This post originally appeared on Five Years to Financial Freedom.
Property investing is not for everyone. The amount of time it takes to set up and (initially) maintain the investment is massive. On top of all that is the fact that you are somewhat responsible for someone’s living conditions… and then there’s the issue of capital.
Perhaps you can’t invest in your local area because the deposits are too high for you and your team of investors. What then?
In this article, we’ll talk you through the six questions you absolutely need to ask yourself before you begin investing in property.
1. What’s your nominal financial freedom figure?
First, make sure you know why you are investing.
How much is your nominal financial freedom figure? This is the amount you want to earn per year and what you will use the money for.
You need to calculate the cash flow you require to continue your current lifestyle, pay off debts, and have some extra in order to save/re-invest in other streams of income.
Note: Be sure to include approximations for tax in your calculations.
Once you know your financial target (e.g. £20,000 per year from property investments or £3,000 per month net of passive income) you can work out approximately how many properties you need in your chosen investment location to achieve that nominal financial freedom figure.
2. What type of income do you want?
Make up your mind on what you want to do with property investing.
Are you buying for passive income or are you buying to renovate and resell at a higher amount? Your income strategy affects where you will buy.
If you are buying for rental (passive) income then you will need to invest in the specific areas that your prospective tenants want to live in. If you are buying and reselling (active income) then you have a larger area in which you can invest.
As an aside, I prefer passive income over active income as the risks are much lower. For example, many active income investors have lost money when property prices have declined, they’ve used the wrong contractors, or have simply had bad luck.
3. What type of guests do you want?
Decide on the type of guests you would prefer to rent or sell to. This is incredibly important as it affects the location you will be investing in.
The types of guests you could have include; pensioners, those on social housing benefits, students, professionals, overseas ex-pats and so on.
My target guests are students, so the locations I invest in are 5 to 10 minutes away from universities.
If your target guests are young professionals you should invest in areas that have high employment or good transport links to those areas. If your target guests are families, then you should invest in the suburbs. If your target market is wealthy overseas visitors then you should invest in city areas that have luxury flats.
A lot of the time your location will affect who your tenants are. You may live in an area with a lot of young professionals, so they’d be your best bet.
Look at your local property market and the demographic of the people who’d want to live there. The type of guest you select are your ideal, but may not be your reality.
4. What is the size of your deposit?
This is pretty basic but often overlooked. Work out how much money you need to make a deposit on a property. Knowing the amount of working capital you have to make deposits on properties also affects where you can invest.
This allows you to set savings goals for yourself, and you’ll only hit goals with a clearly defined target.
Another route is to draw up a list of angel investors, JV (joint venture) partners and find out how much they have to invest along with your own money.
The more experienced you become, the less of your own money you will need. Once you start being able to find good deals, create nice living spaces, and source tenants, people are far more likely to trust that you can give them a return.
Similarly, as you stick to your property goal and make it a focus in your life you’ll meet more and more people who will want to help you. This will happen through the magic of socialising.
5. How many properties do you want by the end of the year?
Decide on the number of properties you want to purchase per year. How many properties you wish to acquire will also affect the investment location. At the time of writing, in my home area, the average three bedroom house costs £450,000.
However, take a four-hour drive south and the average 7-bed house costs £180,000. So the same deposit for a 3-bedroom house in my area would buy three larger properties four hours away.
Again I’d like to reiterate that’s important to go with the flow.
Although the 7-bed looks like a great deal, you’d spend eight hours driving there and back, and those properties would cost more to renovate. On top of that you’d have a four hour response time to any emergencies that may occur, and some tenants “emergencies” are not worth the hassle.
As with most things, slow and steady wins the race. If you’d like to buy three properties a year, but can only afford one in your local area, simply change your time scale to investing in one property a year. You’ll save a huge amount on travel costs, be less stressed, and have an easier time managing the property.
6. How much time do you have to devote to investing?
Finally, you need to decide on the maximum amount of time you have available per week to look at properties, speak with estate agents and walk around the streets of your chosen area.
Time, is perhaps, the most important metric.
As a single mother once said, “My children are more important to me than how fast I want to make money, so I decided to invest close to where I live.”
When I was working full-time, I could not afford the time costs of driving to and from a distant location. So the travelling distance had a huge impact on where I could invest. As a result, I invested in my local area which, luckily, is close to a university.
A working example of the best area to invest in
Now that you know the criteria, it’s location decision-making time. Here’s an example of how to turn your answers into an action plan:
- I want to receive £60,000 (after tax) from my investments
- I want passive income
- I have £200,000 to invest
- I want to invest in properties for students
- I want four student houses by the end of the year
- I can only manage travel within a 20-mile radius of where I live
It’s now time to get the map out and look for all the universities close to where I live. I have one university on my doorstep but house prices only allow me to buy two houses, but there is another university 15 miles from me.
I then have several discussion with multiple estate agents, to get a rough idea of what I can negotiate a property for.
Then I chat with the local letting agents who provide information regarding the demand for rental properties and which streets rent out the fastest.
To verify the estate agents and letting agents I check the demands for property via adverts or online tools such as Spareroom listings.
From my research, I work out that the property prices at the other university are the same as my area. I look on the map to see if there are any other universities within a 20-mile radius of where I live. Sadly there are none.
So I have a decision to make: Perhaps I only buy two properties in my area or I need to change my target guest. If I change my target guest to professionals I find out who the biggest employers are within the 20-mile radius and repeat the previous steps.
Unfortunately, it turns out that house prices are the same for whatever target audience I go for.
My one major criteria is how much time I can spend investing so I can only invest within a 20-mile radius. This means that I choose to grow my portfolio slower than I first anticipated.
Property investing 101
By asking these six questions you will have narrowed down what it is that you’re looking for which makes property investing so much easier! You have also developed a rough road-map of your property journey. Those six questions again are:
- How much do you want to make through this income stream per month or year?
- Do you want to buy and sell (riskier but faster to make a profit), or make money through rental (safer but slower)?
- What types of tenants do you want?
- What deposits can you afford?
- How many properties do you want to buy this year?
- How much time can you invest?
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