When you are a first time investor the whole process is incredibly daunting. On one hand you are a bit like a first time buyer again – very excited about the investment adventure you are about to take, on the other hand, you are about to enter an unregulated market that can as easily lose you your life savings as it can make you a property millionaire!
Here are our top ten first steps to take to help you work out what you need to do to help make sure your first time investment is a success:-
Top Ten To Do’s for First Time Investors
Step One: Write down what you want from your investment
Rather than get too excited about buy to let or a renovation project, first make sure that your property investment will deliver what you want. Don’t believe the ‘hype’ of property sales companies that you can become a ‘millionaire’ with ‘no money down’. Check what the investment will cost you from start to finish (for example purchase, running costs and sales) and what return you will get in income and/or capital growth.
Step Two: Work out how much money you can risk
When you put money into property, unlike investments such as shares, you may need to support your investment over and above the income it generates, for example, if your rental costs exceed income because the property is empty. Property is also typically a long term investment, so how long can you go without the money you are investing?
Step Three: Be clear on when and how you want to make a return
Many people invest in property without working out what their exit strategy is. Will you sell and spend or re-invest the profits? Do you want to keep the properties and pass them onto your children? If you want to invest for your ‘pension’ will the properties pay out what you want?
Step Four: Understand that this is a business, not a hobby
Investing in property can be a full time job, especially if you are looking at a renovation or buy to let project. Many investors comment that they ‘eat, sleep and drink’ the whole project on a daily basis. For example, people talk about making money by buying ‘below market value’. Those new to investment rarely reason to secure a good BMV deal, on average, you’ll need to look through 100-150 property details a month, narrow these down to 50 properties to drive by and 10 to thoroughly assess just to secure one deal!
Step Five: Be aware of the risks involved
Most investments by their nature are ‘risky’, but property is especially so as when it goes wrong, it often goes badly wrong. There are many things that are out of your control. Property price falls, mortgage rates, contractors, tenants, tax changes, increasing costs from regulation. Some you can protect yourself against, others you can’t. You will always need a ‘back up’ plan and ensure you have additional cash available for the ‘bad times’ as well as look forward to the profits during the ‘good times’.
Step Six: Work out how you want to invest
There are lots of ways of investing in property. You can invest by yourself (not recommended!) or you can invest via a company (be very careful!). There are property funds, syndicates, buy to let, commercial, residential, renovation and development projects and all this can be done in the UK or overseas! What’s right for you? What will deliver what you want?
Step Seven: Be careful who you work with it’s an unregulated market!
Unfortunately there are people/companies in the property investment market keen to take your money who won’t deliver. Some fraudulently so, some because they try and then find out they can’t, but don’t return your money. Make sure you run independent checks on companies via Companies House; you see any properties before you purchase; get an independent survey from a RICS surveyor and that you can use your own finance and legal company to invest in any property purchases.
Step Eight: Compare different investment types
Different property investments give different returns. Some investments are high risk (buying land and applying for planning to build) some are lower risk (typically if you hold property for 10, 15 or more years). Some will drain your time, some won’t. Make sure you consider lots of different investment types before you commit any monies.
Step Nine: Check the deal versus other types of investment
Once you have some deals that you are considering, just check what returns they will give (and compare the risk) versus other things that you could invest in. Speak to an independent financial advisor and ensure that you are making the right decision for you (and your family).
Step Ten: Cover your risks
If you do decide to go ahead, make sure you cover all the risks. For example, if you invest in buy to let, then what cover can you get if your tenants default on their payments or if they trash your home (asset)? If you are renovating, what happens if your builder goes bust, or an accident happens on the site? What would you do if prices fell? Mortgage rates rise? Taxes increase? Investment typically comes with risks, so protect yourself where you can.