are not only desirable, but a legal requirement for landlords. The process of providing housing for another person requires the navigation of complex legal waters – you need to have the right mind set to be able to do this successfully.
An important thing to consider is how you’re going to be successful with all these responsibilities. It’s a tricky area to get right, a Harringtons Lettings guide suggests various considerations including;
- Keep Up To Date With Regulations – Your accountability and responsibility for the property is based on legal regulations, these change from time to time so you need to keep up to date with them.
- Register Your Tenants Deposit – By joining a Tenancy Deposit Protection Scheme you will be able to repossess your property more easily, which will limit any losses you might face.
- Ask For A Guarantor – Getting a guarantor is a great way to make sure that you have a secure rental income, as if your tenant can’t pay then their guarantor will have to – the guarantor is a property owner so any unpaid rent will be levied on the value of the property.
There are many common problems that arise as a landlord, but one of the most common ones is collecting payments. Late payments or non-payments are known as rent arrears and are very important to deal with, as landlords often rely on the income they receive from rent. A Landlord Zone article recommends the following approach which is worth bearing in mind before pursuing this type of investment;
- Monitor Your Bank Account – Keeping track of your payments online is a good way to have a constant record, and you can know when a payment is made or not instantly.
- Establish Why Payment Has Not Been Made – There are legitimate reasons why payment might not come in as expected. For example having changed bank accounts may mean a tenants standing order has not been transferred, alternatively if a cheque is used for payment it could have been lost in transit to you. Find out as soon as possible so you know where you stand.
- Contact The Tenant – If you have a problem with payment, then talk to the tenant. If they’ve lost their job or something you might be able to reach an agreement. If they are likely to have a job by next month then you are able to let them pay you then – this can also help build the relationship with your tenant and can save you both hassle.
- Seek Possession – If the tenant is unable to pay, then you will need to seek possession at the first available opportunity. By initiating court possession proceedings you’re more likely to limit your losses.
There are many other common problems that arise as a landlord, maintenance for example. You need to be flexible if you’re going to pursue this type of investment and remember that being a landlord is pretty much a full time job. Most of all, you need to be organised – have a plan going in and you’re likely to have a higher chance of success.
Below is a handy infographic on how to be a successful landlord with some excellent pointers for this type of investment.
The process of developing a property for quick resale is a lot simpler than being a landlord – however you don’t have the same steady trickle of income that being a landlord gives you. The considerations are necessary to make sure you make a profit quickly. They include;
- Time – Every month that you spend developing the property before sale is a month that you will be paying a mortgage; the interest on this mortgage is going to eat into your profit margins so establishing a sensible timeframe to turn around the property is absolutely essential.
- Budgeting – If you’ve got a budget of £100,000 you’re can’t buy a property worth £100,000 and successfully develop it – you need to factor in the cost of development too. A budget for buying the property and a budget for development is very important to think about.
- Understand The Market – It’s so important to take an objective view of the market you’re buying in. Choose an area which is up and coming to ensure that there is enough demand once it comes time to sell.
Overall, this type of investment is a lot simpler. But you still need to have a good business mind set for success. It’s possible that you won’t sell right away. If this is the case then it’s wise to rent the property on a short term lease in order to make sure your monthly costs don’t eat into your profit margins.
Make sure that you have a sound business plan. It’s also a good idea to keep management of any construction projects that are being undertaken under your control, this will save costs and you will have a higher level of control.
Living In The Property & The Combination Approach
If you're living in the property yourself, that's still a great investment.
It’s also absolutely the simplest way of using the property, there are fewer legal considerations and you don’t need to have the level of business savvy that being a landlord or property developer has.
An excellent feature of the combination approach to property investment is that you can gain some of the benefits of one approach without the associated disadvantages. For example, if you have more than 1 bedroom in the property you could let one or more rooms. This is a great way to get some income, but you can still use the property for yourself. Also by living in the property yourself you can more easily look after maintenance issues and any damage that might come up.
Another interesting combination approach to property investment would be developing the property to rent out. This will basically equate to a higher rental income after a successful development. It’s possible to develop the property and live in it yourself, or develop with an eye to letting out one or more bedrooms.
Keeping The Right Attitude For A Successful Return On Investment
Purchasing or letting a property is a very long term investment, it can take a while to see a profit. However with the necessary knowledge and research, and a good business minded approach, you can still make a profit.
Remember that although property can be emotionally draining, if you detach yourself from it to a certain extent you will be much better placed to make better decisions for the investment to pay off.