How To Choose The Right Property
Out of the properties that you might
find, which one(s) do you actually purchase? In short, the ones where the
figures stack up.To explain this further it is essential that you view your
property investment as a business and not just some form of gambling, although
the property market contains a number of elements of risk, as do most types of
investment. Just like in any kind of business you need to know that you will be
making money and not losing money, it is the bottom line that tells you if you
are running a profitable business or not. However, there are at least two
different high level categories of ways to profit from investment in property,
these are explained here.
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| Property and Real Estate Investement |
Investment Types
Capital Growth - Appreciation
This is the most common way that
people think of earning money from property, usually because it is the property
that they own and live in. This type of investment is the act of buying
property for one price and selling it later on for a higher price, the
difference is often referred to as Appreciation. This method of profit usually
takes time over which the value of the property increases.
Positive Cashflow - Income
This is the type of profit usually
made by Landlords where the overheads of owning and letting a property are less
than the income generated from same. What this means is that if you add up your
mortgage payments, management fees and cost of repairs the total should be
less, across the same period, as the rent paid by the Tenant. For example, if
you pay out £500 per month on overheads, you would want to be letting the place
out for at least £550 in order to make a profit, or Positive Cashflow. You will
normally have to pay Income Tax on the profit made from rental.
Plan for Voids
You must build Voids into your cost
structure or overheads. Void Periods, referred to simply as Voids, are the
times when your flat is not let out but you must continue to pay the mortgage
and associated costs like Service Charges, in the case of a Leasehold property.
This is why the most common Buy To Let mortgage is worked out on a factor of
130%, the Lender expects Voids and incidental costs and is building in a simple
safeguard for their financial exposure to you. By anyone's standards the factor
of 130% is a good rule of thumb, this means that your actual rental income
should be 130% of your mortgage payments.
Yields and Profits
There are many methods that people
use to calculate what they call the Yield. Yields are essentially the ratio of
income generated by a property business in relation to the initial capital input and
costs associated with obtaining and letting the property. Yields are normally
represented as a percentage figure and depending on the area and the person you
ask you will get a different story as to how much of a Yield is worthwhile.
Some people assess the potential income from a property by performing a series
of complicated calculations and arriving at this Yield percentage, they already
know their personal limits and may accept an 11% Yield but reject a 10% Yield.
Different Deal Types
There are probably an infinite
number of ways to structure a property deal, in fact there are very few rules
and you can be as creative as you like provided you operate within the
constrains of any lending criteria if you are using mortgage finance. So there
is no way we could not possibly list and define all the various options, but we
have chosen to highlight a few of them here to show you the kind of options
that are out there as well as the pros and cons of each.
No Money Down
This is the most common type of deal
sought by Property Investors who are new to the market or wanting to invest as
little capital as possible. If you think about this option carefully it soon
becomes a very unappetising method of property investment. Up front it appears
that you will get something for nothing, as we all know this is a very rare
thing in life, even more so in business.
Back-To-Back
This type of deal has a few
variations but the basic concept is where you line up a purchase a property and
the subsequent sale of the same property so that the inbound purchase and the
outbound sale complete on the same day. The idea is to make a profit from buying
low and selling high.
Cash Back
This type of deal is quite
straightforward, however, it still has certain inherent dangers. The basic
concept is that you find a property that has a market value higher than the
purchase price and you obtain a mortgage based on the market value. For
example, if the property is valued at £100,000 but you can buy it for £75,000,
then your 85% Buy To Let Mortgage will result in a loan of £85,000 giving you
£10,000 cash back on completion of the purchase. Some solicitors do not like
this kind of transaction as they believe it is misleading the Lender, check
that your solicitor will do this before you start. You must remember that your
solicitor has a responsibility to the Lender to ensure that mortgage fraud is
not taking place.
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