Step one: it’s not timing the market, it’s time in the market
Before even beginning your journey into property investment, it’s important to understand how the market works and that the longer you hold your property for, the better it is likely to perform.
In other words, remember the property market moves in cycles; whilst no-one ideally wants to invest in a property just before the market crashes, if you’re prepared to hold that property for ten to 15 years or more, then that crash should eventually become insignificant.
Historically, property values have always recovered and come back stronger, typically doubling in value within 15 to 20 years, so no matter at what point in the cycle you invest, over time and providing you’ve taken care of the property, you should still reap the benefits.
Step two: What are you investing for?
This might sound like a basic question, but considering your end goal is important: what are the reasons for saving and growing your wealth through property and how quickly do you want to get there? This will help you focus, which will make achieving your goal easier.
For example, do you want to retire early, are you looking to secure and build up a good nest egg for your children or do you want to start a property empire, leading up to, say, five or more properties over the next 20 years?
Once you know your goal, you can start to plan, which takes us onto the next step.
Step three: Get your finances in order
Once you understand your investment goals, you need to take into consideration the financial elements – not just the amount you have to invest with.
There are numerous taxes to account for at every stage of your investment journey and the first two can be the difference between you struggling to get your investment off the ground and floating above water if you don’t understand them. These are:
Stamp Duty: As a buy-to-let investor, remember you will pay a standard rate plus an additional 3% on every buy-to-let or second property you purchase.
Income tax: Any rent paid to you by your tenants will be classed as income and will be taxed as such. Typically, this starts at 20% depending on the amount of income you receive. If you’re investing as an individual, remember this will be in addition to any income you receive as a salary from work so check which tax band this might take you into.
Inheritance tax: This might not be something you want to consider at the start of your investment journey, however it’s worth considering if you want to give your relatives peace of mind in the future - certainly if the value of your estate is above £325,000.
Capital gains tax (CGT): This is the tax you’ll pay if and when you come to sell your property. This tax only applies to the profit you make on the price you originally paid for it. For example, if you bought a property for £150,000 and sell it for £250,000, you’ll only get taxed on the £100,000 gain.
Other things to consider are any agent and management fees plus ongoing maintenance costs of your property once you have your investment up and running and a tenant in place.
Step four: Location, location, location
By now, you should be ready to decide on your property and whatever type of property you decide to buy, choosing a good location is crucial. Typically, there are four key indicators of a good area in which to invest in property: infrastructure, investment and regeneration, amenities and tenant demand.
Infrastructure: A good location will offer good proximity or transport links to key cities, central areas if already within a city, or neighbouring areas of importance. Think train lines, motorway connections and any planned future or ongoing improvements to current infrastructure – for example HS2, Crossrail, the Midlands metro system, etc.
Investment and regeneration: Whilst it’s good to do your homework on which areas have typically performed well in the past as an indicator of how they might continue to perform in the future, do not take this as gospel. Equally, don’t always discount an area based on its history.
Slough and Birmingham are both great examples of this. Both areas have at some point in the past had a bad rep. However, fast-forward to today and Birmingham is the next host of the 2022 Commonwealth Games, home to HS2 and has been reported as a top location for Londoners leaving the capital; Slough is a top London commuter location due to its affordability, position along the Crossrail route and billions of pounds of investment into regenerating the town and its amenities.
Crucially, both areas have reported strong house price growth and good rental yields over the past five years or more. It’s amazing what a healthy injection of investment and regeneration can do.
Amenities: A key element of attracting and keeping hold of tenants and attracting buyers is having good amenities. Easy access to shops, bars, restaurants and leisure facilities means whoever is looking to buy or rent your property in future is likely to have everything they need on their doorstep, which in our current era where everything is instant, is definitely a winner.
Tenant demand: The cornerstone of any successful rental property is its tenant. In theory, the three previous elements combined should equate to strong tenant demand. What you also need to look for is an area where the demand for rental properties outweighs availability, which generally means you can achieve higher yields and shorter void periods between tenancies.
Also, check what type of properties are most in demand and from what type of tenants - if students are your target market then you might want to consider properties with multiple bedrooms whereas if you want young professionals you might look for high quality one or two bedroom units.
Remember, if in doubt on any of the above, stick to what you know – the area you live in or a nearby area where you already understand what and where the rental market is.
Before investing in anything, it’s also advisable to speak to a registered financial adviser or wealth manager who will help to ensure that you are investing wisely.
*Andy Foote is a director at property investment and development company SevenCapital, and a seasoned property investor himself.