You’re thinking about dipping your toe into the glamorous world of property investing, but before you do, its wise to analyse some key fundamentals of the investment itself.

So what are the property fundamentals, and what makes them solid?

Below are 15 points to consider when thinking of parting with your hard earned cash into bricks and mortar with a view to generating a less risky, more stable return over the medium to long term.

1. Always buy at discount (BMV)

  • You’re securing equity at the point of purchase rather than ‘buy and hope’ strategy
  • Insulated against market falling
  • Allows you to recycle your deposit & create infinite ROI (return on investment)

2. Add value

  • Increase the value of the property above the cost of works
  • Often get the property cheaper when properties are dirty-ugly
  • Spend £1 to add £3 of value

3. Invest for cashflow

  • Ensure the property is cashflow positive after all costs not rent vs mortgage
  • The number of properties you own is vanity, the cash flow you make is sanity and the cash you got in the bank is reality

4. Have a cash buffer

  • What if you have an unexpected cost such as having to replace a boiler?
  • Having a cash buffer of 5-6 mortgages payments on each property and an extra for expenses, to counter interest rate rises which can put a dent in your monthly profits or if the tenant leaves and you have to fund the void periods is essential

5. Buy for Yield, not capital appreciation

  • Many investors base their entire business model on capital appreciation and underestimate funding the shortfall in running their property portfolio. This is a very big mistake and a very high risk strategy to be avoided at all cost
  • It was the strategy that financially ruined many people in 2008
  • Buy stock on the basis that property prices will never rise, meaning your model is based on instant profitability: income from rent NOT just growth
  • Never buy on emotion – an asset is something that puts money in your pocket not takes it out (liability)

6. Due Diligence (aka doing your homework)

  • Due Diligence on the property: Get a builders report, get a valuation done, check the certificate of title. Check the properties structure is sound and your house is not going to fall down around you
  • Due Diligence on the numbers: Check & confirm that the numbers are true – sure estate agents says the house is worth 100k, but is it true? Same with rental assessments. Become a local expert in your area. Check to ensure that your reno costs will stack up. How much will the property be worth once renovated? Have you included void rates in your equations? What if rent decreased or interest rates increased? Are the tenants really paying that much rent?
  • Due Diligence on the deal: You should be buying property to suit out strategy, not working out a strategy to suit the deal. Does the property suit your deal profile? How will this property help you achieve your goals? Are you buying on numbers or emotion? You should know how much money you are going to make from the deal before you even buy the property

7. Invest for the long term

  • The main reason we believe selling is a mistake is because you are transferring your wealth to someone else. You are slaying the goose that is laying the Golden eggs.
  • Now, we do believe that IF your property is not performing well, or you have bought a property out of area or you can flip a low yielding property on a quick turnaround, then selling the property to reinvest in another better performing property project or to get out is a viable strategy.
  • The mistake we often see is investors not investing for the long term. If we go by past property cycles, and property prices increasing in value over time, then continually selling your properties reduces your asset base and long term wealth

8. Buy Existing, older properties

  • The right type of property can make you thousands every year for the rest of your life.
  • The wrong type of property will be like buying a new Ferrari, it will lose you a lot of money year after year
  • New Build property, Off Plan property, Overseas Property, Cashbacks, Rentbacks; you name it, we have tried it.

Existing property is the best type of property for the following reasons:

  • Existing [older] property have established values over a period of years
  • There is no immediate depreciation as you would get with the ‘new car from the forecourt’ syndrome with new build properties
  • Existing properties are very often on streets where there are many other properties of the exact same size and type. Do You think that this might just make the valuation process very simple?!
  • 10 properties have sold on Your street for £150,000. Yours is the same and in the same condition: what do you think it might be worth?!
  • There are less things that can go wrong with existing property: less value speculation, less smoke and mirrors [and no language or legal barriers]

9. The numbers never lie

  • Don’t chase the deals; let them come back to you. Play the long game – we had a deal that we exchanged that we have been negotiating on for 2 years that fell out of bed 3 times! This is not uncommon, and far better than trying to tie a price up too early and getting too emotionally involved and ‘wanting to get the deal done.’
  • Beginners are especially susceptible to this.
  • Have a strict set of rules and do not deviate from them. If the numbers do not work for you, don’t think they won’t for another investor. Consider selling the lead on/packaging the deal up. Maximise your revenue streams!

10. Always Selling your Property

  • You make your money when you buy and not when you sell.
  • The main reason we believe selling is a mistake is because you are transferring your wealth to someone else. You are slaying the goose that is laying the Golden eggs.
  • Now, we do believe that IF your property is not performing well, or you have bought a property out of area or you can flip a low yielding property on a quick turnaround, then selling the property to reinvest in another better performing property project or to get out is a viable strategy.

11. Invest in what you know – the right type of property

  • Buying Overseas, off plan & out of area – this is probably the biggest one that often hurts new investors. We learned this the hard way in our earlier investing days when I bought my flat in Bulgaria which only rented out for 2 weeks per year!
  • Many investors are often hypnotised with the fancy artist impression of some beautiful luxury apartments by the sea: somewhere in an idyllic holiday location 3 years off plan

12. Buying on Emotion

  • “I love this place! It has so much…potential!” Big mistake.
  • How we, and many hundreds of thousands starting out, got suckered right in by those big, colourful, lifestyle brochures, new build and dreamy holiday homes. No. Not anymore. This, as we learned the hard way, is vanity. It’s emotional buying. Perhaps you can relate?
  • You see, talk like the above can get you in financial trouble quickly. We know, it’s easy to get carried away.
  • Yes, you will miss a few ‘deals’ on the way up, the more detached you are which is fine. But the more you stick to your buying rules and the fundamentals, the better cashflowing investor you will be. And if you can’t get the deal, at the price you want, then move on. There will be other deals. It’s a skill to think with logic…not your emotions

13. Match your target rental audience

  • It is crucial to remember that an ideal BTL property is not necessarily the same as your own idea of an ideal home – rather, an ideal BTL investment is one which matches your target rental audience – students, professionals, families, tenants on benefits, friends/family

14. Estimating Gross and net yields

  • And to stress test future spikes in interest rate rise
  • If the property does not pay you monthly to own it you are taking on a liability. You will need a day job to support the property in that case. If the property does pay you each month (after all operating expenses plus debt service then you can afford to own the property for a very long time. (In this sort of situation you are buying an income stream and not speculating on future appreciation.)
  • To make the cash flow work you might need to raise the amount of equity you put in.
  • Almost any rule of thumb, ratio or other measure lives in a context. Just because a lender asks for 125% -145% mortgage at 5.5% cover does not mean that is the right number for an investor to use. You need to understand the underlying details and you have to be prepared to change the indicators as the ground shifts. Just be careful about lowering standards to chase business rather than sit on the sidelines.

15. Leverage

  • If you have minimal capital of your own to invest, then leverage can help you (subject to status and availability). Leverage means using other people’s money to finance a significant percentage of your property investment.
  • Today, a typical deposit using leverage would be 20% to 30% of the property’s price. Stick to sensible loan to value ratios (50% to 70%) & do not over to under utilise leverage
  • Leverage is an excellent way for new property investors with limited capital and experienced investors who wish to expand their portfolios at a minimal cost

Mark Homer
Mark Homer

Co-founder at Progressive Property, 600 + properties bought & sold. Full time property investor/analyst/geek & World Record Holder Author of No.1 Amazon best-selling book Uncommon Sense, Low Cost High Life and Commercial Property Conversions.