5 Principles of Property Investing

Following on from our previous article, these are another 5 principles of property investing

 

11. Invest in what you know – the right type of property

  • Buying Overseas, off plan & out of area – this is probably the biggest one that often hurts new investors. We learned this the hard way in our earlier investing days when I bought my flat in Bulgaria which only rented out for 2 weeks per year!

12. Buying on Emotion

  • How we, and many hundreds of thousands starting out, got suckered right in by those big, colourful, lifestyle brochures, new build and dreamy holiday homes. No. Not anymore. This, as we learned the hard way, is vanity. It’s emotional buying. Perhaps you can relate?
  • You see, talk like the above can get you in financial trouble quickly. We know, it’s easy to get carried away.
  • Yes, you will miss a few ‘deals’ on the way up, the more detached you are which is fine. But the more you stick to your buying rules and the fundamentals, the better cashflowing investor you will be. And if you can’t get the deal, at the price you want, then move on. There will be other deals. It’s a skill to think with logic…not your emotions

13. Match your target rental audience

  • It is crucial to remember that an ideal BTL property is not necessarily the same as your own idea of an ideal home – rather, an ideal BTL investment is one which matches your target rental audience – students, professionals, families, tenants on benefits, friends/family

14. Estimating Gross and net yields

  • And to stress test future spikes in interest rate rise
  • If the property does not pay you monthly to own it you are taking on a liability. You will need a day job to support the property in that case. If the property does pay you each month (after all operating expenses plus debt service then you can afford to own the property for a very long time. (In this sort of situation you are buying an income stream and not speculating on future appreciation.)
  • To make the cash flow work you might need to raise the amount of equity you put in.
  • Almost any rule of thumb, ratio or other measure lives in a context. Just because a lender asks for 125% -145% mortgage at 5.5% cover does not mean that is the right number for an investor to use. You need to understand the underlying details and you have to be prepared to change the indicators as the ground shifts. Just be careful about lowering standards to chase business rather than sit on the sidelines.

15. Leverage

  • If you have minimal capital of your own to invest, then leverage can help you (subject to status and availability). Leverage means using other people’s money to finance a significant percentage of your property investment.
  • Today, a typical deposit using leverage would be 20% to 30% of the property’s price. Stick to sensible loan to value ratios (50% to 70%) & do not over to under utilise leverage
  • Leverage is an excellent way for new property investors with limited capital and experienced investors who wish to expand their portfolios at a minimal cost

 

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