Property investment can be a profitable business…. if you get it right. Many have made mistakes and lost money instead of gaining from their ventures. We list the top 5 common mistakes made so hopefully you can be more assured of a profitable property investment.
Not knowing your budget before you start
Most people's first property purchase is usually their home or primary residence. The initial deposit and the mortgage available based upon your earnings at the time will usually establish your constraints to what you can afford.
When it comes to buying property for investment purposes though, this is a very different matter. Most investors either have some cash saved that they want to put to work for them, or release equity from their home. The difference between buying a home that you will live in from day to day, and buying one (or many) to make you money are two very different things. Investing, like gambling, will take no prisoners if it takes a turn for the worst. All too often first time investors will reserve property having loosely "done the numbers" on a napkin, only to find later that lending criteria have changed for equity release, or indeed on the new property itself.
When investing, know how much you have to invest. Factor in some worst case scenarios. What you can afford now may well change over the next months and years. All being well it will be for the better, but there are many factors that cannot be foreseen.
Not understanding the investment
Almost everyone has heard the terms "below market value", "buy to let" "emerging markets" and "distressed property". All sound great on the surface, especially with the amount of publicity they have had in recent years. The thing is to clearly understand how the investment works.
Below Market Value
Sounds like a great idea! Taken literally one assumes "cheaper than it should be, so I can make a quick profit" This hopefully is the case, but the next question needs to be "market value according to who?" Find out, if you don't know, how can you be sure you have a bargain?
Buy to Let
Buy to Let is often promoted by advertising the yield you can expect from the property or portfolio you are buying. The percentages quoted can be very attractive and usually outstrip bank rates and mortgage costs on paper. However, as much as Buy to Let can be an excellent revenue generation tool, there is a lot to consider before diving in. Who is going to manage it? Have you ever been a landlord before? Will your mortgage provider allow you to let the property? If you are going to use a lettings management company, are the charges still going to leave you with a positive yield?
A popular label on many overseas properties over the past few years and there is no question that an absolute fortune can be made when all goes well. The downside though is not just the risk itself, but the number of different risks that exist. Although the risks will differ from region to region there are a few that you should at least acknowledge before you start.
Ownership. Can you own property personally in the country, as a foreign national? If you can, great. If not, and the purchase has to be made through a third party national or a company, you are opening yourself up to a swathe of possible legislation change not just on the ownership of the property itself, but also changes in company regulations.
Profit Repatriation. Some countries have currency restrictions governing how much money you can take out of the country. Whilst unlikely to affect you when you buy, consider what happens if you can’t take the money out of the country when you sell?
Taxes. Emerging market countries often have less stable economies, leading to vast swings in inflation rates, and the subsequent adjustment of taxes by the government. In established markets, although taxation can change, it's rarely by enough to bankrupt someone. Taxation on investment by foreigners in an emerging market can be very volatile indeed.
Distressed property is possibly the most clear cut when taken in the literal sense of bank repossessed or foreclosed property, however it does require quick action and assessment to take advantage of it. Finding distressed properties is getting easier because the banks need to sell them but bear in mind that banks are rarely experienced in the area of property itself, they just want a quick sale to cover the debt. If considering distressed property, it is well worth going through an experienced management company or broker.
Making a decision to buy because you like it
This will undoubtedly raise a few eyebrows, but the bottom line is that it doesn't matter how much you like it. Keep a clear head and focus on the fact that you are making an investment. All decisions should be made with the financial facts at hand. Liking something won't improve its yield. I like my cat, but the profit isn't that good!
Not researching similar options
As advertising campaigns keep telling us, it is worth making a few comparisons before making a decision, although it is wise to avoid taking this to the extreme. If you know what you can afford to invest to start with, it will help you narrow down your options. As you research, your criteria will change a little depending what is available, eventually leaving you a shortlist of comparable options. There is nothing worse than trying to compare the rental value of a 2 bed semi in Yorkshire to a 4 bed villa in Kusadasi. The 2 are completely different investments that do different things entirely.
Not having viable exit strategies
It's not uncommon to hear people talk about the "absolute bargain" they picked up, and how much money they hope to make out of it. House prices have been volatile to say the least recently and these apparent "bargains" haven't all turned out as well as buyers might have liked. Many investors have been left owning far more property than they can afford, or stuck with houses that they cannot let because the rent will no longer cover the mortgage.
This is part of investment in general, a fact of life. Prices and markets can, will and do change, sometimes a little too quickly for everyone's liking. Before you sign on the dotted line, think about how this investment is going to make you money. Yield, capital gain, or both? Will it still have a positive yield if rental value drops by 10%? If you have a plan to sell in 3 years to take the capital gain, can you afford to keep it if prices have not risen?
Remember, you haven't made a useable profit until you have either positive cash flow from it, or you have liquidated the asset!
- Friday 21 May 2010