Property investment can be a great way to replace your current income and build wealth over time. In order to get started, you’ll need to understand the basics of property investment and how it works.
When I started investing in property over 10 years ago, my biggest desire was to be able to replace my current job with income from renting out numerous properties which I have invested in and renovated. This would give me the freedom and flexibility to do what I want with my time, while also providing a stable income stream.
One of the reasons I decided to start a property and online business was, so I could work around my 2 young children. Trying to balance home and work life is a constant challenge. But I love being able to work for myself in a flexible manner, so I can be around for my 2 girls.
In this guide, we’ll discuss the basics of property investment, including what it is and how to get started.
What Is Property Investment?
Property investment is the process of buying, renovating and renting out property with the aim of earning a return on investment. It can be a great way to replace your current job income or build wealth over time.
There are a number of things to consider before getting started with investment property, such as your budget, the type of property you want to invest in and your long-term goals.
It’s also important to have a solid understanding of the risks and rewards involved in order to make informed decisions.
Property investment can be a great way to create passive rental income, which means you earn money even when you’re not working. However, it’s essential to remember that there is no such thing as guaranteed returns, and investments can go up or down in value. As with any financial decision, it’s essential to do your research and speak to an expert if you’re unsure about anything.
Are landlords rich?
There is no one-size-fits-all answer to this question, as the wealth of landlords varies greatly depending on the size and location of their portfolio, among other factors.
In general, landlords have worked hard to purchase their properties and most landlords provide a nice home for their tenants. Landlords certainly aren’t rich, unless they have a very large portfolio. The great thing about being a landlord is that there is a steady stream of income coming in from rent payments.
Keep in mind, property investment and property rental are not get quick rich schemes, there are a lot of upfront costs. You need to be prepared for a long-term approach in order to successfully build wealth from property.
Those who do well as property investors are usually those who start with a single property, seeing it as a long-term investment and, over time, building a multi-property portfolio along with a good understanding of the rental market.
Why become a landlord?
We wanted to get into the property business as a way of generating extra income. We quickly learned that a single investment wasn’t going to make us enough to quit the day job, but it was the first step in a long journey.
Aside from the income, I became a landlord to learn more about the property investment process and how to best maximise return on investment, which in turn allowed me to grow my portfolio of investment properties, ultimately allowing me to replace my job income with rental income from property investments.
A lot of people refer to rental properties as providing a ‘passive income’. This doesn’t mean there isn’t any work to do, far from it, it means that in general the income you receive isn’t directly connected to the work you do. For example, you arrange for the gutters to be cleared, you’re not being paid for that specific task and if it doesn’t happen this month or next month you’ll still get rent.
As you build a portfolio and replace your existing income with rental income, you also gain time. Time to spend with the family, time to travel, time to work on other projects. This was one of the main reasons that we decided to build a portfolio.
Getting started with property investment
Ask anyone how to start a property investing business, and they will likely suggest the first step is finding the right property to invest in.
This is harder than it sounds. There are a lot of factors to consider, such as location, price, condition, and potential return on investment. The process of getting started begins not with properties, but with planning. You have probably heard the quote, if you fail to plan you plan to fail!
Create a long term plan
A plan, or strategy, makes you think about how you’re going to start to enter the property market, the money you have to spend, and your long term goals. Creating a plan keeps you focused and helps you make decisions before stepping on the property ladder.
When we started out in the property business we didn’t make a plan, and that slowed our progress, don’t make this mistake!
Spend a couple of hours considering the following questions and write down the answers:
- What is your primary goal?
- Earn a little extra cash each month?
- Fully replace existing salary?
- More time with the family?
- How do you want to achieve this goal?
- Buy to let
- Let to residential occupier;
- Buy to sell
- Sell to homeowner;
- Sell to other investors.
- Refinance to release funds
- Buy to let
- What is your budget?
- How much do you have to invest?
- How will this be financed?
- Savings;
- Mortgage;
- Partnership.
- How much do you have for other costs, e.g.:
- Mortgage payments/interest on mortgage;
- Landlord insurance;
- Renovation costs;
- Legal costs;
- Management fees (if using an agent to look after the property);
- Service charges (if you have a leasehold property);
- Ground rent.
- Who is your ideal tenant?
- Student(s);
- Family;
- Couple;
- Single(s).
