Over the years, residential real estate has generally been considered a low-risk investment, making it the perfect option for people starting in the industry. Yet, this doesn’t mean that it is right for everyone. You must seriously consider the implications of such a significant investment, as well as knowing your costs through and through. With proper planning, this type of investment can provide a great return on investment, so take your time to look at whether this is right for you and whether the numbers add up!
Significant Upfront Investments
No matter the property’s location, for most people, investing in real estate is a substantial investment that requires absolute financial stability. Without it, you are likely to find yourself in a difficult position at some point.
Aside from the obvious costs of purchase, you will face other issues along the way. You will be lucky to find a property that is fit for your purpose as soon as you buy it, so extensive renovation costs must be taken into account.
Whatever your projected figure is for any renovations, add 10%. Whilst you are likely to have had the property surveyed before purchase to identify any damage, renovations always come with surprises. The 10% contingency will act as a safety net to ensure that any progress isn’t halted during buying, renovating, and selling or renting out the property. Each day without a tenant or buyer is money lost, so having that extra money is essential.
Make sure that you consider all the different purchase options before going through a traditional estate agent. A good way to save money is to use residential property auctions, as the fees involved will be far less, and you are also likely to purchase a property below market price. If you decide to go in this direction, have the property surveyed prior to the auction to prevent any unwanted surprises down the line.
Going into the auction with a maximum budget in mind, as it is common for people to get caught up in the excitement of the auction and spend far more than the property is actually worth.
Ongoing Costs
Again, whether you sell or rent out the property, you will face ongoing costs, meaning you must have other income sources. Even if you sell the property, you will need to pay estate agents and solicitors fees for the sale to go through, so these must be taken into account before purchasing.
When renting out the property, as a landlord, you are responsible for maintaining the property, from smaller things like a dripping tap to expensive issues such as a broken boiler. This is why this investment must be an additional stream of income rather than your sole income.
Limited Borrowing Allowance
As a result of the pandemic, the current market is extremely competitive. Mortgage lenders in the UK simply aren’t considering 5% or 10% mortgages as they have been over the last few years. Instead, 15% is the minimum, which you need to be prepared for. Although aiming for a 15% deposit has issues, you will be restricted in the offers you are made, and you are also likely to encounter extremely high borrowing rates.
To be in the strongest position possible, having at least 20% or more as an upfront payment will help you to get a better deal on your mortgage and therefore increase your return on investment. If you are a cash buyer, this won’t be a concern, and residential real estate should certainly be a consideration for investment.
Deciding on the Right Tenant
Before you can jump into investing, you need to decide which kind of tenant you will be targeting. Could it be a student house that offers fantastic returns but requires more maintenance and comes with a higher tenant turnover? Or perhaps you are interested in a city center apartment targeted at professionals with significant amounts of disposable income?
Families also make great tenants, so it would be worth looking at suburban areas with good school districts. This decision will mainly be determined by your budget and how much you want to be involved with the property. Having a clear idea of who you are targeting and catering to their needs will increase your chance of making a good profit.
Understanding the Market
Knowing exactly where the market is at after a thorough analysis will prevent you from pricing your property too high or low, meaning you could either fail to find a buyer or tenant, or you will miss out on a good return on investment.
Of course, you can reduce the property price, yet the more time it is on the market, the less appealing it will become to people. Speaking to industry experts and getting the price right the first time will put you in a strong position.
Expected Return on Investment
Without a realistic aim for your return on investment, it won’t be easy to know whether it was worth investing in the first place. When calculating your ROI, it is important to base your figures on potentially worst-case scenario values. So, if the investment does well, you might predict you will profit £25,000. However, if the market drops and you’re forced to reduce the cost, perhaps you only profit £20,000. So, you’d always work off the lowest figures to create realistic projections.
Final Thoughts
Residential real estate can be a fantastic investment to secure a substantial secondary income, but it isn’t right for anyone. Make sure to consider these things in depth before jumping into an investment for it to be a success. The main thing to remember is you need to be in a financially secure position with a significant amount of savings to remedy any issues you may encounter along the way. If you’re looking for a higher risk investment and you have enough money, looking into commercial property might be better suited to you.
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