“You got to know when to hold 'em, know when to fold 'em, know when to walk away and know when to run”. Kenny Rogers could well have been referring to the wisdom required for investing in today’s property market when he wrote those lyrics. However, property investment is a safer bet if you gain a little know-how.
Cash is still king these days and property can be a lucrative investment if you make some wise choices. If you’ve decided to get in to property investment but aren’t sure on the best option for you then there are two scenarios to consider.
Let’s say you have cash funds of £100,000. You can either opt for a long term buy-to-let property investment that you can rent out to acquire a steady income and long term investment or you can try and acquire a property at below market value (that you may need to spruce up) and flip back on the market at a higher price to make an instant profit.
What you do need to consider when choosing what option suits you best is your main objective. If you choose to flip a property your objective is to find a buyer willing to pay the asking price. If you choose to let out the property your objective is to find a tenant willing to pay the rental price.
Option 1 – Buy to let
Ideally you’re looking to achieve an annual yield of over 6% gross. When buying rental property it is important to know how to calculate the returns your investment will make.
A simple rental yield calculation
Let’s say that you purchase a property for £100,000 and you receive rental income of £500 per month from your tenant. The yield calculation would be as follows:
£500 x 12 = £6000 per annum rental income.
(6,000 ÷ 100,000) x 100 = 6% Yield
So simply put, Yield is the return on your investment expressed as a percentage of what you put in! (i.e. if you invest £100,000 and you receive £6000 in profit/income per year, so £6000 is 6% of £100,000.)
The above example has been put very simply without factoring in any property maintenance costs/insurance and doesn’t include any mortgage payments.
Alternatively, you could spread your investment across several properties to achieve a similar or higher rental income compared to using the cash to purchase one rental property. This means you will own a larger amount of assets and get greater capital gains if the house price was to rise in the future.
Option 2 – Buy to sell
Buying a property that you intend to flip back on the market can make a quick profit if you play your cards right.
A simple purchase and cost evaluation
Purchase price £85,000 plus £1,000 legal fees and survey = £86,000
Investment to develop property £10,000
Miscellaneous costs (insurance, utilities etc.)£2,000
Marketing fees to sell property £2,000
Total investment over 6 month development period = £100,000
Selling price achieved for property £130,000
The above example has been put very simply without factoring in any mortgage payments if a loan is used to purchase property.
A simple purchase and cost evaluation with mortgage payments
Purchase price £100,000
Deposit £20,000 plus investment to develop property £10,000 = £30,000
Legal fees, survey, marketing fees and miscellaneous costs (insurance, utilities etc.) £3,000
Mortgage repayments over 6 months (interest only 5.5% on £80,000) = £440 x 6 = £2,610
Total investment over 6 month development period = £35,643
Selling price achieved for property £145,000 less mortgage of £80,000 and investment of £35,643
Using the above example, if you developed two properties over the 6 month period your profit would be £58,714.