The 5 Golden Rules of Property InvestingMake Text Bigger
When I first wrote my book “Property Magic” I wanted to come up with some simple guidelines which would help investors to minimise the risks of investing and maximise their returns. I observed that most investors, myself included, made some common mistakes which could easily be avoided by following these principles:
Always Buy from Motivated Sellers
Instead of looking for a property you like, and then negotiating with the seller to try and get a discount, I have a smarter strategy. Look for motivated sellers, who will be flexible on the price/and or the terms of the sale.
Once you have found a motivated seller you can decide if you want to buy that particular property. For a quick sale, the owner may sell it at a discounted price. The amount of discount will vary on their motivation and the general market conditions.
In a rising market you may be happy with a 15% to 20% discount. In a falling market you would want a bigger discount of 25% to 40%. This is to give you more of a safety buffer in case prices come down further.
There is a huge amount of uncertainty in the current property market. There are potentially lots of landlords looking to sell up early, over the next year or so.
The next 12-18 months could be the buying opportunity of the Decade.
Buy in an Area with Strong Rental Demand
You need to accept that as a landlord, you may occasionally experience void periods where you have no tenants. During these void periods where you have no income, you have to cover the property costs yourself.
Your investment then becomes a liability, rather than an asset. Yet you can dramatically reduce potential void periods by only buying property in an area with strong rental demand. You want to ensure that if your current tenants decide to leave the property, you can easily rent it to new tenants at full-market rent.
A general rule of thumb is to buy properties in areas with strong local employment and good transport links with local facilities and amenities. When you know how to do it, you can easily assess the true rental demand in any area. You can use the internet to find comparisons, speak to local letting agents and make use of dummy adverts to test rental demand.
If you are not sure about the rental demand in an area, I would suggest you don’t buy the property. This is so you avoid longer than expected void periods, which will cost you money.
Due diligence is very important before you make any investment decisions
Buy for Positive Cash Flow
This is a very important rule. As a property investor you should aim to buy investment properties that not only pay for themselves, but also make a cash profit (positive cash flow) each month.
There are running costs associated with owning a property, but the basic concept is that, the rent you receive from your tenants should more than cover all of the costs.
Unfortunately, when markets are ‘booming’, many investors will purchase properties which only just ‘wash their face’. This is where the rent would just about cover the monthly costs.
Some speculators will buy properties that have a negative cash flow in the hope that they will profit by prices rising. This then means that the owners have to subsidise their properties each month. A position you don’t want to be in, especially if you have a lot of properties like this.
If your investment properties make a positive cash flow each month, then it does not matter if the property prices fall in the short term, as long as you can afford to hold them.
Invest for the Long-Term Buy & Hold
Some investors like to buy and then sell property to make a profit. This is called flipping property and can be very profitable in a rising market. Yet each time you sell a property you will crystallise your profit. You will never make any more money from that particular property.
Whereas, if you buy and hold, you can make money from the rental profit each month and long-term capital growth. This way you work once and get paid forever by that property for as long as you own it.
I have sold properties in the past and usually regretted it, having seen how much values go up in the long term. The real profit in property is in buying and holding for the long term to benefit from significant capital growth.
The key here is being able to afford to hold it and this is why Rule No.3 is so important, so that you don’t have to subsidise ownership of the property.
If you plan to hold for the long term and your property is rented out, creating a positive cash flow, you needn’t be concerned by short-term fluctuations in price.
I am reluctant to sell property and will only do so for these four reasons:
- If the equity tied up in the property is not generating a good return on investment so if I could invest it elsewhere to make a better return.
- Something has happened to the rental demand in the area since I first purchased the property, and I feel it may be difficult to rent it out in the long term.
- Needing to raise funds to pay down some of my mortgages or build a war chest to make further purchases.
- Needing the cash for whatever reason.
Have a Cash Buffer
A problem I often hear about, is of properties getting damaged, or just enduring wear & tear, which makes them difficult to let out, unless the landlords spends some money bringing them up to standard.
The landlord may not have the spare cash available to make the necessary repairs and improvements, so the property remains empty. This ends up costing the the owner more money. These landlords often become ‘motivated sellers’.
The way to avoid this potential problem is to make sure you always have cash buffer set aside, to cover unexpected expenses. In reality, you can get insurance to cover most of the potential issues. This could include a tenant not paying the rent.
What to use as my cash buffer?
- Cash in your bank.
- A clear credit card.
- Cash in someone else’s bank that you have agreed you can borrow if necessary.
The size of this buffer depends on your personal level of risk. A few thousand pounds per property might be a good idea. This will stop you from becoming a motivated seller yourself.
Whenever I meet investors who have lost money in property, it is usually because they have broken at least one of these 5 Golden Rules of Property Investing. If you follow the 5 Golden Rules you will minimise the risk of investing and maximise your return.
Invest with knowledge, Invest with skill.
Author of Property Magic and Founder of property investors network
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