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Investing in Property

Investment is about saving and preserving capital by carefully analysing the risks before you commit your resources to any investment project. Speculation, on the other hand, is akin to gambling - betting on the outcome of an unknown and unknowable event with little or no margin of safety.

Property investment is a unique form of investment as you can safely use borrowed funds to make your own capital work for you - that's because the property has inherent value which underwrites the risk to the lender - the property itself gives you the collateral needed to borrow money. Your tenants pay your mortgage and purchase your properties for you!

This sets property aside from other investments such as stocks and shares - these would be far too risky an investment for the amateur to borrow the funds against, even if she could secure the borrowing. However, property is illiquid compared to shares, meaning you cannot always sell quickly and realise your cash.

Property investment is a great way to make your capital grow over time and provide you with additional income at the same time: as you build your property portfolio it can give you a lifestyle which may be unattainable otherwise, and if you do it sensibly, it's relatively risk free.

When we say relatively risk free, we mean just that - RELATIVELY. There's no such thing as a risk free investment. The more highly geared you are (the proportion of borrowed money to your own capital - Loan to Value - LTV) the higher the risk of losing your beloved property if things go wrong and you can't keep up your payments.

The other major area of risk with investment property is tenant risk: getting, keeping and managing good tenants - income cash flow - is absolutely paramount. Having two to three months of the year without rental income, due to a void period or a bad tenant, could spell disaster.

On the other hand, if you take sensible risks you will build-in the margin of safety you need to ensure you survive the early years in property investment, until your equity stake or property portfolio is such that you have very little risk at all:

  • Don't overstretch yourself - use some of your savings to keep the Loan to Value (LTV) ratio within sensible limits - a 95% LTV would be great if you can get it, but can you still pay the mortgage if your tenant fails to pay rent or interest rates go through the roof?
  • Don't overpay for your property - it's easy to get carried away when buying and in your enthusiasm let your heart rule your head. Set yourself a maximum price you can afford to pay based on sensible cash flow calculations and research the local property market for rental demand very thoroughly.
  • Buy the right property in the right location - making sure there's good rental demand and your property maximises rental income - generally smaller properties have higher rental yields.
  • Buying a poor condition property in a good area is far better than the other way around - your research should tell you if the area improving or declining?
  • New Builds and Off Plan investments, even if you can get genuine discounts from builders, represent higher risks no matter what any advisor tells you. Many areas have too many coming on the market all at once. Letting one terraced house in a street is a far different matter than letting a new build apartment when there's 100 others to-let in the block.
  • Consider self-management - as opposed to using an agent. With practice you can do it relatively easily with little time involvement and you can save up to 15% of your rental income, which an agent would charge you. But you need to live near your properties. The LandlordZONE web site will give you all you need to know about managing rental property.

Your Attitude to Risk

Generally, younger people can take bigger risks than say those approaching retirement. Capital loss for younger ones can be recovered, but if you lose large chucks of capital late in life you could be facing retirement in penury. But we are all different and circumstances differ, so some older ones with spare resources, may be willing to take big risks.

Of course, the higher the risk you are willing to take, the bigger the potential gain (or loss). You need to decide if you can sleep nights with high, moderate or low risk.

(1) A Low Risk Strategy - for the cautious investor:

Long-term, property appreciates over time so your risks are relatively low when you invest in property if you take a 10-year view. However, in the short-term property prices can go down as well as up, so can interest rates, and tenants can be fickle - you may have a void period, or a tenant who does not pay you rent.

Make absolutely sure there's good tenant demand in the area yin which you buy. Do your research thoroughly and compare rents and prices. Have the property surveyed or at least checked over by a builder to make sure there are no nasty expensive surprises in store.

Don't overpay for your investment and don't gear-up your financing too highly (LTV) unless you have cash reserves to underpin the loan. Pay as high a deposit as you can afford and obtain a fixed-rate repayment mortgages to minimise your risk in the short-term. Take at least a 10-year view on your investment.

Try to ensure that your rental income covers all outgoing expenses and mortgage payments by a good margin, or you will need to have financial resources to see you through.

If you use agents make sure they are trustworthy, preferably members of one of the main professional associations and that they screen tenant applicants very carefully. If you manage the tenants yourself, carry out very thorough tenant screening. Successful landlord and investors have perfected the art of selecting tenants so they avoid trouble.

