Investment Property In London

THE BIGGEST MISTAKE AMATEUR PROPERTY INVESTORS MAKE WITH INVESTMENT PROPERTY IN LONDON

In boom times it is very easy to believe that buying property is a risk free investment. I cannot remember the number of times I have heard friends and potential clients say: “I am going to invest in property. Shares and pensions are erratic. At least if I buy a property it will always be there”. Or the classic “You can always live in a property, but you can’t live in a share certificate.”

Unfortunately property is not a simple investment. Just because you have lived in a house does not mean you understand property any more than you understand in which oil firm to invest just because you use petrol!
If property was such a simple game how come thousands of people have lost fortunes?

The First Step To Buying An Investment Property In London

Before you even consider choosing properties to view, you need to have a basic plan. The very basic starting point is to decide what your investment criteria are. This does not mean what type of property you want to buy (although a profitable one would be nice!). It means working out what return you want from your property.

  • Do you want a good yield or are you only interested in capital growth?
  • How long do you want to keep the property?
  • How much equity do you want to have invested in the property?
  • If you are buying or adding to a portfolio do you want to have different types of property to attract different types of tenant to spread your risk?
  • Do you prefer being a specialist in your particular niche?
  • What is the minimum profit or yield you will accept?

You then need to establish the best means of achieving your goal:

  • Do you want a basic buy-to-let?
  • Do you want to buy, refurbish and sell or buy refurbish and let?
  • Do you simply want development sites?
  • Are you looking for sites that you can turn into HMO’s to increase the yield?
  • Are you looking to target the “super-prime”, “prime” or standard market?

A word of caution: just hoping for capital growth can be a dangerous game unless you are planning to add value to property yourself. If an investment property in London offers a good yield the capital growth will probably follow.

Once you have your investment plan you can then start the search (please click here for advice on the search).
It is essential that you become an expert in the type of property and area in which you plan to invest. Trawling the websites will be a complete waste of your time. You must source your own properties, be on the estate agent’s preferred buyers’ list and constantly be on the look out for profitable opportunities.

When you have found a potential investment property in London you must do your research:

The classic mistake amateur investors make is to take the easy route and simply accept figures given to them by the selling agent. It is imperative that you do your own research. Remember the estate agent’s legal obligation is to sell his/her client’s property for the best price possible.

  • You need to find out from an independent letting agent what similar properties rent for in the area.
  • You need to find out what similar homes have sold for (when refurbished) in the area from at least three other agents.
  • You need to get a quote from three builders to have a reasonable idea of what the build costs might be.

If you do not have this information you are doing nothing but gambling.

The Second Most Common Mistake Amateur Investors Make with investment property in London

Underestimating the cost & being overly optimistic/pessimistic:
Again this is partly due to the fact that they have failed to carry out their research. You are reading this so, you are clearly planning properly. Here are a few points to consider in your calculations:

  • Have you included the annual service charge and ground rent?
  • Have you included letting agents’ fees (c. 16% for a fully managed service)?
  • Have you included stamp duty (4% of purchase price above £500k) and other purchase costs like solicitor’s fees?
  • Have you included maintenance costs?
  • Have you realistically allowed for “void periods”, i.e. when the property may not be tenanted (allow for c. 10-15% of the year)
  • Mortgage Payments

It is very important not to be overly optimistic or pessimistic. There will always be an element of risk. It is for you to establish whether the investment return warrants the risk. However, it always pays to have a plan “B”. In the worst case scenario do you have a “get out” clause.

IF YOU THINK YOU MIGHT NEED ACCESS TO YOUR MONEY AT SHORT NOTICE THEN INVESTING IN PROPERTY DIRECTLY IS PROBABLY NOT THE RIGHT INVESTMENT FOR YOU.

If you would like exposure to the market, you may be better advised to invest in a REIT or property fund.

A Couple Of Final Thoughts:

This is an extremely brief guide to investment property in London. It is meant more to provoke thought and to encourage you to seek more information. You will see books and resources below, which will help you make informed and successful investments.

At the time of writing (July 2009), the London market has dropped c. 15-20% in sterling terms. There is a shortage of properties on the market because borrowing costs are at historically low levels. Consequently there are few forced sellers despite falling rental returns, rising unemployment, restricted lending and falling wages (fewer bonuses in the city).

This has led to a lack of supply and numerous people are buying because they think the market represents value. However, just because something is cheaper does not make it value. If you are planning to invest in a buy-to-let investment property in London ask yourself a simple question: Would it be cheaper to buy the property or rent it?

For example:

Property value: £1m
25% Deposit: £250k
Mortgage at 5% on £750k £37,500
Cost to rent (p.a.) £35k
Purchase Costs @ 6% £60k
Other costs (see list above)£?k

This is a real example. It is clearly cheaper to rent and that is without considering the return you would get on £250K AT 4% IN A BANK. As a landlord you would effectively be subsidising your tenant. The chances are this would be a bad investment.

WHEN BUYING AN INVESTMENT PROPERTY YOU MUST LOOK AT THE COLD, HARD FACTS. EMOTION CAN HAVE NO PLACE. JUST BECAUSE YOU WOULD NOT LIVE IN A PROPERTY DOES NOT MAKE IT A BAD INVESTMENT – ONLY THE NUMBERS COUNT – Conversely, if you fall in love with a property, you must still ensure the numbers add up to a profitable decision.

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