How to buy the best investment property?May 10, 2021
How to buy the best investment property?
Becoming successful as a Property investor isn’t a matter of chance. While the unforeseeable may happen from time to time, buying well and the best property can help supercharge your success. Buying a property well is part of this process.
What do you mean buying well?
We use this phrase a lot – and for a very good reason. To ensure our continued success, every property we consider has to meet specific criteria in order to be the best property that we can buy – that is "buying well".
Here’s how you can help ensure the success of your business …
How to buy the best investment property? Revisit the five rules of investing
We have written a whole article on this, which you can read on our blog. To recap, the five golden rules of selecting and managing your investment properties are:
- Cashflow - selecting property that is ripe with the potential for generating income or a fast turn-around. Think profit AND cashflow
- Looking for opportunities where you can add value as an investor
- Using realistic property end value projections - A good rule of thumb is to make sure: original cost + refurb costs + profit = NEVER MORE THAN the end value
- Build-in a 25% cost and value contingency – no matter how well you plan, renovations, refurbishments and value add-on projects can often cost more than you have allocated
- Ensure you add a time contingency - overruns can happen, however well managed a project is.
Look for the right deals
For example, finding a property at 25% below market value is likely to be the equivalent of your mortgage deposit.
Although looking for value-add opportunities is important, sinking vast sums into restorations is likely to hurt, and put your entire business at risk.
The key message is, money costs money. Whether that could be the cost of interest on a mortgage and loss of rental income while you renovate or source a tenant; or where you overspend on a project – make sure you do the maths before you invest.
Calculate the ROI
Return on investment (ROI) is almost like the bank interest rate of a house. For example, most of us would prefer to put our money into a bank account that yielded say 5% as opposed to 2.5%.
Calculating the ROI can help you see exactly what is going to happen, based on what you have already invested and, the expected costs and income.
To calculate the ROI
Divide the annual profit generated by an asset (income minus costs), by the cash you've put in.
As an example:
Annual rent of £6,000 - Annual costs of £2,500 = An annual profit of £3,500
Purchase price: £200,000. Mortgage used: £160,000 = Cash invested: £40,000
£3,500 divided by £40,000 x 100 = 8.75%
So, ROI = 8.75%
Momentum property investing
Momentum investing means making sure you can pull as much capital out of a property as possible to then reinvest into another property deal. We are looking for the majority of our capital to come back out on refinance. The more cash that comes in, the more property you can buy – keeping your property purchasing, refurbishment and refinancing going.
By investing in the best properties, your business will be liquid with cash flowing through it – giving you more opportunities and income.
Momentum investing means you can scale your business by recycling your capital through different projects.
As your business grows you will need to consider how you will manage additional properties. As your business is set up to handle more properties (from the back-room stuff to maintenance to keeping up with legislation), without it impinging negatively on its operations, the more your portfolio can grow. (Tools such as the Go Tenant App can help you manage everything from one place).
Having the funds to negotiate with
Cash is king.
If you have liquid or easily accessible funds available, you’ll be able to drive some attractive deals and drive hard bargains as you'll be in the same position as a cash buyer. So, you can move quickly, and there isn't a chain underneath you – meaning you will get chosen over financed deals.
Finally - don’t just park your money
Many fledgling investors enter the market by purchasing a property and waiting for its value to increase over time and never ask themselves 'How to buy the best investment property?'.
It’s easy to get into property investment this way, and the yields mean it’s tempting to park the money and wait.
This method of property investment, however, may mean you are missing out on money-making opportunities.
Successful professionals buy well and use their knowledge to grow and scale their business.
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