Choosing the Right Property
Out of the properties that you might find, which one(s) do you honestly purchase? In short, the ones where the figures stack up.
To interpret this added it is principal that you view your property investment as a business and not just some form of gambling, although the property market contains a amount 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 separate high level categories of ways to behalf from investment in property, these are explained here.
Investment Types
Capital increase - Appreciation
This is the most common way that people think of earning money from property, normally 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 unlikeness is often referred to as Appreciation. This formula of behalf normally takes time over which the value of the property increases. However, you can add value to the property by doing some kind of work to it, like refurbishment or an extension. In other instances you may be lucky sufficient to buy something for less than it is worth and sell it the next day for market value thereby making a behalf on the 'turn' or 'flip'. You will normally have to pay Capital Gains Tax on the increase of the property's value when you sell it.
Positive Cashflow - Income
This is the type of behalf normally made by Landlords where the overheads of owning and letting a property are less than the earnings 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 obvious Cashflow. You will normally have to pay earnings Tax on the behalf made from rental.
The above two types of investment are not the only two and they are not necessarily mutually exclusive, that means it is potential to find a property that represents both types of investment. In fact most property will have some kind of appreciation, although there are areas that have had zero increase over the past few years and, indeed, some areas that have had negative growth, that means the value of property has honestly dropped.
Similarly, obvious Cashflow is changeable and can rise and fall with market conditions, you can only make your best, informed decision on the day, for the day, with all the available information. Historical trends may point towards a potential future, but this is not any kind of guarantee.
Plan for Voids
You must build Voids into your cost buildings or overheads. Void Periods, referred to naturally as Voids, are the times when your flat is not let out but you must continue to pay the mortgage and related costs like aid 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 construction in a uncomplicated 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 earnings should be 130% of your mortgage payments.
Many Investors and Landlords have been caught out by not accounting for Voids and suddenly running short of money when they have to pay their mortgage with no rental earnings to equilibrium the outgoing cash. In areas of high competition your property may be empty for any months. It is a good idea to have around three months worth of mortgage payments set aside for your Buy To Let property in case of Voids.
The more properties you have in your rental folder the less opening there is that you will run short of cash for the mortgage payments, as you equilibrium the risk of Voids across the whole folder and not just on a particular property. However, this assumes you have sensibly spread your rental properties across varied separate areas to avoid loss of earnings if one particular area is impacted for some reason. For example, if you have five flats in one apartment building, they will all suffer from the same local market conditions. In times of low interrogate and high competition you will have not one but five Voids to say with. If you had five rental properties in separate suburbs of the same town or city then you have reduced your chances of having all five properties empty at the same time. Better still to have these five properties in separate towns altogether. As the old saying goes, don't have all your eggs in one basket.
It is foremost to remember that no matter how many properties you have and no matter how spread out they are, there is always a slim opening that they might all suffer Void Periods at the same time. You should have a plan in case this happens, but you can lessen the opening of this happening by expected your Tenancy Periods so they don't all start and end in the same month. This would normally happen anyway as varied Tenants come and go at separate times.
Yields and Profits
There are many methods that people use to conjecture what they call the Yield. Yields are essentially the ratio of earnings generated by a property in relation to the first capital input and costs related with obtaining and letting the property. Yields are normally represented as a division form and depending on the area and the man you ask you will get a separate story as to how much of a Yield is worthwhile. Some people compare the potential earnings from a property by performing a series of involved calculations and arriving at this Yield percentage, they already know their personal limits and may accept an 11% Yield but reject a 10% Yield.
But when you look at the big photo most Yield calculations are honestly a waste of time as the conditions they have based their calculations on will change tomorrow. Furthermore, the idea in business is to make money and not lose it, therefore, commonly speaking, any earnings is good earnings even if it is only 5%. Obviously there are practical considerations but you have to remember that these figures can change from day to day and are fully dependent on how you conjecture your Yield.
The preferred formula of establishing the viability of a obvious Cashflow type of investment is naturally looking at how much behalf you have after your costs. If your flat costs £500 per month to run then an earnings of £490 per month is Negative Cashflow, but an earnings of £550 is obvious Cashflow. It all comes down to what you are comfortable with and how much you need to compose a Void buffer as mentioned above.
Try not to get bogged down with hairline division variances where 10% is bad and 11% is good, instead focus on real earnings and what this means to your property business.
