Within carefully considered markets, real estate can offer strong growth opportunities, high financial returns and maintain a level of stability that makes it a low-risk asset in one’s investment portfolio.
Three main reasons that real estate can be such a promising investment are:
Besides the obvious financial incentives, the initial decision to buy an investment property is often a personal one. Investors consistently state factors such as the desire to leave a legacy for their children, the pride of owning a property, and the independence it helps them achieve as main motivators.
The process of developing an opinion of the value of a given property.
A tax on the profit one has made when they sell something that has increased in value. It only applies when an investor sells their asset for a price that is higher than their initial purchase price. Not all countries implement a capital gains tax, and most have different rates of taxation. Independent financial advice is always recommended to properly assess your personal circumstances.
A portion of funds that are used as security or collateral when renting or buying property.
The current value of a property, subtracting any outstanding mortgage or other charges held over that property.
When a property is handed over from the developer to the owner. This process includes snagging (see below), inspection, certification, registration and everything required to ensure the asset is ready to let.
A contract by which the owner lets their property to a tenant for a period of time in return for a periodic payment.
This term is commonly used by lenders, i.e. banks and building societies, to represent the ratio of the first mortgage loan as a percentage of the total appraised value of a property. The higher the LTV ratio, the riskier the loan is for a lender.
The selling or purchasing of a property before the property is built and when only the plan is available for inspection.
A figure used to express how much income a property can be expected to generate in relation to the investment cost. The gross annual rental yield for a property is determined by calculating the annual rental income as a percentage of the purchase price. For instance, if an apartment was purchased for USD200,000 and the owner receives USD10,000 in annual rent, the gross annual rental yield would be 5%.
The process of checking a new building for minor faults that need to be rectified.
People will always need a place to live, and this factor alone makes residential property a more stable investment. If you choose your area wisely, a consistent pool of potential tenants guarantees strong demand.
Additionally, if the location has been carefully considered, capital growth can be good for residential property, too. Supply in many markets, such as larger cities in the UK or their surrounding suburban areas, is frequently outweighed by demand, putting upward pressure on housing prices.
Such areas typically offer a decent pool of properties to choose from, and often investors have greater choice for residential properties as compared to commercial real estate.
Financing for mortgages can be easier and more straightforward for those investing in residential property, and start-up costs are generally quite low.
Residential property investment also offers a greater level of familiarity for potential investors and requires less experience, as many investors have either purchased or rented a residence at some time. While gains could be less, these investments are generally considered to be more stable, particularly in a down market.
One of the most obvious factors in buying off-plan property is that you can need to trust floor-plans, blueprints and artist impressions to know how the product will look. For this reason, off-plan properties generally work better for buy-to-let investors as opposed to owner-occupiers, as whether the property ends up how one envisions it is less of a concern for those looking to rent the property out as soon as it’s completed.
With off-plan properties, it is important to research who you are buying from and the developer’s track record. Buyers must have confidence in a project and the developer behind it, as there is a possibility that issues can arise between plan and completion.
IP Global carefully select projects from developers we trust, and for many projects, we commit to the project by underwriting the same properties that we offer to our clients.
The significant advantage of investing in off-plan property is that it can be less of a financial burden for investors. Once you have the money for a deposit, further payments may not be needed for some time, and payment plans can be attractive and flexible, giving the purchaser time to save, without having to make substantial payments upfront.
Multiple payments of smaller amounts can allow investors to purchase a property that they may not have been able to afford as a ready-made property, as more capital would have been required upfront.
With off-plan investments it’s beneficial to get in early. Not only does this give the investor the opportunity to take the pick of the properties within a development, securing the best space or superior views, but generally the first round of buyers will get a better deal financially.
While rental income on off-plan properties must wait until completion, capital gains tend to be higher, as long as the area, facilities, amenities, developer and the price are all right.
In comparison, buying a ready-made property means the investment costs are typically higher, requiring a larger down payment, usually upfront when compared to purchasing an off-plan investment. Generally, capital appreciation is lower, though this depends on the market.
There can be other associated costs with buying ready-made properties. With older pre-owned residences, upgrades may be needed before they are ready for the rental market and maintenance costs are often higher.
Whether you are a first-time buyer, or an experienced investor, purchasing a property as an investment leaves you vulnerable to common mistakes that many a buyer makes. Here are ways to avoid them, both before you start looking at properties, and once you are ready to purchase.
1. Always Do Your Research and Due Diligence
It is important to do your research on the market (supply and demand data, sales and rental figures, growth projections), and on more technical aspects that can make or break the profitability of your investment. Investors should also conduct research on the process and the partners one uses, whether it’s a mortgage broker, property lawyer or management company.
When investing in foreign markets or ones less familiar to an investor, legal structures are essential, too, as well as tax implications. There can be stark differences in income, capital gains and inheritance tax, as well as the requirements and eligibility to get financing. Don’t be caught out at too late a stage in the process. Moreover, don’t forget to look ahead to selling up – there can be regulations and cost implications at this end of the process, too.
2. Look at the Bigger Picture
Always think strategically and look to the longer term. What is your aim with the property? Are you looking for rental income or capital gains? What is your exit strategy? Also, what about tax implications?
Think about how your circumstances might change in the coming years – whether in terms of income or impending retirement – and how your investments might, therefore, need to move with those changes. Set goals with regards to where you want to end up and consider how to achieve them. These will help decide how, where, when and what you should invest in to achieve the best outcome for you.
