Buying a house is one of the most expensive and stressful purchases any of us will ever make. If studies are to be believed then buying a house outranks bankruptcy and divorce in terms of stress levels.
Property investors, however, need to repeat this process time and again in order to build their portfolio. Fortunately, there are a number of ways to reduce the risk of such a sizable investment, and consequently to make the whole process more enjoyable and, we hope, more profitable too…
Carry Out Thorough Research
Knowledge, as they say, is power. Never is this more accurate than when considering investing in property. Consider the huge array of factors that can impact the overall profitability of a purchase; from the costs involved to the amount of work needed, from the type of tenants you rent to through to rental “floor” in any specific area.
In short, every property investment is different due to variations in property type, size and layout, not to mention cost and local market conditions. In property investment one size most certainly does not fit all.
Research is therefore your greatest asset. The more knowledge you can glean about not just a specific property but also the area in general the more likely you are to select a profitable investment. So take your time, figure out what is working for other investors in the area and make your decision based on a deep understanding of market conditions rather than just “gut instinct”.
Do Your Maths
While property investing can be an enjoyable and rewarding way to spend your time, if we’re honest the main motivator is profit. A deal needs to produce positive cashflow if it is to be worth doing.
For this reason it’s critical that you carry out a deep study of the finances surrounding any potential investment. Figure out the cost of bringing the property up to rental standard. Compare it with other local properties to get an idea of the likely rental income. Factor in taxes, ongoing maintenance and potential vacancy rates. Investigate financing options to see what rates are available to you.
From here you can work backwards to decide what the breakeven point is for each property. Buy it for less, and you should find a respectable profit coming in each month. In contrast, if it is priced too highly then it may be better to pass up this opportunity for one that stacks up financially.
Don’t Be Bowled Over by Salesmanship
It’s all too easy to get carried away in the excitement of buying an investment property, especially if you are new to the market. Slick salesmen may fill your mind with possibilities, and images of riches, while palming off a dud to an unsuspecting investor.
By all means listen to what the salesperson has to say, but treat everything with a pinch of salt. Have the confidence to ask for further information, or evidence of any claims made. The goal should be to make an educated,
dispassionate decision based on facts and evidence, rather than on the say-so of a salesperson.
Share the Risk
Historically property investors have bought entire properties; a house, an apartment, a shop. Thanks to the wonders of the Internet, however, it’s easier than ever before to invest with others. Rather than shouldering the entire risk yourself, instead you take a far smaller part. Numerous crowd-funding sites such as Crowd2Let and Crowdahouse let you invest small sums of money into properties, thus reducing your financial risk of loss.
Another way to reduce your risk when investing in property is simply to spend less than you otherwise might. Instead of taking on the responsibility for an expensive property, instead choose lower-cost options like choosing apartments rather than houses, or investing in a lower-cost area. A small number of property investment companies like this one focus on these low-cost properties, so can be an excellent place to start your search.
Hedge Your Bets
Just as investing smaller sums of money can help to reduce your risk, so too can investing in a number of properties. The law of averages says that despite your best efforts, sooner or later you’re going to invest in a dud. On the other hand, some of your investments are likely to be run-away winners.
Investing in more properties spreads this risk, offering a more diversified portfolio. There are a number of ways to accomplish this, either through buying a larger number of lower-cost properties, or by investing with one of the peer-to-peer networks like Property Moose who will spread your investment across multiple properties.
Gather a Team of Professionals
Lastly, don’t overlook the benefits of building a network of trusted professionals. From accountants to letting agents to surveyors, these specialists are often experts in their fields. They’ll have deep experience in the industry and can offer perspectives that you might not have noticed. They’ll help you find the right funding, they’ll alert you to any concerns they may have, and will vet tenants before a rental agreement is signed.
While such professionals are not cheap, they can more than pay their way through qualified, professional advice and risk reduction during the property investment process.