Investing in property should not be compared with simply saving money in a bank or savings account. Saving should include no risk. Your capital should always be safe from loss, except erosion through inflation or fraud perhaps. Investing is different. It will likely involve risk. That’s whether you invest in stocks and shares (whether through an ISA or not) or bricks and mortar.
To minimise the risk when investing in property there are a variety of measures you should take and precautions you can make. Here are just a few;
INVEST IN AN AREA YOU KNOW. It’s just common sense to buy in a locality you know and understand. As soon as you buy outside an area you are not familiar with you open yourself up to more risk.
DO YOUR RESEARCH. Before buying make sure you understand what market you are aiming at. If you plan to buy to let ensure that you are buying the property most in demand in a specific area. There is not point buying a studio flat in an area where the primary demand is from families seeking four bedroom homes.
ALLOW FOR VOIDS. Make sure you don’t overextend yourself. Of course, the greater your LTV (Loan to Value) ratio, the more highly geared your investment, meaning any growth in capital value represents a much higher return on cash invested. The opposite also applies! You must allow enough cash reserve to allow for gaps in cash flow or a fall in valuation thus requiring you inject cash to meet your loan terms and LTV requirements if you are to avoid the dangers of default on any loans secured on your investment.
KEEP UP WITH THE LAW. The law is changing all the time, especially with regard to rented property. A Landlord’s obligations can be many and varied. Make sure you understand the legal obligations you may have as a Landlord. For example, you will need to have a suitably healthy EPC (Environmental Performance Certificate) before you can rent a property. You must commission annual gas safety checks on boilers and gas appliances and you make sure all fire codes and other regulations have been met. Failure to do so can be expensive and might also be a criminal offense resulting in a prison term!
HAVE THE PLACE SURVEYED! Make sure that the property doesn’t have any hidden faults that will end up costing you money to fix! A structural survey for older or more unique properties is worth considering. A modern or new property in good condition might just need a mortgage valuation. Take advice on this.
Read about valuations and surveys.
TAKE OUT THE CORRECT INSURANCE. The insurance you need for a rented property will be different to your home insurance. Make sure you get the correct insurance or you might find you are not insured at all! AreWhen taking this insurance you might also consider taking insurance to cover you for other risks such as rental voids or bad tenants and legal costs.
Find out about Insurance for Landlords.
UNDERSTAND THE TAX IMPLICATIONS. Buying a house or flat to let has become something the Government are keen to discourage. Therefore, they have introduced punitive tax legislation making investment in buy to let less attractive, especially for high rate tax paying individuals. This is a complex area of tax law and you must take advice before you invest!
LIMIT YOUR LIABILITY. Buying property through a Limited Liability Partnership (LLP) or Limited Company may well limit your personal liabilities in the event that something disastrous happened, although in most cases lenders will be keen to extract personal guarantees on loans to a limited company or LLC.
SHARE THE RISK. Buying a property between two or more investors might help you to share any risk. However, like all business dealings, you really need to know your partners well, trust them and have in place a clear agreement as to how the partnership will be formed and administered. Limited Companies and LLCs may be good for this purpose and might also have added tax benefits for this type of investment.
Also read our tips when buying a property with a partner or friend.
CONSIDER SHARES OR UNIT TRUSTS? If you are interested in investing in property but you don’t have the time or the skills necessary to buy actual bricks and mortar it might be worth considering buying a mix of shares in property companies or better still, a tracker product that tracks a specific sector. This is likely to spread your risk but as risk falls so your likely returns follow. There are many more middlemen involved in the investment and each will take a share, leaving you with a smaller part of the whole return. And, of course, your investment is still at risk.
For more information or to speak to a specialist buy to let mortgage adviser, contact us on 01628 507477.
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