It’s also important to look at the bigger picture when searching for a property. You aren’t confined to one market or one country. Many of the most successful property investors diversify their portfolio by finding the right property market to match their financial goals.
3. Seek a Professional Partner
Investing in foreign or unfamiliar markets can lead to investors feeling lost. There are professionals who have been through the process many times before and seeking their advise can offer comfort and confidence before committing to an investment.
4. Prepare for All Eventualities
Cashflow management is key. New investors can be caught off-guard by the fees incurred by properties and it is important to prepare yourself and be educated about all costs and if you will be able to finance these.
Ultimately, remember that property investment is not an overnight way to make money – it takes time and money to make money, and you should be prepared for any number of diversions the property investment journey can take you on along the way.
When it comes to residential property, not all investment opportunities are created equal. There’s no need to only explore opportunities in the areas that are close to home or that you're most familiar with.
Several key factors can help determine the investment case and predict the future growth of a property market.
When IP Global explores a particular area to invest in, we look for the following key characteristics that help indicate its potential:
Once you’ve found the right market, how do you select the right property?
Making investment decisions is all about having access to as much information as possible. It’s about identifying the factors you want to see in an opportunity, and about eliminating properties that do not have those characteristics.
Looking at the overall information for a property is crucial. Factors such as location, price, projected rental yields, connectivity, and unique selling points should all be considered. Two similar properties located close to one another might appear to have few differences but upon closer inspection can have very different features and investment potential.
The right property for one investor might not necessarily be the right property for another. Simply focusing on a rental yield figure is not enough. Consider the amount you wish to invest, the make-up of your existing portfolio, your attitude to risk: these should all help to inform your decision and vary greatly from investor to investor.
Rental yields tell us the income a property generates as a percentage of its cost. High rental yields may suggest good investment potential as the cost may be low while rental income is high. However, it is possible that the yield is high because of falling property prices as opposed to rising rents.
Lower yields might indicate potential rental growth in the future or strong capital growth, which could result in better overall return.
While rental yield figures help, it’s important to remember that rental income can fluctuate. Current or historical rental yields may not be accurate indicators for future performance, particularly in a market where, for example, property prices are increasing rapidly, but rental rates are staying relatively level.
Rental yields often use data that can be at least 12 months old and as such may not be an accurate reflection of current market value. It’s worth considering what has happened in an area or market over the last 12 months, or the period since data was last collected, and whether there is anything that could have severely impacted rental or sales prices.
Gross rental yields don’t take into account the various expenses and costs associated with purchasing and owning a property. Therefore, a high rental yield may not be an accurate representation of actual returns. It’s often more useful for potential investors to calculate net yields when assessing their financial commitments and to consider the sustainability of owning an investment property.
For net rental yields, higher yields are generally better, but it is very much dependent on an individual’s circumstances – what is good rental yield for one person, may not be enough for another.
Overall, while rental yields are an important consideration, they are only an indicator and should be considered alongside many other factors. If you are interested in managing an investment portfolio that’s going to perform well, capital growth is a key factor to also consider alongside rental yields.
In all but the most straightforward transactions, it is advisable to engage professionals to assist with the purchase of a property, whether as an investment or otherwise.
A licensed conveyancer is someone specialising in property law, generally with a focus on residential property, whereas a lawyer will be familiar with many aspects of law and can offer a full range of legal services. As such either is capable of handling a property transaction.
When purchasing property, the use of a licensed conveyancer or lawyer can help reduce the hassle and potential for things to go wrong during the purchase or even after completion.
A lawyer will help ensure that nothing is missed during purchasing process, will perform the necessary due diligence on the property and complete the legal and administrative requirements to affect a complete title transfer.
However, the role of a lawyer in a property purchase will differ in different markets.
In the UK, for example, a lawyer can be involved in all aspects, from drafting the contract and corresponding with the seller’s lawyers to undertaking various legal searches on the property at the Land Registry and assisting with the mortgage application, signing the contract and finally, exchanging on the property.
Taking steps to ensure you have a mortgage agreement in place, a solicitor engaged, and all of the necessary documentation ready before making an offer on a property will maximise your chances of an efficient and quick purchase. This will also minimise the chances of getting ‘gazumped’ (where a competing higher offer is made on the property you are in the process of buying before exchange, and that offer is accepted).
Later in the process, lawyers can again be appointed when you are ready to draw up your tenancy agreement. It is essential to have a watertight contract that can cover you as far as possible, should any difficulties arise with tenants down the line.
Property is generally regarded as a safe investment but rarely a short-term one. Generally, it is advisable to plan on keeping an investment property for a minimum of five years.
This amount of time should give a property the chance to achieve good capital growth and to reduce the impact of the costs of buying, such as stamp duty and fees from a loan provider, agent and lawyer.
Property owners should also remember that when it comes to selling, there are costs to be aware of; from agent’s fees to capital gains.
As with most property investment decisions, when to sell depends on an individual’s circumstances. As a general rule, it is wise to maintain ownership if you can, and always keep an eye on the market you’ve invested in so that should an opportune time to sell arise, you are ready to take advantage.
We recommend that interested parties always seek professional advice when considering their first investment property.
The advantages of talking through opportunities with a professional should not be underestimated, especially when it comes to getting full and frank answers to the questions that may still be on one’s mind.