What are the biggest mistakes property investors make?
Property has long been seen as an asset that is “as safe as houses.” Yes, there is the occasional blip in the market, but generally property is an asset that continues to appreciate.
According to Land Registry Data, the average price of UK property has almost trebled, from £76,000 to £227,000, over the last 20 years. So it’s no surprise that property, particularly buy-to-let, has become an integral part of many investor’s portfolio, if not their sole focus.
A report written in 2015, for example, showed that over an 18-year period buy-to-let exceeded every other major asset. Between 1996, when BTL mortgages were introduced, and when the report was written net annual returns averaged at 16.2 per cent, compared to a lower average return of 6.2 per cent on UK equities.
But not everyone who has ever invested in property has seen those returns. Many inexperienced investors had their buy-to-let fingers burnt following the financial crisis.
Cheap credit disappeared practically overnight and short term falls in house prices meant many were left in negative equity.
But while financial shocks, and the whim of governments, are impossible to predict having a strong understanding of the market you are investing in and being prepared for the unexpected is highly important.
So why and where do so many property investors go wrong?
You don’t focus on a niche
Property investment and development comes in many forms. You could buy a piece of land, and build property from scratch, to then sell at a profit. You could buy a property that has seen better days, give it some care and attention and then sell it on or rent it out.
As a landlord there also a number of options. You may let your property as a house of multiple occupation, to students or professionals. Or you may target family tenants.
However, each of these approaches requires a very different set of skills and knowledge. From a buy-to-let perspective, renting to a family is very different to renting to students– whether that’s the facilities that they expect the property to have or in marketing the availability of the property.
By focussing on a specific niche it means that you can continually refine your development and investment process. As the saying goes, a jack of all trades typically means a master of none.
You don’t target a specific type of tenant
The bane of a landlord’s life and business are vacant periods, where they are not generating any rental income. To avoid this is to understand the needs of your tenant. And different tenants will have different needs.
If you are renting to students, they are more likely to require a furnished property than a family. Likewise, students are more likely to require a property that is close to their university while accessible transport links, or proximity to the town centre may be more important to young professionals.
By buying a property to “rent out”, without actually considering who you are going to rent it to, will seriously affect your chances of generating a steady income. By knowing the exact requirements of your tenant beforehand you can then purchase, develop and furnish a property to meet those needs.
You haven’t done your research
A popular perception of property investment is that you buy, charge a level of rent that covers the mortgage, with profit on top, and then cash in when you sell several years or decades later. Or simply find a neglected building, renovate it and sell at a profit within a few months.
But as many have discovered to their cost, it’s not quite that simple.
Without thorough research or experience, it’s easy to overspend on renovations and underestimate how long it will take. Then you find the work hasn’t added as much value as you were hoping and you’d forgotten to factor in the costs involved in selling a property.
Likewise, when buying a BTL property many simply calculate the returns they’ll be generating based on rent to mortgage payments. Once vacant periods, ongoing maintenance and property management costs are factored in the profit margin doesn’t look quite as rosy, if it’s there at all.
You let your emotions get the better of you
Buying an investment property is very different to buying a home to live in. When buying a family home emotion plays an integral part in the buying decision. There is no explanation for it – you find a property that immediately connects with you, where you can imagine you and your family growing up.
Which means you are prepared to overlook the fact that it isn’t quite as close to the town centre as you’d like. And although it’s slightly out of your budget range you can stretch your finances a little further than you intended to.
Which is exactly the way NOT to approach a property investment. You, hopefully, will be spending as little time there as possible. And you want to make sure that once the purchase, and any refurbishment is complete, that you can sell or rent to your target tenant or buyer as soon as possible and well within budget. So if it doesn’t tick those boxes, then you should immediately walk away.
You don’t realise there are alternatives methods of investing in property
Unfortunately, it’s not quite as easy for amateur investors to reap the rewards from property as has been in the past. As we have mentioned, buy-to-let in particular has become a financial and legislative minefield in recent years.
However, it is still possible to generate handsome returns from property by investing in experienced property development companies. By investing in a reputable property investment firm you can receive the benefits without the headaches.
At Lord Panda Property, for example, our years of experience mean that we perfectly understand the needs of student tenants. We know exactly what to look for when purchasing new property to ensure we immediately increase value and have built a highly effective team that can carry out renovations on time and within budget.
So while we freely admit that we have made some, if not all, of the above mistakes in the past we have learnt from them.
Having refined our process over many years we now have occupancy rates of more than 98% across our BTL portfolio and consistently generate returns of up to 10% for our investors.