What is your goal with property? To build financial freedom for your family, and their family? To replace your income and leave your job? To afford more holidays or a new car?
Whatever your goal is when investing in property, there is one thing you want to happen; You make much more than you put in. Of course you do!
But investing in property is difficult, and the smallest of mistakes can cost thousands and could jeopardize your entire investment.
But that is no reason to hold back from investing — Instead, ensure you’re well prepared BEFORE you even get the ball running.
Do your research, get educated and most importantly — set up some rules.
Having no rules, or having rules that you don’t stick to, is a serious risk. Each and every one of us is driven by our emotions, even more so when it comes to making decisions. But when investing in property, you need a clear head and make decisions that are logical and most likely to lead to a positive return on your investment.
That’s why it’s essential to have rules in place, and then stick to them! So, when investing in property, what rules should you get in place?
Whilst there are many others, let’s focus on rules that surrounded the biggest opportunity to make a great ROI, but is also a risk if done incorrectly — purchasing a property.
Buying the right or wrong property can mean the difference between achieving financial freedom, and never achieving it.
I have six golden rules that I’ve used to buy all of my over 200 properties, and that me & my team use when buying our clients properties for them using our ‘hands-free’ portfolio building services. Since we started we’ve purchased well over 1,000 properties for our clients, so I know that these rules work.
So without further ado, let’s dig into…
The Six Key Rules That Ensure You Always And Only Buy The Best Investment Properties
To remember rule #1 I call it Capacity. Capacity relates to the capacity of the property you’re considering to invest in.
The rule states the property MUST be a 3 or bed HOUSE, not a flat.
Why have I put this rule in place?
3 or 4 bedroom houses and not flats, appeal more to families including one or more children. Families like this are less likely to move often, which means they’ll be a long term tenant for you.
Long term tenants are what you need — every time a tenant leaves, it will cost you several thousands because you have to advertise the property, consider applicants and agree the best tenant. These have costs associated with them, but there is also the cost of having a property empty for the duration of the process — which can take on average 6 weeks.
So to minimise this as much as possible, invest in only 3–4 bedroom houses to attract long term tenant families. Sure, eventually they’ll move somewhere else or become a first time buyer — but this will have less often than any other tenant type.
Rule #2 is named City, because it relates to the location of the property.
The rule states the property must be in an area that is growing, and not an area that is simply close by or an area you like (remove the emotion, focus on the facts).
Why does this rule exist?
When I first work with investors, the majority are fixated on investing in property in their home town or city, or somewhere nearby. You can’t base your decision on whether to buy or not on emotions like this.
You need to think logically, and buy a property in an area that is growing the fastest, allowing you to maximise your returns in less time.
Let’s look at an example.
You’re an investor and live in the Northern England city of York.
You find a property you think would be good to invest with in York, and it will cost £150,000.
When tenanted, the property will generate you £700 per calendar month in rent.
At the same time, you’re offered two properties in the seaside town of Scarborough, just 42 miles away and is where my company The Insight Group is based.
Scarborough is growing just like York, but because it’s not a city the cost per property is lower.
You’re offered two Scarborough properties valued at £75,000 each. Because it’s not a city you will get less rent at £600 pcm, but that is per property — and for the same investment as one property in York, you can get two in Scarborough.
So you either choose to get £700 pcm from a property in York, or spend the same money but in Scarborough on two properties, generating a total of £1,200 pcm.
Logically and financially speaking, Scarborough is the place to invest! Just because it’s not in an area you know, or far away from where you live, that’s no reason not to buy in it.
Rule #3 is named capital, as it focusses on the capital growth of a property.
The rule states that an investment property you’re considering must be near to a secondary school, near great road & rail networks AND be in a town or city.
Why does this rule exist? Because being near a secondary school, road & rail networks as well as being in a town or city — all relate to the capital growth of the property.
Properties that meet these criteria experience faster growth. On average in the last century house prices have gone up 7% year on year. But there will always be areas that grow slower than others.
Property in secluded or rural areas, far away from road & rail networks will grow slower. They’ll still grow, but why invest in property you know will grow slower when you can invest in property in faster growing areas?
Rule #4 is referred to as cashflow because it relates to — guess what, cashflow!
The rule states that a property must have a positive cashflow — that means after you’ve received your rent and paid all of your costs, you have some money left over.
Why does this rule exist? Because profit from rent is an essential part of the investing strategy with property. You’ll generate a return as house prices rise, but you also want to make some return from rent too.
But how do you know if a property will generate you a positive cashflow?
Whilst you won’t know exact figures, you can still roughly work out both your costs as well as the rent you’ll receive monthly, providing the property is tenanted (follow rule #1 to ensure that!).
Rule #5 is check which refers to the checks you need to do.
The rule states that a property MUST be clearly tenantable, which means it has 10 or more interested parties who want to become a tenant.
This rule exists because even if a property meets all of the other rules stated, there’s no guarantee it will be easily tenanted. The costs of having a vacant property quickly mount up and there’s even a danger that nobody will ever tenant it — this is unlikely as there is a house shortage.
So how do you check it will be easily tenanted, before buying the property?
You’re able to run a test at the point of accepting a property, as you’re still able to pull out. To test the tenancy potential, start advertising the property as available to rent. If you receive 15–20 notifications of interest, then the property should be easy to tenant. On average, 50% of interested parties will be applicable to tenant your property. So 15–20 assures 7–10.
Of those 7–10, you have plenty to consider, allowing you to only ever choose the best tenant for you.
Rule #6 is named contingency, which surprise refers to having a contingency in place.
This final rule states that every investor must always have and keep 4.5% of their investment amount as a contingency. So if you’re investing £100,000 you need an additional £4,500 in reserve.
Why does this rule exist?
As I’ve already said, property is the most safe and secure investment you can make. But there will always been things out of our control that impact our investments. Understanding that fact, and being prepared by having a financial contingency or buffer in place is essential — and is something I always ensure my clients have in place before investing a penny. Here’s just a few uncontrollable things that could happen which a contingency would mitigate.
-House prices fall — Steady increases in house prices is why property is an amazing investment. And house prices have been steadily increasing year on year for the last century. BUT, if the economy falters and house prices fall by even a small percentage, you’ll immediately lose money on your property. Even though the decline should be short term and house prices should resume after a few years, you still need to make up for that loss.
-There’s a flood that hits the area that your property is in and there’s a lot of damage you need to pay for. Again, this shouldn’t be very likely as one of the rules you need to have in place is ensuring a property you invest in isn’t in potential flood plains. But if it happens, you have a contingency in place and are not caught off guard.
-Damage to your property can be caused by other things, such as criminal damage. Again, getting a contingency in place covers you and the tenant in the event that happens.
Stick to them
So they are the six key rules that has been proven to always lead to the purchase of the best investment property — providing they’re stuck to!
There can be no flexibility, all six of the rules MUST be followed rigorously ever single time you’re looking to add to your portfolio. Fail to do so, and you put your investment at risk.
Author: Aran Curry