If you listen to some people, you could be forgiven if you believed that property investment was a one-way ticket to riches.
There is no question that you can indeed make good money from a savvy property investment strategy, but it should also be remembered that poor decisions and a lack of information, could end up costing you dear.
Searching out properties on sites like taylorsestateagents.co.uk is just one part of the equation when it comes to investing in bricks and mortar. Here is a look at some of the other aspects of property investment that you need to consider if you want to avoid some of the common pitfalls.
Take a Hint From Your Bank
There are certain types of lending proposition that your bank might turn their nose up at, which should be taken as a strong hint that you might want to consider whether it is a deal that is right for you too.
There are several distinct types of property investment that many banks will view as high-risk, which often means that they either won’t lend you as much money in the first place, or simply refuse to provide any financial assistance at all.
A list of these potentially risky investments from a bank’s perspective will normally feature serviced apartments, commercial properties outside of conventional locations and properties with shared access or issues, such as being above a retail premises or being used as student accommodation.
You can’t always dismiss these property propositions completely out of hand, but if your bank considers your proposed investment to be too risky for their lending terms, or they want to offer a lower loan-to-valuation ratio, you might want to at least take the hint, and decide if it is a good fit for you.
Get Your Sums Right
Market research is absolutely critical to the success of your property investment plans, as a failure to get all of the information you need and to do all your sums to see if it works, could end up putting your finances under undue pressure.
You need to compare equivalent property prices in the area to see if the proposed investment property is being offered at the right value. Overpaying is going to undermine your potential for a decent return and unduly harm your cash flow, so you need to have a good idea of whether the purchase price is realistic and gives you a margin.
If you are buying a property to rent it out, you also need to check out the rental values in the immediate vicinity and not only see what rents are being charged for a similar property, but what level of demand there is from prospective tenants.
If you are borrowing money from a lender you will need to justify what sort of rental income you can generate in comparison to the purchase price. Even if you are paying cash, it is still hugely important that you get your sums right.
Focus on Capital Growth
If your main goal is wealth creation from property investment, your focus has to be on achieving capital growth.
Buying property that offers attractive rental yields or even good tax deductions, may well appear to be an attractive proposition, but if these things come at the expense of demonstrable equity growth, then you might want to question whether the property deal is right for you.
As a general rule, focusing on high rental yields or tax benefits, over capital growth, is an investment strategy that could well turn out to be flawed in the long run.
Capital growth provides you with the opportunity to generate good equity and accelerate your your wealth in much more robust way than concentrating on rental yields, so while that is important, it should ideally be your secondary focus, behind capital growth as your main priority.
If historical trends can be a reliable indicator as to what might happen in the future, property investment has an excellent track record for creating personal wealth.
It isn’t hard to find plenty of “get rich quick” schemes that offer you rapid returns on your money by taking a gamblers approach to property investment. If you are looking to generate long-term wealth and build up substantial equity, you have to take a patient and disciplined approach, rather than rolling the dice and trying to find deals that could earn you money, but could also just as easily go wrong.
Not every property deal might turn out to be a winner, but by doing your homework and taking a disciplined approach, you should stand a chance of adding to your wealth through property investment.
Jay Ashton works as a property auctioneer, previously having done a brief stint as a realtor before deciding this wasn’t the job for him. However, Jay has built up a lot of knowledge of the property market, and shares his insider thoughts and tips in his articles.
Looking for a little more reading today? Check out my interview with Andrew over at Family Money Plan!