This is a tough subject to cover, because while those running seminars, selling property investment advice, courses or otherwise profiting from an "ultimate strategy for investing in property" want us to believe that there are some mystical powers involved, it is pretty much common sense. However, there are a couple of things that aren't, and which can be done before an investment is made to give the best chance of success.
To give advice on every form of investment would require many articles, so we will focus on bricks-and-mortar residential property investment.
Calculating Returns before Investing - Rental Yield
Let's say we have 2 properties, one costs 150,000 with a potential rental return of £600pcm (property 1), and the other costs £180,000 with a potential rental return of £775pcm (property 2). Determining which the better investment is comes down to rental yield.
Rental yield is the total rent a property earns in a year shown as a percentage of the money invested in the property. There is nothing mystical about it, but any bricks and mortar property investment strategy should include making this calculation.
The calculation is as follows:
MR = Monthly Rent
IN = Investment
Yield = MR * 12 / IN * 100
So, for property 1 the rental yield would be:
£600 * 12 = £7200
£7200 / £150,000 = 0.048
0.048 * 100 = 4.8% Rental Yield
And for property 2:
£775 * 12 = £9300
£9300 / 180,000 = 0.05
0.05 * 100 = 5% Rental Yield
So, by an unsubstantial amount property 2 is the better investment.
Obviously the figures above are for a residential property, but the calculation is the same for commercial property as well.
But of course, these calculations are only good if the property is earning rent every week. While that is never certain on well chosen properties voids are rare, and in any good investment property strategy, involving the right research properties are being chosen well. To find out if you have a good strategy you can seek advice on property investment from IPIN, or simply read the wealth of property investment guide articles and texts published online.
Then it comes down to things like maintenance costs, but even they can be calculated. Like cars have the AA in many countries there are maintenance companies that will cover your property for a fixed fee. In the UK we have huge corporations like NPower offering full cover for boilers, plumbing, heating systems, and electrics competing with British Gas for the water-based cover. Because you can put everything on a fixed monthly fee, this can be taken out of the rent when calculating yield.
Ensuring an Exit Strategy
This is far harder to do, especially when investments are usually over the long term. However, many of the same things one looks for when researching what will make a good rental property will mean it has a strong exit strategy. In residential property investment the exit strategy is selling the property, so things like rapid population growth, good employment, good schools, amenities and supply shortages that make a good rental property provide the basis for a reliable exit strategy. We can also look for a strong and growing mortgage market, but this will be predominantly a factor in emerging markets with young mortgage markets.