- Which area do you want to invest in?
- What property type do you want to invest in?
- Flat;
- House;
- Commercial property.
Of course, the plan can change and should over time, if you’re new to investing I’d expect you initially want to earn a little extra cash each month via a single buy-to-let property while learning about the industry, at which point your primary goal might shift to replacing your salary via a full portfolio.
By considering the above points you’ll have created a clear plan that will help keep you on the right track to achieving your primary goal.
You may also find the answer to some questions help answer others. For example, your ideal tenant will have a big influence on the area you invest in. There is no point trying to rent out a family home in an area highly populated by students with lots of bars and clubs rather than schools and parks.
Create a property investment “power team”
While it might be tempting to try and save money by doing as much of the work yourself, in reality, this approach can lead to costly mistakes being made.
Instead, create a property “power team”, a group that will help ensure minimal mistakes and smooth transactions.
The team will consist of everyone required to purchase and rent out a property, and it should be built before finding a property, so you’re ready to move quickly.
The power team should consist of:
- Solicitor: Oversees the purchase.
- Mortgage Broker or Commercial Finance Broker: Help secure the money required.
- Accountant. Prepares and submits your self assessment tax form.
- Insurance Broker. Finds the best landlord insurance deals.
- Letting Agent. Finds and vets tenants.
- Refurbishment Team. Get your new property ready using builders, electricians, plumbers etc
- Handyman. To deal with ongoing maintenance.
If you don’t have these in place, then visit our directory and expert panel for recommendations at http://justdoproperty.co.uk/expert-panel/
It’s especially important to find and speak to an accountant before entering the property market. An accountant will help to decide whether you should buy the property personally or put it into a Special Purpose Vehicle (SPV). The structure of the purchase will significantly impact your tax situation.
With ever-changing guidance and legislation, it’s critical to have an accountant that understands the property sector inside out. Not only will this help you stay compliant and save money, but it will also give you access to better systems, procedures and key contacts to help your business grow.
Also, be sure to have your financial situation clarified. Do you have savings to invest? Are you eligible for a mortgage? How large a mortgage can you obtain?
Finally, make sure you have a Landlord Insurance option ready to go. This should be in place ready for the exchange, it shouldn’t be something you obtain once the property is legally yours. If your new rental property gets damaged after that date – because of a storm or flood, for example – you’ll need to pay for the repairs. Having insurance in place from the start means you are protected should some freak event or accident damage to your new property.
Stealing the copper pipes!
We purchased a house a few years ago and just as we had completed on the property, the house was broken into. The thieves ripped out all the copper pipe from the property!
The house needed refurbishing, but the break in caused a lot of damage.
It’s very stressful to receive the news that your new investment property has been broken into! But fortunately, we had insurance in place from the point of exchange. It’s really important to do this. Make sure you get your insurance broker in your power team before you start looking for your first property.
Find a property
With the initial groundwork in place, it’s time to start researching potential investment opportunities. Traditionally, this involves buying through estate agents, but some people also invest via property auctions.
When buying as an investment, you need to view the property differently to how you might view somewhere you plan on moving into as your own home. This is a business transaction, it doesn’t matter if you love the place, the only thing that matters is that you can get it rental ready quickly and that it will be desirable to tenants.
When I start looking for a new investment I don’t initially visit potential sites, my first task is to research the area and conduct due diligence. This includes:
- Checking the preferred location already has rental properties (i.e. there is a demand);
- Checking historic sale prices;
- Checking existing rental pricing;
- Checking the area ‘Stacks Up’, i.e. properties fall within the budget and that the average rent is enough to cover costs while still providing a profit each month;
I’ve found a lot of this research can be done in the comfort of my own home, I check online estate agents, such as rightmove.co.uk, I make calls to local estate agents and I sign up to auction email lists.
Don’t just stick to the area local to you, ideally you should look for areas of growth, for example those with new transport links or announced planned improvements.
Once I’ve completed my research and am comfortable I’ve found a good area for my investment I start the process of looking into individual properties.
Although I find online sites have a lot of great information, nothing beats visiting the sites of interest, it allows me to do a visual check of the outside, check the local area and understand what facilities are close.
