Before you begin you need to be able to answer one question. Property produces two sources of profit: capital growth and rental income. Which is more important to you? Do you want to put some of your hard-earned money into bricks and mortar just to watch that capital (hopefully) grow slowly over time, or do you want to make your money work harder for you today by investing for rental income?
Predicting capital growth isn’t easy, and purchasing a property in the hope it might increase in value isn’t a wise move. Try to buy in a way that no matter what happens to the market, your investment is sound. For example, buy below market value, or plan to add value by developing the property.
Think outside the box
When buying a home to live in yourself, you will search for very specific criteria. But when you buy for investment, try to forget everything you want and approach the search from a different perspective. Research locations where neighbouring areas have already seen price increases, or have new transport links arriving. Try to think outside the box. We have bought properties in locations that may not have a high residential value or be sought-after, but are close to local businesses making them very easy to rent.
Stress test your investment
Find a good mortgage broker experienced in buy-to-let mortgages. If you use the formula of purchase price plus refurbishment costs (plus extra for fees) being less than 75 per cent of the end ‘done up’ value, you can then release cash by refinancing. Take advice from your broker.
Consider an interest-only mortgage so that you only have to put down 25 to 30 per cent of the property’s value, and repay the interest each month. It’s important to stress-test your investment, and also to buy at the right price so that you can repay your loan when you sell.
Who’s going to live there?
Think about who will be living in the property. You can keep it simple and rent to one person or one family on a long term tenancy agreement, giving you the peace of mind that you will be able to pay your mortgage each month. But you could consider increasing your earnings by renting it out as a holiday let, or — if the property is large enough — you could spilt it into individual rooms and rent to working professionals. However, holiday lets and homes of multiple occupancy take more time to manage, so consider your options carefully.
Set up a company
If you plan on buying more than one investment property, consider setting up a limited company. There are pros and cons to this, so talk to your accountant to make sure it’s right for you. Any profits you generate when owning property in your own name will be considered income and you will be taxed accordingly. However, if you hold properties in a company, any profits will be liable for Corporation Tax instead (currently 19%). Also, from April 2020, mortgage interest will no longer be an allowable expense for individual property investors, but will be for companies.
Manage the managers
Investing in property correctly is one of the most liberating financial moves you can make. You can make a full-time job out of it and manage your properties yourself but with the right management, you can generate income without getting out of bed. Take as much time researching managers as properties.
If you are serious about investing, then invest in education. There’s a whole range of resources online, but nothing beats having a mentor. Prices vary, but the cost of making a mistake when investing in property isn’t worth thinking about, so make some calls and see if you can find someone with experience to help you make the most of your money.
■ Look for fixer-uppers, repossessions, or homes with motivated sellers. Try and buy at least 10 per cent below the market value.
■ Don’t wait any longer. There is no time like the present to make the move to start investing. If you buy right, you will never regret it!
■ Sophie Morgan is a director of Empire Investors, a property investment and development company in the North East. She is also co-presenter of Best Laid Plans, a ten-week series which helps homeowners to undertake large-scale renovation projects. It starts Saturday at 4:30pm on Channel 4.