How To Tell if a UK Property is a Good Investment?
hen the average person wants to start investing, the decision is usually paired with lots of enthusiasm and dreams of becoming wealthy. These expectations quickly diminish when the person is faced with the large array of options he has regarding where to put his money – stocks, bonds, investment funds, property, commodities, bank deposits, and many, many more. Comparing these domains is a hard task in itself, which is why we will investigate one of them today, namely the real estate market: why invest in it, what returns you can expect, and how to find the perfect properties.
First of all, there is a list of reasons why investing in real estate is preferred over investing in stocks, bonds or futures. The main reasons are the following: real estate properties appreciate over time, represent an inflation-free investment option and usually present a very good return on investment, between 5% and 8% annually. They are also a prime example of using leverage in the advantage of the buyer since you are only required to put down a down payment in order to secure a property – not the entire lump sum. These are some of the reasons why investing in real estate is a good idea, but is getting started really that easy?
“The advantages of the real estate market are clear and have been clear for quite some time now since we see many people from all around the world treat the real estate market as their investment option of choice.” Property Development Loan Company UKBridgingLoans,com – With a Great Bridging Loan Guide
The idea behind investing in real estate properties is fundamentally very simple: Buy a property at a price which you consider either fairly priced or below market value (an undervalued property), check if it needs repairs or improvements to bring it to top condition, and then sell it for a profit or rent it out. Easy, isn’t it? While it does look so on paper, finding an undervalued property isn’t so easy.
Here are some ideas which we consider key in finding undervalued properties:
- Analyse its price relative to household income and gross annual rents. This is one of the first things you should do. Here are the numbers: across the UK, houses sell for approximately 21 times their annual rent. This means that if the rent is £1000 per month, a home would sell for around £250,000. If you want to borrow the same sum using a mortgage with a 3% interest rate (quite good), your monthly payment would be £1051. Remember, these £51 you would lose a month are just typical market conditions, not housing bubbles.
- The next step would be to compare housing prices with household income. Here, we can see that in London, for example, the median household income is £56,000, while the average home price is £586,500. Places like Houston are at the other end of the spectrum, where the average home price is just three times the average yearly household income. Combine these numbers to better understand investment opportunities, along with where and how to invest in order to not lose money.
- Analyse growth opportunities in the area – both economic and social. This idea is fairly straightforward – find a property which is undervalued NOW, but will grow in value over the next few years. Things like new infrastructure, up-and-coming areas and new office buildings and places to work are all things which increase home prices and provide lots of new rental opportunities. Apart from the economic factors (jobs available, city GDP, etc.), weigh in social factors as well – the number of cultural events, immigration rate into the state, etc. – to gauge how many people want to live in the area.
- Take your time – find motivated sellers and make lots of offers. After crunching up the numbers, you will get a good feeling as to what a home is worth in a certain area or city. After that, you need to go out there and actually find properties worth buying. Ideally, you need to find motivated sellers who are likely to accept offers below the market value of their property or look for small building complexes that usually hold 2-4 apartments, since these are easy to maintain and rent away. Make lots of offers and stay close to the market – so you can carefully pick the best investment opportunity.
- Look for properties which you can both sell or rent out. Keep this in mind when considering how undervalued a property really is. For example, a house in the outskirts of big cities are a prime candidate for selling, not so much for renting out, while a large apartment in the city centre can be hard to sell since families tend to move away. Target properties which represent a good combination of both – easy to rent out and easy to cash in on if necessary.
If you follow the above ideas, it will be easy to find undervalued properties which you can invest in. Remember that investing in real estate is a numbers game above all, so consider all the implications when deciding to enter: taxation, how long your money will be blocked, what’s your expected ROI, etc. While real estate investing is a game with more losers and winners, the benefits you can get from good investments are undoubtedly worth it.