How to INVEST in property? 5 rules of investing!May 10, 2021
How to Invest in Property?
The FIVE rules of property investing
Is there a fool-proof way to guarantee a profitable investment? Sadly, no - you will never be able to guarantee that an investment will definitely be profitable. However, that said, we are now in our third decade of being property investors and stick to these five rules to ensure the very best chance of success.
Let’s look at our five rules of property investing. How to Invest in Property?
Think profit and cashflow - not just potentially increasing valuations.
Look closely at your monthly costs and forecast income. The balance after deducting your expenses should be positive, thereby providing you with net income cashflow.
This provides you with both your working capital and income for your lifestyle.
If you don’t have this as a result of your investment, you’ll need to earn money elsewhere at the same time as managing your property.
Calculating your cash flow and thereby utilisable profit is key.
Add value as professional investors
Identify opportunities where there is potential for adding cost-effective value.
For example, a seven-figure suburban property in largely pristine condition may offer less potential than a run-down Victorian building in a city centre.
Adding value is not just about doing things to increase the property's future resale value. In the context of investment properties, it’s more about making changes that will increase your cash flow and income potential.
Think carefully about the nature of such changes:
- having things such as an extra bedroom or creating an office space might add income value
- professional landscaping or expensive luxury fittings probably won’t.
Use realistic property end value projections
Don’t get carried away. Make sure you never lose sight of realistic property and end value projections.
Get this wrong, and you may never recover your overall investment, let alone make a return on it.
A good rule of thumb is to make sure: original cost + refurb costs + profit = NEVER MORE THAN end value.
To put it another way - never spend more than what it will be worth as a whole. Some examples:
- a limited-edition Lamborghini with gold steering wheel may be worth more, a mini with a gold steering wheel typically won’t
- a 2-bed terraced house with gold taps will not be worth more than what the house, street and general locality dictate in market terms
- don't add six en-suites to a £50k house - look at the limiting values of the other homes in the street.
Use smart design to engineer value into the project but within your constraining market valuation expenditure ceiling.
Build-in a cost and value contingency
It is a harsh fact of life that the majority of renovation and adding-value projects run over-budget.
Serious overspends can destroy the underlying financial rationale behind your investment decision. To reduce the likelihood of that happening, build a contingency into your financial projections. If you use a figure of about 10%, and control your cost accordingly.
Ensure you add time contingency
Another unwritten law with property work is that it always takes longer than you originally anticipated. Remember that time equates to cost, and delays in work will negatively affect your overall return on investment calculations, so:
- make sure you have a full project plan in place
- manage it ruthlessly
- if you’re not experienced in formulating project plans and their subsequent management, be prepared to pay for the services of someone who is.
Investing in property in the sense of spending money is very easy. Getting a significant and attractive return on that investment is another matter altogether. It requires a hard-nosed business approach from the outset and one that you will need to maintain throughout the entire duration. Following these five rules will help ensure the best chance of success of how you can invest in property.
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