How to make money in property and the mistakes to avoid
With all of the T.V programmes and newspaper articles taking about how people are getting rich in property every day, it’s easy to get drawn in to the glitz and glamour and the view that property is a short term ride to quick riches.
- But is it really the case?
When I started in property in 2005 I felt exactly the same.
It looked fantastic.
Everyone around me that I knew who were involved in property seemed to be getting rich and doing very little for it.
From the outside looking in it seemed the dream ticket.
Now 8+ years later, after a very varied background of property experience under my belt, as an estate agent, an investor and a landlord, I tend to see things a little differently.
Don’t get me wrong, property is a fantastic vehicle to retire young and retire rich and I could never say otherwise as it’s given me a very good lifestyle, but it’s not always plane sailing.
In this article I want to touch on some of the (simple) mistakes that many new investors make in property… and how to avoid them.
Buy to Let Mistakes to Avoid
The first property I brought was a 3 bedroom terrace in Warrington (in the North West) with a partner. It was a great house but I made a shopping list of errors on this one.
With no previous experience in buying property I had no idea how to value it or even know what I should really be looking for.
I could easily write a ten point checklist on the errors I made on this one, but the two main one’s were:
- Paying Full Market Value
- & not checking the rental yield
Paying Full Market Value
On our first property we simply wanted a way to make money.
A long term investment that would look after its self, but we always had in the back of our mind
“Well if we find somewhere we really like maybe we could live in it ourselves if the worst came to the worst….”
Mistake #1 – Never buy a rental property with your own tastes in mind.
Focus on the fundamentals of what make a good rental investment….Use a property due-diligence checklist to make sure it ticks all the right boxes and you shouldn’t go far wrong. If the worst does come to the worst then selling it would be a better option often than moving in to it yourself.
So don’t start off with the mind-set of seeing yourselves living there or you will end up buying the wrong properties.
Now because we were so keen to get on the housing ladder at the time it almost felt like any house would do.
Then when we viewed this property we fell instantly love with it.
The seller had done at great job in making the place very appealing as a buyer.
Candles in the fire place, bread baking in the oven, dinner table laid…
It was a completely emotional purchase
When it came to placing the offer I didn’t know what sort of offer to give and I didn’t want to be cheeky.
At the time of placing the offer it was on the market for £115k, although it had been on for £120k originally, so I thought that must be what it was worth.
Mistake #2 – Don’t take the Marketed Value as the Value the property is worth.
The ‘marketed value’ of a property is a price that the estate agent has agreed to ‘market’ the property for, nothing more.
Often the marketed value is higher than the real value as the estate agent (and seller) are obviously trying to get the highest price possible.
Stay neutral and focus on the real life comparisons to check it’s value. You can check the sold prices of similar properties in the area by checking here
In the end we offered £114,000 and paid well over the odd’s as similar properties had been sold in the area for around £100k!
Not Checking Rental Yield
The other mistake I made on my first property was not actually checking the rental yield.
You should treat buy to let’s like any other investment, asset or business.
It may sound obvious that it needs to be profitable, but not everyone understands what that actually means.
When I first started investing in property I was focused on the capital growth. As long as the mortgage is paid by the rent then long term I’ll make money right?
Well not always.
Mistake #3 – Don’t Rely on Capital Growth
For a start property prices aren’t always going up.
They follow any normal economic cycle of supply and demand and have boom and bust periods where prices may rocket one year, and drop a year later.
So relying solely on capital growth is a very fine line to balance.
It’s much better to focus on the cashflow a property will bring, especially if you’re looking to the long-term.
Also simply covering your mortgage with the rental income won’t be enough. There are other costs many investors don’t consider like:
- Void Periods (empty properties between tenants)
Mistake #4 – Don’t forget to include ALL the costs of running a rental property in you calculations
If your strategy is to buy rental properties and own then over the medium-to-long term (3+ years) then you’re likely to have regular costs to consider.
Long term maintenance of the property, tenant finding fees and even property insurance will all add-up and eat in to your expected profits.
If your rent is therefore £450pcm and your mortgage is only £350pcm you may think your making £100 potential profit every month.
But when you include the other costs you may not even be breaking even.
A very quick way to check if a property has a good rental income is to understand how to calculate rental yield.
One you have this calculation down, you can much easier compare like for like properties (apples to apples) and choose properties that only have enough rental yield/rental income to cover all your costs AND still make you a profit.
Making Money On Buy To Let’s
When you are buying your first investment properties, simply cutting out simple mistakes, buying at the right price and considering the fundamentals, will put you on the right path to being successful in property AND you’ll be ahead of 90% of your competition.
Then once you own the property you must act like a responsible landlord.
Joining a service like the National Landlords Association is a great starting point.
Finally avoid bad tenants with this handy info graphic
Article Written by: Robert Jones www.propertyinvestmentsuk.co.uk