Jul 18

Buying property to make a profit

Reading Time: 6 mins

Investing and buying property to make a profit is a big decision and one you shouldn’t treat lightly.  You will be spending a big chunk of your money that will be tied up for some time and you have no guarantee you are going to make a return.

Yet some experts, like Ian Samuels, author of Property Tycoon: A simple seven step guide to becoming a property millionaire, are saying that now is a great time to buy property as prices won’t be this low again and you will be able to reap the benefits of a property boom expected between 2018 and 2020. We’ve put together this article to help you determine whether investing in property is right for you and, if so, what you should be buying.

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Things to consider before buying

Is investing in property right for you?

Firstly you must consider whether investing in property is right for you.

Ask yourself these questions:

  1. Key, Mortgages, buying a houseCan I afford to have a lot of money tied up for some time? If you’re planning on renting your house out it will mean your money is tied up and, unlike some other forms of investing, it can take a long time to access your money.
  2. Do I have the time and energy to manage it? Equally it’s not an investment you can sit back and watch grow. You will have to have regular involvement with it in terms of dealing with tenants, mending and painting things, sorting out mortgages etc.
  3. Do I know what the costs are? There are potentially costly payouts including repairs and inspections. You may even have to fork out to extend the lease as well. If you’re buying to let you will need to make sure that you will be able to cover the cost of your mortgage payments.
  4. Do I know the risks? Like with all investment there is also risk, property prices and demand for rented accommodation can rise and fall so there are no guarantees.

If, after saying yes to the questions above, you feel investing in property is right for you then you should, if possible, have a diverse portfolio of investments so when the housing market slows down you don’t feel the pinch. In other words, don’t put all your money in property, and certainly don’t put it all into one house.

Other investments you might have include shares, bonds, gold and even art. Here at Moneymagpie we’re always saying that you need to spread your bets. It’s always good to have another source of income so you can wait out the slow periods and make the most of having a long term investment.

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Should I buy a house to flip or a house to rent out?

For rent sign.240x180
Some people make their money through ‘house flipping’ which is essentially buying a run down house at a cheap price, doing it up and then selling it on at a higher price.

The alternative is to buy a house and then rent it out. You might do up the house before or after renting as well and then sell it later, so you’re doing a bit of both.

Property tycoon Ian Samuels recommends that if you want to make the most money from your property, you should be buying to let. “House flipping is harder and more expensive than you might think,” he says. “It requires deep pockets, and, even if you make a quick burst of money, buying to let is likely to be the most profitable in the long term. This is particularly true when you consider the cost of capital gains tax each time you sell a property. Plus, when the time does come to sell the property you have been renting out you may be entitled to letting relief on your capital gains tax.”

The renting market is also one that is continuing to grow. With the Bank of England’s decision to make it more difficult to get mortgages (only 15% of new mortgages will be allowed to be higher than 4.5 times a borrowers income and there will be extra checks in place for all lending), more people are going to be pushed into renting.

What key things should I consider when buying a property to make profit?

a house and a $ in a rocker

  1. You will need to consider the current market and where it is in the property cycle. Steady house price rising is often followed by a boom and then a slowing of the market.
  2. You need to make sure you buy your property at the right time.
  3. Equally you will need to think about the location. Is it a nice area and will people want to rent a property there?
  4. You need also to consider, if your renting your property out, your tenant’s profile. It might sound snobby but buying a house in a cheap area and charging relatively little rent might attract a kind of tenant who is financially unstable. All this needs to be taken into consideration before buying.

Indeed Ian Samuels’ top piece of advice for new investors is do your homework.

  • Know the area
  • find out if you’re getting a good deal
  • see if the area is going to have any large scale investment over the next few years which will increase the worth of your property.

Where and what should I buy?

raiseWith London overheated and unaffordable for most, there will soon be (hopefully!) a drop in the house price value. This means it’s not a good place to invest.

Instead Ian Samuels recommends properties in the North and the Midlands. Properties there have potential to be bought at a good price and will likely steadily increase in value, as will many of the properties in the country.

Indeed many of the foreign investors who have owned properties in London are now viewing it as too expensive and are instead looking to buy property in the North and the Midlands.

Xavier Adam, MD of AMC Network UK which invests in commercial property for large-scale foreign investors, agrees. “It’s hard to make a profit in central London so international investors are prepared to look at the regions, particularly big cities like Leeds and Sheffield,” he says. He believes the property investment market will cool down a little over the next year following a frenzy of activity in the last eight or nine months.

“Some vendors have unrealistic expectations about international money flooding in,” he says. “These people have money but they aren’t stupid. They will pay a fair price but they aren’t going to be ripped off. It’s a good thing because the market needs a reality check and tenants need to find the money from somewhere when their rent goes up.”

However you should factor-in where you live in the country. You will need to consider the potential problems if you live a distance from where you buy your property, not least the difficulty in managing a property that is hard for you to get to. So if you live in Cornwall, it’s not necessarily going to be helpful in the long-run to buy in the North. You’re better off looking in the South West where there are pockets of potential value.

What kind of property should you invest in?

 As to what kind of property to buy, Ian Samuels recommends investing in a two bedroom apartment if you’re planning to rent.

If you’re not looking to rent but simply looking to sell on then he recommends a three bedroom semi detached house. Assuming house prices continue to rise then you should be seeing a good return.

The property market is always changing. Ian Samuels believes that in 3-5 years, once there has been a steady increase in house prices, the deposit needed for a mortgage will be lower. In turn fewer people will be renting and the prices will change again.

That is why, as with other investments, investing in property is a long term venture and should, where possible, be part of a diverse portfolio.

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