How to buy your first investment property
Property appeals to a lot of people because it feels tangible and seems easy to understand. Some people simply buy a property local to them in an area they know and rent it out. But to get the best results, there are a lot more things to consider. In this article, I explain how to buy your first investment property.
Set a clear goal
Many investors get started and then feel discouraged when their investment doesn’t have the impact they hoped for. Others will jump from one strategy to another, which is rarely optimal.
If you don’t know what you’re trying to achieve, it’s impossible to know how to buy your first investment property. There are so many different strategies and options to choose from. Knowing what success looks like allows you to pick the best strategy to achieve what’s important to you.
Think about why you want to invest in the first place and what success would look like. Your goal should be meaningful to you and measurable, so you know when it’s achieved.
Consider your budget
One of the great advantages of property is the ability to use mortgages. That means you won’t need to fund the whole purchase in cash, but you will still need money. Typically, you will need a 25% deposit plus money for stamp duty and purchase costs.
We always recommend speaking to a good mortgage broker before purchasing. They will help you to understand the best funding options and approximate costs.
Fintentional works with experienced brokers specialising in property investment. Not just standard brokers who mainly do homeowner mortgages with a bit of BTL on the side. Partnering with a quality broker will add huge value if you’re serious about investing.
Get a plan
Before you decide how to buy your first investment property, you should have a plan. That plan should ensure you pick the right strategy to achieve your goal. You should also know how you plan to buy your second property and continue to scale.
Every investor has three resources that they must consider:
- Capital
- Skills
- Time
Everyone will have varying amounts of each resource, and this should influence the strategy you choose.
For example, a tradesperson has a skills advantage to successfully implement a refurb strategy. Somebody with a busy job and little spare time might be better with a more hands-off BTL strategy.
If you would like help to understand your options, pick the right strategy, and get a plan to ensure you achieve your goals, you can book a free call with us here.
Take tax advice
Once you have a plan, it’s vital that you seek professional tax advice.
If you structure your purchase correctly, property can be very tax efficient. Get it wrong and it’s possible to pay more in tax than you make in profit!
Everyone’s financial situation and tax liability is different, which is why bespoke advice is so important. A good tax adviser will usually save you more than they cost.
It’s impossible to know how to buy your first investment property without first knowing the right tax structure.
Fintentional partners with a tax adviser specialising in property investment. Tax regulations are always changing so a specialist can add a lot of value over a generic accountant. We can help to ensure your portfolio is structured correctly and your strategy is optimised for ongoing tax efficiency.
Choose a location
There’s a well-known saying in property; “location, location, location”!
Some areas will experience higher capital growth. Others will achieve higher yields. Not all locations will have the same rental demand.
Picking a location with strong fundamentals for growth and high tenant demand is key. Consider your target tenant profile and what they would be looking for. Your budget will also impact where you can afford to invest.
If your strategy is to be hands on, maybe refurbishing or self-managing, investing locally is usually best. However, it’s also very unlikely that your local area will have the highest returns. A hands-off strategy enables you to invest remotely and pick the very best locations.
Always do your research to understand which areas have the best fundamentals to suit your goals.
The best location will ultimately depend upon your budget and your strategy.
Find a property
This is rarely as easy as it sounds!
You need to find the right property for your strategy at the right price.
Should you look for a house or a flat? A new property or older property? All this will depend upon your strategy.
Sometimes investors will focus on what discount they can achieve. But if a seller needs to grant a large discount, it may be a sign of low demand. Or the property may be overpriced in the first place. Either way, it’s not a good approach. Getting a good purchase price is important, but not at the expense of the fundamentals. A big discount on a bad property is still a bad investment.
Some investors will focus on the highest possible yield. This can be one of the factors to consider, especially for a cashflow-focused strategy. However, the highest yield is rarely the most profitable investment overall. These risks are all usually greater on higher yielding properties.
Key points to buy your first investment property:
- Look for strong local fundamentals.
- Focus on the needs of your target tenant profile.
- Understand what a fair price is based upon comparables.
- Consider likely future maintenance costs.