You don’t need to arrange a viewing at this stage, without contacting an estate agent and by just visiting the site you can find out:
- Condition of windows;
- Condition of driveway;
- Condition of surrounding walls;
- Condition of garden;
- How quick to walk to the nearest shops;
- How quick to walk to transport links such as bus, tram or train;
- What desirable facilities (shops, restaurants, gyms etc) are nearby.
Research, research, research! The more you know, the better prepared you will be to make smart decisions that could lead to greater success.
If everything looks good, I then proceed to check the yield falls in line with my budget before booking an appointment to view.
Estimate the rental yield
I like to make sure I’m ready to move fast if I find somewhere I want to invest in, so before visiting and making an offer it is vital to ensure the numbers work for you, and one of the best ways to do this is by calculating the expected rental yield, but what is a rental yield?
A rental yield is a calculation that estimates how profitable a property is by dividing the annual rent income by the purchase price of the property.
Let’s take an easy example to demonstrate how this works.
Estimated property price: £120,000
Estimated rental value: £1,000 per month / £12,000 per year
£12,000 / £120,000 = 10% gross yield
This is a good indicator but doesn’t help you estimate how much you’ll earn each month as it doesn’t take into account running costs such as management fees or maintenance costs.
Following your research let’s say you’ve calculated £500 a month/£6000 a year in running costs, this allows you to work out the net yield:
(Annual rent – annual running costs) / purchase price
(£12,000 – £6,000) / £120,000 = 5% net yield
See what a difference it makes? That’s why we always use net yield, it gives a more accurate indication of your expected income.
Visit potential properties
With the research done, power team in place, finances secured, and potential properties located it’s time to take a closer look at the shortlist.
I really enjoy this part of the process, finding the hidden gems and seeing the potential they have. Over the years I’ve learned there are some key areas you should look at, you don’t need to be experienced in the building trade to spot these obvious renovation issues:
Windows: Are they in good condition? There are still older properties with original wooden frames. These would need replacing with modern uPVC windows. This will put some buyers off due to the expense, but can be a quick way to immediately increase the value.
Walls and carpet: Ignore any furniture, that will likely go with the current owner. Instead, focus on what remains, are the carpets worn and tatty? Is the wallpaper peeling? Or is there, horror of horrors…woodchip wallpaper?! This is a nightmare to remove!
Built in units: What condition is the kitchen in? Do the bedrooms have fitted wardrobes? If all existing units are in good condition it’s a plus, if they look worn and tatty they’ll need replacing.
Unused space: Is there a loft or basement? If easily accessible, could either be converted to increase the space available? Is there room for an extension?
Bathroom condition: Along with the kitchen, the bathroom is one of the most important rooms in a house. The condition of both rooms tells potential tenants a lot about you as a landlord. As with other rooms, a tired, tatty, bathroom should be replaced.
Boiler: Ask if there is a service history you can see. Has the system been well maintained? Turn on the bathroom taps/shower, is there good pressure?
Utility meters: Where are they located? Are smart meters fitted? Is a water meter fitted? The main advantage of a smart meter is the utility provider sends up to date readings, preventing estimated bills from piling up and making the process of tenants moving in and out much easier as the supplier will have a reading for the dates people move in/out without them having to provide it.
I always take notes when visiting a potential investment property to make sure I don’t forget anything. I then review these notes and estimate a cost for the problems noted, I can do this based on experience, but I would suggest contacting your power team to get general cost feedback. It doesn’t have to be 100% accurate, you just understand roughly how much it will cost to get rental ready.
If you’re lucky, it is a general refresh of paint and carpets. If you’re taking on ‘a fixer-upper’ then expect it to take more time and money to get the place ready.
Buy the property
After visiting in person I head back and review my budget, comparing it to what I’ve discovered on my visit. Is the renovation work required going to blow my budget? Remember, at this stage I’ve not had any quotes for the work, I’m going off a best guess, and if my best guess exceeds my budget I know it’s not the right opportunity.
If all the signs are positive, I make an offer. Remember, at this stage I’ve done my research, have my power team in place, have my finances sorted, and I’m in a position to move fast. That preparation makes me a very attractive buyer to those looking to sell as the deal can be completed quickly.
The listed asking price is usually something the seller has been given advice on by their estate agent, but that doesn’t mean it’s the price you’ll end up paying.
