Choosing the Right Property
Out of the properties that you might find, which one(s) do you actually purchase? In short, the ones where the figures stack up.
To explain this further it is essential that you view your property investment as a business and not just some form of gambling, although the property market contains a number of elements of risk, as do most types of investment. Just like in any kind of business you need to know that you will be making money and not losing money, it is the bottom line that tells you if you are running a profitable business or not. However, there are at least two different high level categories of ways to profit from investment in property, these are explained here.
Capital Growth – Appreciation
This is the most common way that people think of earning money from property, usually because it is the property that they own and live in. This type of investment is the act of buying property for one price and selling it later on for a higher price, the difference is often referred to as Appreciation. This method of profit usually takes time over which the value of the property increases. However, you can add value to the property by doing some kind of work to it, like refurbishment or an extension. In other instances you may be lucky enough to buy something for less than it is worth and sell it the next day for market value thereby making a profit on the ‘turn’ or ‘flip’. You will normally have to pay Capital Gains Tax on the increase of the property’s value when you sell it diathesi.
Positive Cashflow – Income
This is the type of profit usually made by Landlords where the overheads of owning and letting a property are less than the income generated from same. What this means is that if you add up your mortgage payments, management fees and cost of repairs the total should be less, across the same period, as the rent paid by the Tenant. For example, if you pay out £500 per month on overheads, you would want to be letting the place out for at least £550 in order to make a profit, or Positive Cashflow. You will normally have to pay Income Tax on the profit made from rental.
The above two types of investment are not the only two and they are not necessarily mutually exclusive, that means it is possible to find a property that represents both types of investment. In fact most property will have some kind of appreciation, although there are areas that have had zero growth over the past few years and, indeed, some areas that have had negative growth, that means the value of property has actually dropped.
Similarly, Positive Cashflow is variable and can rise and fall with market conditions, you can only make your best, informed decision on the day, for the day, with all the available information. Historical trends may point towards a potential future, but this is not any kind of guarantee.
Plan for Voids
You must build Voids into your cost structure or overheads. Void Periods, referred to simply as Voids, are the times when your flat is not let out but you must continue to pay the mortgage and associated costs like Service Charges, in the case of a Leasehold property. This is why the most common Buy To Let mortgage is worked out on a factor of 130%, the Lender expects Voids and incidental costs and is building in a simple safeguard for their financial exposure to you. By anyone’s standards the factor of 130% is a good rule of thumb, this means that your actual rental income should be 130% of your mortgage payments.
Many Investors and Landlords have been caught out by not accounting for Voids and suddenly running short of money when they have to pay their mortgage with no rental income to balance the outgoing cash. In areas of high competition your property may be empty for several months. It is a good idea to have around three months worth of mortgage payments set aside for your Buy To Let property in case of Voids.
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