property investing golden rules

The 5 Golden Rules Of Property Investing

In this article about successful property investing, I am going to share with you the 5 Golden Rules for property investment that will make you a more successful investor. When I wrote Property Magic I wanted to come up with 5 simple rules and guidelines that people could use to minimise the risk and maximise the return. So let me explain each of these rules for property investing in detail for you.

1. Always Buy From Motivated Sellers

The first Golden Rule for Property investing is that you want to buy property from what we call motivated sellers. A motivated seller is someone who really needs to sell their property. They've got some problem and because of that they're more flexible on the price and/or the terms of the sale. This is because for these people it's not about getting the most amount of money, which is what most sellers want by the way, it's about getting speed and certainty that this transaction is going to happen.

Most people when they're looking to sell a property don't start out as motivated sellers. They want to get the most they possibly can from the sale of their property, but as time goes on people become more motivated. They have deadlines they're trying to hit. Maybe they need to emigrate or they're moving for a job. They could be growing the family, or their family is shrinking. Maybe they've got financial difficulties. They see selling this property as part of the solution to that problem.

Given that one in three sales in the UK fall through, even if someone gets a sale agreed there's a pretty good chance it might well fall through. Selling a property is not a fun or enjoyable experience. If a sale falls through it's really quite stressful.

If you can find these motivated sellers and then come up with an ethical win-win solution, they get what they want, and you can get a much better price or flexibility on the terms of the sale. It's important to understand here that we're not looking to take advantage of people. We want to find the ethical win-win that works for you and works for them. It is a numbers game. You need to learn how to find these motivated sellers and when you do, you're going to be far more successful in your investing.

“We’re not looking to take advantage of people. We want to find the ethical win-win that works for you and works for them.”
 

2. Only Ever Buy Property in an Area of Strong Demand

The second of Golden Rules for Property investing is we only ever buy property in an area of strong rental demand. Sometimes people think they should buy a really cheap property because they think it meets the first Golden Rule for Property Investing. But if no one is going to want to rent that property, then there's no point buying it. So, it's got to be in an area of strong rental demand.

You can check this out by going online, you can see what the rental demand is in a particular area. You can also speak to local letting agents and ask them what they think the demand is like in the area. So it's about doing your research and your due diligence to make sure this is a good strong rental demand area.

Take into account what's happening in the area. Are they increasing the number of jobs? Are they extending universities? Are they building new hospitals? Are they creating business parks that will bring people into the area who want to work there and probably want to live in the area as well?

If you can buy in an area with a growing population you're going to have much stronger rental demand. You're going to also see better capital growth over the long-term.

3. Only Ever Buy Property That Gives You Positive Cash Flow

Out of all of the Golden Rules for Property Investing, I think this is the most important one. What this means is, at the end of the month when you get the rent and take all the other costs away, there must be some profit left over for you.

Possible Costs:

  • Mainly your mortgage
  • The insurance you need
  • The management fees
  • Leasehold fees
  • Maintenance
  • All the bills if it is a HMO or Serviced Accommodation.

If there's no cash flow, no profit, then don't buy the property. That's not going be an asset, it could be a liability for the future. An asset is something that puts money into your pocket, a liability is something that takes money out of your pocket. Now with a rental property obviously you have a mortgage, but the whole point is you're putting tenants in for more than just covering the costs. You want them to give you some of that profit every single month.

You do need to pay tax on the profit, you do need to declare it to the tax man but it's in the same way if you have a job and earn an income, you pay tax. If you have another business that makes money, you pay tax on your profit. So it's no different to anything else. The rules around taxation did change in April 2017, with the introduction of Section 24, but I suggest you speak to your accountant to understand how that might impact you.

A lot of people prior to that used to buy property in their own name, now many people buy within a company structure because it's more tax advantageous. But really you should get independent advice from a property tax specialist. They can look at your personal circumstance and give you the best advice and guidance based on your situation.

It's always dangerous to try and get advice on Facebook groups. People might give you advice on what they've done but that doesn't mean it's going to be relevant and correct to you. This is why it is really important you get the right advice.

 

4. Buy Property for the Long Term

The fourth Golden Rule for Property Investing is we buy property for the long-term. Now you can make money for the short-term in property. You can buy a property, renovate it, and sell it straight on. It's called flipping property and it's a great, very profitable strategy in the right market conditions.

Ideally you want a rising market to be successfully flipping property. You don't want to be flipping property if it's a stagnant or a falling market because there's a good chance that you buy it, do the work, and it's worth less than when you first bought it. So that's not a profitable strategy. However, if you're looking to hold property for the long-term that's generally what I do.

I have sold some property in the past but I like to hold for the long-term. This is because in the UK we live on this island with a limited supply of accommodation and an increasing population. This means over the long-term property prices go up. So, holding property for the long-term, benefiting from the monthly cash flow and the long-term appreciation - that's how you create real wealth through property. Obviously you could then pass that wealth on to your family, to their kids, and their kids, your grandkids, by buying property and structuring it in the correct way.

“If there’s no cash flow, no profit, then don’t buy the property. That’s not going be an asset, it could be a liability for the future.”

5. Have A Cash Buffer In Place

And finally, Golden Rule for Property Investing Number Five is very important and it's about having a cash buffer. This is some money put aside. It could be on a credit card, it could be in a bank, it could be someone else's money you've agreed to borrow in advance, just to make sure you can fix any problems that aren't covered by insurance.

Now most of the things in property can be insured against, you know if your tenant runs off and doesn't pay the rent you can insure against that. If the tenant causes damages, you can insure against that. However, sometimes things aren't covered by insurance and it means you've got to spend several thousand pounds on your property to fix it and make it rentable again.

If you don't have that money you can't fix it, you can't rent it, suddenly that's a liability costing you money every single month. This is why need to have some money put aside which you can use to make sure that even if there's a problem you can fix the property. You can get it rented out nice and quickly to make sure it's bringing in money.



Summary

If you follow these 5 Golden Rules for Property investing i.e.

Buy from motivated sellers; Buy in an area of strong rental demand; Buy for positive cash-flow; Buy for the long-term; Always have a cash buffer.

You will minimise the risk of property investing and maximise your returns.

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