Want to invest in property? The right investment may boost your bank balance, but there are pitfalls. Here’s how to get it right.
It’s easy to make mistakes that could jeopardise the profits from your property investment.
Whether it’s selling during a downturn, or failing to set savings aside for an emergency, getting it wrong can cost dear.
We’ve outlined some of the most common investing mistakes, below, and how to avoid them.
1. Letting your emotions rule
When property prices take a dive it’s understandable to feel nervous and want out. But panic-selling any investment risks missing out on potential profits over the long-term.
An investment property should, ideally, be held for many years. Ensuring you hold on to a property for a long timeframe means you can maximise returns, without emotions prompting you to make investment mistakes.
Similarly, if the property market is steaming ahead, this could make you overconfident and tempted to expand your buy-to-let portfolio.
Yet it’s important to bear in mind that past performance is never a guide to the future, and it’s probably best to take a measured approach.
A general rule with any type of investment is that it most likely pays to be patient. Whatever is going on with the market, it’s impossible to know for certain what’s going to happen next.
Remember that the property market has endured world wars, and financial crisis, and recovered over time.
So calmly commit to your investments and take any emotional highs and lows out of the process.
2. Failing to diversify
While the British have a love affair with property, it’s not a guaranteed – or the only – path to riches.
A golden rule of investing is to spread your assets. So alongside property, it’s advisable to have some money in cash and stocks and shares. This way, you’ll hopefully reduce the impact of any market setbacks.
If you want a small exposure to physical property within a diversified investment portfolio, you could opt for a fund.
For example, you can invest with Bricklane.com and pool your cash in funds containing residential property in popular UK cities.
Bricklane.com offers a range of account types for customers to invest in depending on their circumstances.
These include a Property ISA, and Standard account. Or if you’re saving towards retirement, you could include a Bricklane.com fund within your self-invested personal pension (SIPP).
Whichever account you choose, your investment earns rental income, and moves in line with any changes to the value of these buy-to-let properties.
This can be a hassle-free way to add property to an investment portfolio, as you don’t have the bother of being a landlord.
But remember, your capital is at risk, which means the value of your investment can decrease as well as increase.
If you’re opting for a Property ISA or SIPP tax rules apply, and these can, and do change. Their effects will also depend on your personal circumstances, which may also change.
3. Not knowing your reasons
Don’t overlook your investment goals. It’s vital to know why you’re investing. Do you want an income from a property?
Or are you trying to build a portfolio of investments that will help fund retirement? And when might you eventually sell to release a chunk or cash to meet other financial obligations or wishes?
Asking yourself questions like these is an important part of creating a property investment plan tailored to your needs.
4. Avoiding the research
Buying any property involves a big chunk of cash and shouldn’t be done lightly. So while it may seem a chore, it’s vital to do careful research.
This way, you’ll make sure any investment is the right choice for you, with potential for profit.
Your research should involve doing the sums and working out what rental income you may achieve, and if this is enough to cover costs.
Consider location and your target market. Are you aiming to attract students or young families? Speaking to local lettings agents during the decision making process may help - and you don’t have to sign up for their services.
Zoopla has a buy-to-let guide with more info.
5. Trying to time the market
Perhaps you’ve heard the investment saying “buy low, sell high” – but attempting to time the market is generally a fool’s game.
It’s impossible to predict exactly which way the market will move next, particularly if you’re investing in property shares or funds, which may lose or gain value suddenly if there’s a market shock.
One option if you’re investing in the stock market, rather than physical bricks and mortar, is to invest regularly. Drip-feeding money removes the guesswork and helps smooth volatility over time as you’re committing to a fixed amount irrespective of the price.
6. Poor money management
Getting into property investment is often an expensive business – so don’t forget the importance of having a cash pile set aside for emergencies.
It may be tempting to put all your money towards securing the best property at the most attractive mortgage rate. But don’t forget the risk of unforeseen expenses once you have a buy-to-let.
What if the boiler breaks down? And have you got a cash buffer to meet costs during any void periods, when the property stands empty? Even the most appealing buy-to-let property may not be rented out at all times, so factor in returns on having less than 100% occupancy.
And don’t forget your tax liabilities, particularly given the amount of rule tinkering over recent years.
For example, there’s the reduction in mortgage interest relief – this will reach the basic rate of 20% by 2020. This could make a significant difference to profits for higher-rate taxpayers in particular.
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This article does not constitute financial advice. If you are unsure about whether investment is right for you, you should seek independent advice before investing, including tax advice.
Zoopla Limited is an introducer appointed representative of Gallium Fund Solutions Limited (Reference number: 487176) which is authorised and regulated by the Financial Conduct Authority.