5 Questions to Ask When Investing in London Property | London Real Estate Investment Tips

Are you thinking about making your first rental investment?  Or do you have one or two and are looking to expand?  Well in this article, we’re going to give you 5 great questions you must ask yourself if you’re considering investing in property.

Question 1 – What Type Of Investment Do You Want To Make?

Do you want to invest in residential or commercial or maybe land?  Each has different dynamics and considerations. 

If you want to invest in residential, what type? 

Do you want a single unit or a multi-unit? 

Do you want something that offers great yield or long term appreciation?

For some of my landlords, they want to invest as short let / Airbnb which will typically offer a better yield, but may have different tax considerations and require more active management. Do you want to maximise yield? then perhaps you’re looking for something that needs a lot of work and will be the best opportunity to improve the value and generate a great yield.  Here in the UK, some investors are focused on buying properties with short leases as a way to generate yield.  Or perhaps something that will earn higher rental incomes such as short let investments.  

Question 2 – How Long Do You Want To Plan To Hold The Investment? 

Just like the stock market, timing is everything.  If are looking for a relatively short term hold strategy, there may be higher rewards, but also typically higher risk.  For example, some investors are happy to do renovation flips where they can buy a property, do the work and then sell it for profit.  In this case, the investment timeline may be less than a year.  With that, you just need to really do your homework that you’ve factored all the components of that strategy including costs, unexpected delays and then exit strategy on the back end.  

Many investors in the early 2000s were buying off plan properties in London where the strategy was to purchase a property and only pay the reservation deposit which was typically 5% or less of the purchase price.  While the property was being built, the market was expected to appreciate as it had done historically, so by the time a few years later, typically 2 or 3 years later when nearing completion,  they could “sell on” that contract to someone else without ever having to secure the mortgage and come up with the remainder of funds, and they would have made the difference in the value of the asset.  In many cases that could have been hundreds or thousands of pounds. 

The only problem was that 1) developers started getting hip to this strategy and so staggered their releases in phases so too many units were not coming into the market at once and 2) the market could shift during that time and market values had gone down.  That happened to several clients that I ended up having to sell their contracts at heavily discounted values because they now had a time pressure as well as legal obligation to purchase the property that was now worth a lot less than they paid.   

Property is less liquid than other investments, so it is not so easy to get out of it in a pinch.  Therefore, you need to make sure if you are investing, that you have a clear and realistic timeframe for your investment. Sometimes I speak to people who need to sell by a certain date but also need a certain price.  Sometimes that is just not realistic if that’s not where the market is at, so can you afford to wait for the market to give you the price you want, or do you need to sell now and take what the market value is? 

Question 3 – What Area do you want to Invest in? 

Whether it’s London or a secondary market, location matters.  You need to be familiar with that area and what may drive supply and demand.  What are the employment and income trends?  What are the area dynamics?  For example, if you’re in an area that is urban, parking may not be a big consideration.  But what if you’re not?  You will have to factor in something like parking but also what other amenities might a tenant want.  

The area also matters in terms of what you may be able to afford.  If you’re just starting out, you may want to be in a place where the entry purchase price is much lower but if you’re more established and comfortable with investing, you may consider different options that allow you to be in higher valued areas.  

Question 4 – Who is the Team that Will Support You? 

If you’re going to successfully invest, you need the right partners around and there to support you.  You need a trustworthy agent who can help you identify the right opportunities that fit your investment criteria. 

You will also need a great tax advisor to help you clearly calculate the tax implications of your investment.  One of the key things investors look at is whether to invest in their own name or via a company structure.  There are tax considerations for each ownership structure that could be further impacted by the number of properties you plan to invest in.  

Other team members may include a property solicitor, financial advisor, a mortgage advisor, surveyor, insurance agent, contractor, handyman, property manager and even cleaner. 

Question 5 – What Are the Operating Expenses You Will Incur? 

This is so critical.  It will start with your interest on your mortgage, which is another reason why that mortgage advisor is so important.  Here in the UK, fixed rate mortgages are typically for 2, 3 or 5 year and not much longer than that.  So have you stress tested your expenses to see what happens if your interest rates go up by 1%?  Sounds unlikely perhaps, but we are at historical lows, so rates really only have one way to go and that’s up. 

Other operating expenses may include service charges, ground rent and insurance.  Beyond that, you should set funds aside for general ongoing maintenance and repairs but also for capital improvements if it’s an older property that may need something like a new roof soon.  

I hope you’ve found this article really helpful.  One of my favourite sayings is “you make your money on the buy”.  Meaning the deal has to stack up on the front end, not based on rosy assumptions of what may happen in the future.   So make sure you do your homework on the front end, read,  follow and learn from what others have done before making your first investment.  

And if you are thinking of investing in the London property market, please reach out as I work with a lot of international buyers to help them get their perfect piece of London.  For a full guide on living in London, get your free Relocating to London guide here: https://mailchi.mp/onyxpropertyconsultants/reloguide