Consider starting off in a small way, gaining experience as you go. For example, if you own a large property you might let off rooms to lodgers. Think about small terraced properties you can pick up for reasonable sums, or student houses which you might have more management involvement but returns are higher and tenant demand is good.

It's always a good idea to reduce risks by buying several small properties as opposed to one big one. The more tenants you have the less likely you are to fall foul of cash-flow problems if your one tenant fails you.

(2) Medium to Moderate Risk Strategy - for the middle of the road investor

Here you might be a little more adventurous, expanding into larger properties, buying off-plan or new-build and perhaps even the odd commercial property.

If you buy off-plan, make sure any discounts are genuine, make sure the contracts are in your favour, not all for the developer and that you are not totally relying on selling on or letting within a very tight timescale.

Commercial property demands more money and more experience in the property business because the legal processes are more involved and more expensive. This is when you need good advisors around you.

Your Loan to Value ratio (gearing) is likely to be higher but don't go too high. If there is a downturn or interest rates go high you have got to be able to make your finance payments one way of another. Try to obtain fixed rate mortgages, though you may go for interest only, at least in the short-term.

(3) High Risk Strategy - for the Speculative investor:

It really is not wise to go for a strategy that is too high risk. Plan to get rich slowly, not going too fast. There are too many examples of investors, even recently when property investment has been so successful generally, getting their figures burnt.

Granted, some have been very adventurous and it's paid off handsomely, but the high growth period in the property markets seems to be over for the time being, unless you are prepared to look at some of the foreign markets, which brings in another level of risk.

Speculative auction buys with refurbishment and development schemes, larger residential and or commercial properties represent a more risky strategy. However, if you do your research and follow some of the other advice here, you should be able to cut your risk and exposure to one of a calculated nature.

Property Investment Tips:

  • Seek advice from and use the services of truly independent, experienced and recommended professionals when you need it. Use your own surveyor, agent, accountant, solicitor, insurance and financial advisor.
  • If you deal with a property investment company, pick one with a reputation and track record of sound advice and good long-term investment success - ask to speak to satisfied clients and do some checking.
  • Be very wary about slick salesmen peddling investment seminars, expensive property investment club memberships, no money down deals, gifted deposits, cash backs and claims of discounted properties etc.
  • Check comparable property values in the area, occupancy rates and rental demand and avoid developments where there are too many properties to-let or for sales to sustain value.
  • If you are buying off-plan from developers get some good advice about contracts.
  • If you buy abroad do all of the above but more so, use advisors who speak the language, know the local markets and laws and have good reputations.

The Average Landlord / Buy to Let Investor:

Research quoted by the MonetFacts.co.uk website and carried out by Paragon Mortgages reveals the typical make-up of a buy-to-let landlord:

The average or typical UK landlord in 2007 will:

  • Have been involved in buy-to-let for around ten years
  • Own an average portfolio of 10.6 properties (a quarter of them unencumbered) worth 1.69m
  • Have mortgage borrowings with 2.4 different lenders
  • Have an average loan to value of only 50%
  • Be reliant on property investment as the primary source of income in just over a quarter of cases
  • Receive rental income sufficient to cover mortgage costs by a ratio of 130%
  • Be on average aged 49
  • Prefer property over any other form of investment
  • Be of socio-economic group B
  • Fund deposits for property from savings
  • Have an average loan-to-value ratio of 50%


Landlords will typically invest for a combination of capital growth and rental income. They are not short-term speculators wanting to sell on quickly to make a quick buck! The serious landlord takes a professional approach, learning about letting and gaining experience as he or she goes along. The average landlord has another main career besides their property investment activity.

How to Profit from Off-Plan Property
How to Profit from Off-Plan Property by Alyssa and David Savage
This brand new property investment guide tells you everything you need to know about investing in off-plan and new-build property.
It's written by two industry insiders who have been involved in over 100 million of off-plan property purchases in the last four years.
In this unique book these two experts share all their secrets and provide a fascinating insight into how you can make big money from off-plan property... and avoid all the pitfalls along the way.
This book is therefore essential reading for anyone interested in off-plan property or property investment in general.
More Information / Buy Now

Information here is general only & believed to be correct, though we cannot guarantee it, nor do we accept any liability if you act or fail to act on this information. Always seek professional advice before making decisions. Investments can go down in value as well as up over  time.