By Ashley Osborne | Head of UK Residential & Managing Director – International Properties
So you’ve done your research about property investment, saved up for it, but feel that you still lack the expertise to get started? Colliers International’s residential property investment guide will introduce you to the fundamentals of investing in residential real estate, provide advice to mitigate your risks and walk you through the road to a successful investment.
Step 1: Set your goals, evaluate your finances and forecast the expenses
Determine your investment goals so that you can have a clear sense of direction with your investment. Why do you want to invest in a residential property? Your answers could range from earning a stable rental income for retirement to profiting from the investment for short term gains.
Diving into an investment without being aware of all the associated costs is a risk you do not want to take. Consider the main costs and incorporate them into your cash flow forecast:
It is unlikely to find a property that you can finance 100% on a mortgage, so you should forecast the initial deposit you will need to incur. You may set the deposit based on your budget or the mortgage that you are able to acquire.
- Property taxes
Keep in mind that you will need to incur property tax. The rate varies by country and sometimes city, so you should do your research based on the country you are considering to invest in. For example, in the UK (except Scotland), it is the Stamp Duty Land Tax (SDLT) for residential properties exceeding £125,000. While in the US, this is referred to as real estate transfer tax and varies according to states. In most cases, it is paid by the seller, not the buyer. The buyer usually incurs the recording fee, a fixed amount charged by counties.
- Maintenance and repairs
Never underestimate how much you will require to keep a property well-maintained so that you can attract tenants or increase the asking price for when you decide to resell it down the line.
- Tax on rental income
Like any other type of income, you need to pay tax on the rental income you receive. In the UK, there are allowances that you may be eligible for, which helps lower the rental income tax you will need to incur.
- Mortgage repayments
Remember that even during “rental voids” – periods when your property is without tenants – your mortgage still needs to be paid. Take on a loan that you can afford regardless of any unexpected costs or temporary loss of income.
When it comes to estimating your cash flows, there is no such thing as being too detailed. Check your finances as thoroughly as possible before taking the next step and selecting your property investment.
Step 2: Finding and Buying the Ideal Property
Armed with the information about your finances, move on to the next stage and determine the type of property, location, and strategy for your goals. Here are some guidelines on how to select your property:
Which country and city?
A country that has a well-developed property market carries less risk and is therefore ideal for both new and experienced investors. Countries such as the UK, US, Australia, and Canada are long established safe havens for property investments, which means that there is lower risk of losses as compared to other countries. Cities within these countries such as London, Sydney, New York, and Vancouver continue to be sought-after locations for investing in real estate.
From a tenant’s perspective, location is one of the most important factors to consider when looking for a home. Determine if the location of your property is an attractive place for people to live in or if or has the potential to be one.
Access to a good transport network, existence of good schools, and recreational facilities such as malls and public parks make an area a more conducive place to live in. Another important factor is the local crime rates, since it reflects the existence of law-abiding neighbours and effective local law enforcement, among other things. Areas that are safe indicate the potential for long-term residency, which make it a good investment opportunity.
With a promising location, regardless of what you are planning to do with your property – be it renting it out or selling it to another buyer later – you are more likely to find an interested party whom you can strike a good deal with.
What to buy?
To maximise the potential for high returns, choose a property type that is demanded by the tenants in the area. To do that, understand the types of tenants that live in the area and the specific tenant group that you want to target with your property.
For example, if you are looking to invest around a university campus, your potential target group could be university students searching for reasonably priced accommodation. For a middle-income residential area, your target group may be families of a certain income bracket who prefer houses with a backyard over apartments.
Depending on the strategy you’ve chosen, you should aim for a stable source of rental income or high resale value from your property investment. Understanding your target profile will help you find a credit-worthy tenant who is capable of paying his or her rent every month, or a buyer who values what your property offers.
When to buy?
Like any other market, the property market has its ups and downs. Stay on top of the latest industry news, especially of the locality you are considering to invest in. Another additional factor to consider for overseas property investment is exchange rates. Make sure to monitor trends in the exchange rates to take advantage of the rates when they are favourable to you and to be prepared for any unfavourable downturns.
What strategy to use?
Deciding on a property investment strategy and the property to buy go hand in hand, as certain properties and locations may be better suited for a buy-to-let investment, whereas others may be ideal for short-term investment. It is important to understand the differences in these strategies, and their pros and cons before determining the strategy for your residential property investment.
Step 3: Monitoring and management
The work doesn’t end after you pay for your property – you need to keep an eye on your investment, regardless of the strategy you opted for. You can either choose to do this yourself or elicit the help of a property manager.
Self-management has its merits since you are in total control. Decision making will be faster and you would save on the cost of a property manager. Even if you lack the expertise, learning how to invest in property first-hand will be invaluable, allowing you to make subsequent residential property investments with ease.
However, hiring a property manager comes with its own set of benefits. A property manager is likely to have more resources and expertise in managing property investments, which is vital if you are new to the industry or have other priorities to manage. Additionally, an expert would be able to give you the best advice on market conditions and industry regulations. This would ultimately save you valuable time and help you get the maximum out of your investment.
Consider all the pros and cons of both options to decide which would be the best method for you.
Browse through our list of blue-chip residential properties and new residential properties to explore the available opportunities, or get in touch with us for more guidance on the best investment opportunity for your needs and goals.