9 Tips To Follow Before Entering In The Field Of Real Estate As An Investor

Follow your dreams – especially when they include becoming an investor in the property market!  However, before doing so, there are many aspects to take into consideration, especially when it involves a large amount of finance for such investment. Experts in the industry, like estate agents in UK, can explain such details to prospective investors.

Here are a few tips for those investors about to step into the field of real estate:

Budget:  It is important to calculate figures and arrive at a budget.   

  • Capital:  How much capital is available?  To pay the initial deposit, enough finance must be available.  Of course, in these times, there are online investment platforms and REITs (Real Estate Investment Trusts) which allow the investor to join others in investing in larger commercial or residential properties.  This real estate crowdfunding requires less capital than an outright purchase.  It depends on what you would like and what you can afford.  
  • Liquidity:  Easy access to your money is an asset, so this should be looked into thoroughly.

Tax rules:  You should be well aware of the tax liabilities.  Your estate agent can clarify these for you.  They can cover stamp duty land tax, any surcharges applicable, whether any deductions are available, etc.  Though tax relief has been withdrawn from mortgage interest payments, “financing costs incurred by a landlord will be given as a basic rate tax reduction”.  These need to be clarified.  Also capital gains tax for when the property is sold.

Setting up a limited company:   If you plan on becoming a professional investor, savings on tax payments could be implemented by setting up a limited company.  However, this is a big step and needs to be thoughtfully considered with help from an expert before taking the leap.  If the property is company-owned, all costs can be deducted as business expenses, including mortgage interest payments. Corporation tax on profits will be paid by the company.   Income can be drawn in the form of dividends, but after the first GBP 2000 tax-free dividends, tax is payable on further withdrawals.  The portfolio of a limited company needs to be thoroughly researched.

Location:  This is an important aspect to check out – the area in which you want to invest in property.  Some attractive offers may come at bargain prices, but research on the locality first needs to be conducted.  If you are looking at buy-to-rent and the demand for rentals in that area is falling, it may be difficult to find a tenant.  Consideration of prospective tenants is also important.  Will the demand be likely from young professionals, students or families?  For whom is the accommodation most suited? As one professional explains, “What people don’t realize is that just because a house is in a more expensive area, it doesn’t mean it will command that much higher rent per room.”   If a plan to sell the property comes up later, will the ROI (return on investment) be worth it?

Make an offer:  Once you have an idea of the locality and how much you can afford to spend, you will have to make an offer.  A good real estate agent will have an idea of how much the seller is expecting and may be able to guide you with your offer.  If that is not the case, it is better to start with a low offer, as it is an investment property and not your new home.  In case it is too low, negotiations can be carried out.

Profitable investment:  Unfortunately, not all property investments are profitable.  Since you will need to prove that yours will be, especially to obtain a good mortgage, more research will need to be done.  The rental yield will have to be calculated, by dividing the predictable annual rental income by the property price and getting the percentage.  Also, maintenance and insurance costs, agent’s and broker’s fees, mortgage interest (including increases) will all have to be taken into account.  

Mortgage broker:  These are experts who can advise on the best deal available for you. A DIP (decision in principle), indicating the amount of mortgage, will be required once an offer is accepted by an estate agent.  For investing in a buy-to-let, rather than a live-in property, the personal income bracket will be lower.  There will be a rental income which will help with mortgage payments, as lenders are concerned about cash flow.  Of course, there are some high-up lenders who will insist on a high personal income bracket.  A mortgage adviser will ferret out and come up with the best deal.  That is why a “whole of market” broker is recommended, as he will have a broader view of lenders with a wider range of offers.  To choose a good mortgage broker, ensure that he is registered with the FCA (Financial Conduct Authority) and is listed in their Services Register.  Fees and services provided can be compared to enable the right choice.

Solicitor or Conveyancer:   Once an offer is agreed upon, the important process of transferring the legal ownership from seller to buyer will be overseen by the solicitor or conveyancer.  Both solicitors and conveyancers are regulated by legal authorities. Licensed conveyancers are specialist property lawyers, focusing largely on residential property and progressing transactions”. Solicitors, on the other hand, are qualified lawyers, with training in many aspects of law.  If there is a difficult transaction, such as a divorce between the selling couple, or boundary disputes, it is better to hire a solicitor.  Ensure that the solicitor/conveyancer is on your mortgage lender’s panel.  Another tip is to compare and check the fees and services offered.  

Documentation:  All paperwork should be kept ready, as the estate agent will need it as soon as the offer is accepted.  

  • ID will be required by way of a photo, driving licence or passport
  • Proof of address – (council tax bill or bank statement over the last 3 months)
  • Proof of funds – a screenshot of the bank account, showing your name with sufficient funds to cover the deposit
  • DIP (decision in principle) from the mortgage broker
  • Details of solicitor or conveyancer.

Conclusion:  Owning property or becoming an investor in real estate may seem to be on the top rung of your ambitions ladder.  There is certainly risk involved.  However, if the above tips are taken into consideration, they will surely help in ensuring that your dream becomes a reality!

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