One way of enhancing your earnings is to have an Interest Only mortgage, as opposed to a appropriate repayment mortgage. This can mean considerably lower repayments each month, but beware, at the end of the mortgage you will have to repay the principle loan amount in full. This is often an ideal formula when you only plan to have a property for say 5 to 10 years of a 25 year mortgage, as when you sell it you would hope to repay the principle mortgage amount anyway, but in the meantime you have had to pay less each month. If the Capital increase in the property is good then at the end of the mortgage term you may well be able to refinance or sell it and pay the principle back with sufficient left over to reinvest in something else. It very much depends what your long term plans are, but Interest Only mortgages can be a principal tool for property Investors and Landlords.
Different Deal Types
There are probably an infinite amount of ways to buildings a property deal, in fact there are very few rules and you can be as creative as you like in case,granted you control 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 varied 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 spend as minuscule capital as possible. If you think about this choice carefully it soon becomes a very unappetising formula 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.
For a start, the name of this type of deal is a bit of a misnomer as it infers that you can own a property by not putting any money into the deal, if this were true then everyone would be out getting property for nothing. There will normally be some kind of deposit to be paid in order to gain your interest in your chosen plot. There will at last be conveyancing fees to pay and possibly some other incidental costs. But even if you conduct to get the possession to buy a plot without parting with a penny, by the time your property is built and ready to perfect it may have changed in value quite considerably. This can be good, but often is just the opposite.
When new developments are pre-valued (valued before they are built) the developer often has minuscule more intention than to sell the bulk of the properties to Investors and will push to gain a high valuation in order to make their supposed discounts appear very attractive. But by the time the properties are finished the market can suddenly turn your investment into a nightmare. This is because the appropriate Buy To Let mortgage is based on the ratio of 130%, as explained above, which can succeed in the Lender offering you a lot smaller mortgage than you were expecting. The end succeed is that you find yourself contracted to buy something that you don't have the money for. At this time you only have a few choices :
- Option 1 : Try and find the deposit money plus any added funds needed to perfect on the purchase, this often means taking out a loan from somewhere or borrowing money to cover the buy and then looking you have to make mortgage payments on something that will not let out either. This can lead to a downward spiral in finances.
- Option 2 : Accept that you have to pay the deposit but cannot afford the equilibrium to perfect and ,therefore, lose the property and your deposit.
- Option 3 : Try to find man to buy you out of your contract. Even if your ageement is transferable this is like blood to sharks, once man knows you back is to the wall they will tie you down to an absolute minimum and you may still walk away from the deal a few pounds poorer.
- Option 4 : You might be lucky, given the short consideration period to complete, to find an onward buyer who will back-to-back the deal, but this is unlikely and quite rare.
Back-To-Back
This type of deal has a few variations but the basic thought is where you line up a buy a property and the subsequent sale of the same property so that the inbound buy and the outbound sale perfect on the same day. The idea is to make a behalf from buying low and selling high.
Whereas back-to-back deals are more honestly carried out on new-build properties, thereby allowing a good lead time to search a buyer, in many cases established properties can be bought and sold this way too. Sometimes it is down to good fortune and other times it is good management. If you can transfer early and have a long period until completion you can give yourself time to find a buyer, but you obviously have to have something that is in interrogate and that you have bought in cheap.
Cash Back
This type of deal is quite straightforward, however, it still has obvious potential dangers. The basic thought is that you find a property that has a market value higher than the buy price and you gain 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 succeed 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.
Most Lenders will only lend on the buy price, this is called a Loan To buy (Ltp), so you need to find a Lender who will lend on the value, this is called a Loan To Value (Ltv). The other formula is to find a Lender who will lend you more than the value, or buy price, of the property in the first place. Some Lenders offer, from time to time, up to 125% of the value of the property. Sometimes they will issue the funds upon completion as part of the basic mortgage, other times they will issue funds towards payment of works or improvements in the property. In the case of improvements they normally want to see invoices or receipts and may make payment directly to the provider of the goods and services in question.
The only point of note, concerning this type of mortgage, is that your property finance will be what is termed "highly geared". This means that you have the maximum amount of equity squeezed out of the property. The question with this is that it normally means that your mortgage payments will be higher which may cause you problems in generating obvious Cashflow from that particular property. It may also mean that it takes a lot longer to achieve any Capital increase in the property.
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