From my research, I know how much other properties in the area have sold for, and I have a general idea of what condition they were in. If the asking price is similar, but the condition is worse, I will submit a lower offer, explaining all the issues contributing to the lower offer.
I find negotiations often follow this pattern:
- I make an offer under what I think the true market value is
- Offer rejected, but an indication given as to what might be an acceptable offer
- I make my ‘sensible offer’
- Seller accepts, asks for a little more and then accepts, or flat out refuses
If my sensible offer is refused I walk away. That’s the reason I have a plan and budget in place, to make sure I don’t overspend. It’s better to have no property than to purchase the wrong property.
Once purchased I address any issues I’ve noted down, or that have been found during the survey, so that it is rental ready ASAP.
Gain your first tenants
From your initial plan you should already have an idea of your ideal tenant and will have renovated to appeal to them.
For example, if I were targeting students I would maximise the number of bedrooms available, sacrificing a space on the ground floor to increase the bedroom count.
When ready, consider carrying out an inventory inspection, or make use of property inventory service providers to do it for you.
You will also need an assured shorthold tenancy agreement, landlord insurance (which you should already have!), and some way to advertise.
If you decide to use an agent (online or high street) keep the following in mind:
- Always choose a professional letting agent. Recommendations are really important here. The
service you receive from a letting agent varies wildly, some are great, and some are absolutely
terrible – we have learnt this from experience (unfortunately). - Make sure they belong to an approved redress scheme.
- Check the small print of their terms and condition in their contract. There is a lot of small print,
don’t blindly sign it. You could be agreeing to something that will mean that you will pay them a
lot of money that is not required. - Don’t be scared to negotiate with the lettings agents. If they have a set fee for finding a tenant,
ask if it can be reduced. The same goes with the management fee. Usually, nothing is set in
stone, you may save yourself a lot of money by just asking the question. - One of our properties is in the North East and we are in Manchester so it was quite a long way away. We initially used an agent due to the distance. However we found that we were paying them a monthly fee for doing nothing. I therefore contacted the owner of the agency and put a propostion to them. I said that I didn’t want monthly management anymore but could I pay them on a job by job basis? So if I needed something doing they’d charge me for each job. This had worked really well and saved me a fortune!
- Make sure they use a deposit protection scheme to deposit tenant’s money. A deposit
protection scheme is designed to enable landlords and letting agents in England and Wales to
take and hold a deposit for the duration of the tenancy.
You can actually protect the deposit yourself. I prefer to do this as it means that I am in control.
Some lettings agents will charge you for registering the deposit. I think this is ridiculous as it is
a 10-minute job. We use the DPS www.depositprotection.com for our deposits.
Be a good landlord
Your tenants aren’t just a source of money, they’re your customers. In general, having happy customers results in a smoother business for you.
Here are my key tips for maintaining a happy and, hopefully, long relationship:
Welcome new tenants. Even if you’re using an agency to fill vacancies it never hurts to meet and greet them in person. Not only does it give you a chance to put a face to the rent paying name, but it also allows you to answer any questions and hand over a welcome pack of information, for example emergency contact details. If you are not close to the property you can do this on the phone or via email.
Respond quickly to any problems. If you’re told about an issue don’t put it to one side and forget to deal with it. Be sure to acknowledge receipt of the issue, arrange a follow-up call or visit if required, and get the matter addressed quickly.
Keep your property in good condition and update it as needed. Many issues can be avoided by ensuring you proactively maintain the site. This is easier to do if you have short periods without tenants, but if you have someone renting for an extended period you should work with them to schedule in any required maintenance work.
Respect privacy. You might legally own the building, but it isn’t your home. Don’t just turn up and start looking around, if you need access arrange a date and time and, if no one is going to be in, gain confirmation they’re comfortable with you accessing the property while they’re out.
These may all sound like common sense suggestions, but you’d be surprised how many landlords there are that put little to no effort into maintaining a good relationship with tenants.
Final thoughts
In conclusion, property investment is a long-term game. It takes patience and dedication to succeed.
Once you have a single site generating income you can review your plan and update it for the next stage. Will you sell the existing property? Create a property portfolio via further property investing? Or just enjoy the regular monthly income while you gain an understanding of the market?
If you build up a successful portfolio you’ll reap the rewards of being able to live off your investments without having to work.
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