It can take a lot of time to research a location and find the ideal property. Then it can take more time to travel for viewings and negotiate a deal. Don’t rush to buy the first property you see just because you’ve committed a lot of time.
Many factors that make a good property are hard to quantify. For example, potential maintenance costs, tenant profile, and likelihood of void periods. These are hard to know initially but will have a huge impact on the bottom line. Experience is a big advantage in understanding these wider factors. For this reason, most people’s first investment is rarely their most profitable.
Consider using Fintentional’s sourcing service to find the ideal property without the hassle.
Know your numbers
Understanding the numbers and calculating the return on your investment is crucial before committing to a purchase.
First, you need to understand what the real value of the property is. This isn’t necessarily the asking price. Look at comparable sales for similar properties nearby to be sure you’re paying a fair price. Your mortgage lender will send a surveyor who also checks comparables. If there’s no evidence to support the price you’re paying, you risk a downvaluation. This means you would not be able to borrow the full amount you require.
Then consider how much rent you can realistically achieve. Again, look for comparables to support this. You will need to achieve a certain level of rent to support the mortgage borrowing. A good broker will guide you on this.
In addition to your 25% deposit, you will also need capital to pay for other purchase costs. Stamp duty land tax is payable on completion. Solicitors’ fees and disbursements will also be payable. Most good mortgage brokers will charge a fee, and your mortgage lender may charge fees too.
Then consider your monthly outgoings. Mortgage interest will be the largest, usually followed by letting agent management fees. There may be other known costs too, such as service charges, ground rent, and insurance. You may also wish to include an allowance for maintenance, although this will vary massively by property type.
If you used a sourcing agent to help you purchase, there will be sourcing fees to account for too. However, a good sourcer will save you more money than they cost.
See this blog for more details on how to calculate ROI on property investment.
Decide how to manage
Once you decide how to buy your first investment property, you need to decide how to manage it.
The easiest way is to use a letting agents full management service. This will typically cost 8-12% of the monthly rent (and often more in London). They should then collect the monthly rent and pay it to you each month, less their fee and costs incurred. The agent will be the main point of contact with your tenants. They should stay on top of any compliance, maintenance, and rent reviews.
The cheapest way is to self-manage, which saves paying any costs to an agent. However, you need to ensure you understand the requirements to stay legally compliant. Of course, this will also be more time consuming.
If you do choose to self-manage, registering with the NRLA can be useful to receive templates and training. Alternatively, Fintentional provides ongoing support and guidance through our mentorship service. This helps you to stay compliant and optimise your management processes.
Find a tenant
A good or bad tenant will make or break your investment. However, if you purchased the right property, the hard part is already done.
A good property in a good location in good condition will attract a good quality tenant.
A letting agent will find you a tenant, but not all agents are made equal. Cheaper agents may only advertise on one of Rightmove or Zoopla. It’s usually worth paying a little extra to an agent who advertises on both. More potential tenants seeing your property means more chance of securing the right tenant quickly. A slightly higher fee will always be worth it for a shorter void period. Try calling a few agents and avoid any that are hard to contact.
Even if you decide to self-manage, consider using a letting agent’s tenant find service. For a one-off fee, they will advertise the property and facilitate viewings, so it’s a huge time saver. They should also ensure the tenancy is set up legally and fully compliant.
You can advertise yourself very cheaply using services like OpenRent. There are some advantages to doing the viewings yourself as you can meet potential tenants in person. However, you’ll ideally need to live locally, and it can be time consuming. You also need to be confident that you know all the regulations and compliance requirements.
Summary
Your first property investment may not be the best one you ever make. However, it is the most important.
As you gain experience and acquire more knowledge and skills, future investments will likely be more profitable. However, you only gain that experience by making your first investment and following the correct steps.
Your first investment will also help to fund future investments. Partly through equity growth and partly through saved rental profits. That’s why it’s crucial to know how to buy your first investment property the right way.
Fintentional offers sourcing and mentorship services to minimise risk, remove the hassle, and help ensure success. Book a free call to find out more.
