Real Estate Investment: Expectations vs. Reality
If you’re just getting started in real estate investment, there are plenty of misconceptions about it. Like what it means to own a property to sell for profit or to become a buy-to-let landlord.
In this article, we take a look at some of the expectations people have of the real estate market. Also, some of the common mistakes made when starting out. And the realities that you should keep in mind when making any real estate investment.
How to Make Money on Property in the UK
In 2022, the UK property market has experienced a cooling after the record highs of the previous year. However, in many areas we are seeing a buying and selling frenzy. As people try to move home before interest rates further increase to help tame inflation. (Read more about UK Inflation & Property Investment: What to Expect?).
The UK property market is expected to remain volatile for some time as people adjust to this new economic environment. In addition, with Brexit negotiations still ongoing, there is also uncertainty around how this will affect property values in the future. As such, it’s important for prospective buyers and sellers to stay informed about changes in the market and be prepared to act quickly when opportunities arise.
UK Property Market at a Crossroads
With many areas of the UK property market experiencing an urgency ahead of expected interest rate rises, the property market has seen some uplift. There also remains a constrained supply of houses in the UK which pushes up demand.
The annual rate of house price growth dipped to 11.5% in August, showing evidence of a slowdown in the market. The UK real estate market is currently at somewhat of a crossroads. With the expectation that property prices will drop off but the market still remains quite active for the time being.
Overall, it appears that the property market is at a tipping point and it remains to be seen what direction it will take in the coming months. Some experts believe that the market will remain relatively stable despite the current turbulence, while others predict that a drop in prices is inevitable. As such, it is important for buyers and sellers to do their research and take advice from professionals before making any decisions.
How to be a Real Estate Investor: The Most Common Expectations and Realities
Property is one of the safest places to invest during a period of inflation, particularly compared to stocks or cryptocurrency. Property values are typically resilient in times of economic uncertainty, and they can benefit from inflation. Although there may be some volatility in the short-term, property values are likely to increase over the long-term. Furthermore, investing in property can provide an additional income stream through rental payments which can help offset any losses incurred due to inflation.
If you’re thinking of investing in property for the first time, here are some of the misconceptions worthy of awareness and the realities you need to keep in mind.
Expectation: Property Always Increases in Value
Many people assume that any investment made in a property will increase in value in the years to come. If you buy a decent property and hold onto it, it will surely appreciate in value, right?
The reality is that this depends on many factors, one of the most important of which is location. While a property may appreciate in some markets, it may depreciate in others. An area appreciating today may be depreciating in years to come.
Before investing in any property ensure that it is in a sought-after location. As well as it being well-connected to other parts of the area, city and beyond. Also that it has good surrounding infrastructure and amenities like shops and schools. Making location a key factor in your investment decision is of high importance. It will give you the best chance of buying a property that increases in value over time. It also ensures you make the best investment in real estate.
Expectation: You Just Need a Deposit and Mortgage to Purchase a House
When it comes to real estate finance and investment, a common misconception is that it’s enough to have the required deposit (usually 25% of the property price) and an approved mortgage. The reality is that purchasing a property comes with a number of other costs you will need to factor in.
Chances are any property you purchase will likely be in need of some renovation or upgrades. Your real estate finances will also need to cover other costs. Like solicitors fees, stamp duty tax, surveyors fees and the real estate agent fee. If you’re making a commercial real estate investment you might face other associated costs. Mostly in order to bring a property up to standard.
While there are additional costs associated with property, there are also other ways to structure your real estate investment so you need less upfront capital. For example, joint ownership is a way to drastically reduce the amount of equity you need to part with upfront. With the option to invest with up to four people, you can reduce the upfront equity required to as low as 5% of the property value by pursuing the joint-ownership of a property.
Expectation: It’s Easy to Rent Out or Sell a Property
When purchasing an investment property it can be tempting to base your criteria on one that you would be willing to live in yourself. However, a nice, fixed-up house that you would find pleasant to live in may not be the best investment.
The reality is that you should focus on the key elements and areas you can make a profit and those that will attract buyers and tenants. Rather than solely focusing on the property, you should also focus on the location. The best places to invest are not always the nicest, but those that are up and coming – undergoing regeneration or infrastructure improvements which will drive up property value.
It’s usually better to buy a house that needs cosmetic work or renovations in an in-demand area than a ready-to-move-in property in a saturated market. Looking to the future and understanding the best performing areas that will attract buyers and tenants should be your focus over a property that you would like to live in.
At the same time, understand the different things buyers and renters look for. The demands and expectations of renters will be lower than buyers, so if you’re investing to rent out a property to tenants you can usually forgo the highest level finishes and appliances.
Expectation: Rents Always Increase
While we are currently facing a housing shortage and rents have been on the rise for some time, the reality is that rents don’t always climb. Rents can decline based on factors like a decline in employment in the area or a shift in living patterns – like we saw with changes in lifestyle during the Covid pandemic which impacted the types of properties most in demand from tenants.
While future forecasts for landlords and rental rates look good, there is always a chance that rents will decline. Landlords should be aware of the risks and prepare for them. They should consider diversifying their rental portfolio, investing in different types of properties in different locations, and taking steps to ensure their unit is more attractive than competing units.
It is also important for landlords to stay up-to-date on the latest trends in the housing market, such as changes in local rents or new development projects that could affect rental rates. By monitoring these trends and staying ahead of the curve, landlords can adjust their rental strategies accordingly and anticipate any potential dips in rental prices before they occur.
Expectation: Finding High Rental Yields is the Most Important
Some new investors may overly focus on the rental yield – the annual return of a property based on its purchase price. Having a monthly rental income that covers things like the mortgage and repairs to ensure your investment is sustainable is a benefit, but it’s not the only factor.
The reality is that your target should be a combination of capital growth and cashflow. Although that depends on your investment goals. If you want to focus on short-term cash flow, yield plays a much greater role. Properties with higher yields tend to be in locations that are growing in demand. But less established, and yield can be a reflection of risk.
If your main focus is capital growth, it might be better to invest in property in a more established higher-demand location. One with lower yields but that may typically be more secure from a long-term investment perspective.
However, you should also be mindful of the fact that capital growth is not guaranteed. It’s important to remember that no matter what investment strategy you choose, there are no guarantees. You may need to adjust your strategy over time as market conditions change.
Expectations: It’s Quick and Simple to Make Money in Real Estate
Many people assume that making money in the property market is simple and easy. Simply a case of buying a property, renting it out to tenants and watching monthly income come in as the value of the property increases over time. The reality is that it takes a decent amount of time and knowledge. Especially if you want to be successful in the property market.
You’ll need a thorough understanding of market trends and the right location and areas to invest in. If you’re set on renting out the property, you’ll need to understand certain things. Such as your responsibilities as a landlord and have an awareness that it can be time-consuming to find and screen tenants. As well as and deal with tenant queries and problems. A real estate investment company or property management company can come in handy. It usually offers a service to ensure your property always has a tenant but that will cut into any profits.
It’s easy to watch TV shows about newbies flopping homes and making large profits. While certainly possible, there are risks involved too with finding the right property. As well as knowing the right contractors and being able to sell for profit.
In many instances, real estate is a good investment. When it comes to how to make money on property and real estate investment, there are plenty of expectations that don’t match up with reality. While real estate can be a potentially lucrative investment avenue, it does take knowledge, time and experience. Especially when you need to find the right property that will generate decent returns. If you’re wondering how to be a real estate investor or to get started with your first property, get in touch with our experts today.