PROPERTY INVESTMENT PITFALLS
For property investors, particularly first time property investors there a huge number of potential investment pitfalls that might befall the unwary investor. Property Hawk has therefore highlighted some of the most common pitfalls for property investors to avoid. This along with the property investor’s checklist will hopefully help guide new and existing landlords in making what are often very complicated and difficult investment decisions:
1. One classic investment pitfall is for a fledgling investor to buy a property because it appears to be a bargain. Having acquired the property, they then start thinking about who they could rent it to only then to discover that the type of tenant they were after doesn’t want their investment property because it is in the wrong area or is the wrong type of property. This property may be difficult if not impossible to let.
2. Landlords need to watch out for excessive service charges on apartments and ensure that they factor these into their calculation of their potential investment returns Service charges particularly on new apartments can be significant and frequently account for 15%+ of the gross rent.
3. New landlords who are investing for the first time should remember that they are buying an investment not a home! Landlords should avoid over personalising any fit out of the interior of the property as this is likely to restrict its appeal within the lettings market. Also if a landlord is refurbishing the property prior to renting it out, don’t overspend; particularly on bathrooms or kitchens. A shrewd landlord will never spend more than a couple of grand on fitting out a bathroom or kitchen. Draw up a tight budget and stick to it!
4. When selecting a potential investment, landlords should avoid being dazzled by expensive fittings. Even the nicest designer taps can be bought for a couple of hundred pounds, they’re not worth an extra £10k on the properties asking price. Remember one of the most important but often least considered factors about an investment property is the space a landlord gets for their money. Avoid going for an investment property just because of the design. Landlords should make sure that they work out the amount of space offered by the property and how this compares with alternatives before they invest.
5. Landlords should watch out for areas in the flood zone and check out the environment agencies web site to see if the property is at a high risk of flooding before considering buying. Inclusion in the flood zone is not a reason not to invest in a property. However a landlord should factor this consideration into their own investment appraisal. With global warming there is a chance that investment properties in areas susceptible to flooding will be more difficult and more expensive to insure.
6. Landlords should avoid a ‘money pit’ – in other words they should avoid over paying for a refurbishment project, particularly if it’s their first. Remember that property developments rarely come in on budget and on schedule. This is particularly likely if it is a property investor’s first development. Therefore, landlords need to allow a buffer for cost overruns. Professional property developers refer to this as a contingency. Landlords managing a property refurbishment or development should expect the odd delay in between phases of work and then factor these into their development schedule.
7. Avoid buying a property because you want to invest. Landlords should buy because it’s a good investment opportunity. They should do their sums and make sure that the figures ‘stack up’ by doing a full investment appraisal.
8. Ex-council houses are not always the bargain they may seem. Undoubtedly they can be cheap and make good family accommodation but make sure you can get a loan for them first . Landlords that buy these properties in the expectation that they will be able to rent them to tenants receiving benefits should understand that housing benefit is no longer paid directly to the landlord. The new system of the Local Housing Allowance pays the benefit to tenants and this could increase the chances of a landlord not receiving their rent.
9. Landlords should beware of ubiquity. They should avoid investing in a large residential block if there are a high proportion of units already or are likely to be owned by investors. A residential investor will normally be able to tell this by the number of To Let boards and the profusion of letting adverts in the local property press. The reason for this is that where and when over supply exists a landlord will be forced to compete on price. This has already occurred in many of the large provincial city centre developments. A landlord needs to ask themselves where there are already tens if not hundreds of rental units in the same residential block, why would a tenant choose their property. A landlord should be convinced that they can win the ‘rental game’ if the competition gets tough.
10. Investing in property outside a landlords local area in a perceived ‘property hotspot’ can seem like an attractive proposition. However, landlords will need to ensure that once bought that they have the time and capacity to be able to continue to manage these investment properties. If things go wrong they me be required to visit the property personally to sort out the problems which could be very time consuming!
11. Too many landlords have been suckered into buying ‘discounted properties’. If a landlord is contemplating buying a property with a discount ensure that it is a genuine discount to the market price and that the developer has not inflated the price first and then knocked some money off.
12. Avoid putting all your eggs in one basket. Landlords should avoid buying too many units on one development. This is because if the development performs badly then this will have a significant effect on a landlord’s investment returns. Instead they should look to spread their investments amongst different types of property e.g. flats, houses and in different locations.
13. Landlords should avoid over gearing their portfolio. Many landlords in recent years have looked to borrow the absolute maximum to fund their investment portfolio in the belief that residential property will go up and up in value. They have used interest only buy-to-let loans to finance their portfolio. This leaves a landlord exposed should property values fall or interest rates rise. Instead property investors should avoid over borrowing and look at a mix of repayment and interest only mortgages which will ensure that in the long-term the equity in their property portfolio rises in a sustainable way even during years when property values are not growing.
14. Before employing a letting agent to manage their investment properties a landlord should ensure that they have obtained an acceptable contract with the terms of engagement. Many landlords will employ a letting agent either on a let only, or sometimes landlords prefer to opt for a full management service where the letting agent looks after the day to day running of the property investment. The mistake that many landlords make is that they do not insist on a contract. The problem for landlords is that there aren’t standard terms of engagement from letting agents or agreed fee structure. This means that what might be covered by one letting agent another letting agent will charge extra for the same service. One way that letting agents can charge landlords additional & unnecessary fees is by renewing an Assured Shorthold Tenancy every 6 months and charging a landlord for each tenancy although the agreement is with the existing tenant. Firstly, there is no need because the tenancy if left would just become a periodic tenancy and secondly if the landlord is having their property managed they should negotiate to have this service included as part of the overall management contract.
15. One of the biggest investment pitfalls is a landlord who fails to vet their tenant properly. Having found a tenant the landlord assumes that being a ‘good judge of character’ they can tell a good tenant from bad. They are then susceptible to becoming victim to a professional scammer who will be costly and stressful to remove.
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