How to tell or find out whether a house is a good investment property

MWild_2

hi ive just moved into a privately rented terraced house with my girlfriend, were renting it off her cousin, and we where thinking of getting a deposit together and offering to buy it off him, we are almost certain hed be willing to sell it, but thats besides the question.

we where wondering how we can find out whether buying the house would be a worthwhile investment, would that be a question to ask an estate agent?

thanks

RabbitMad

Where does one start?

A home is not an investment as such, one buys a house for security, a place to live etc. While some think renting is dead money others prefer it. I don't as I don't want to be paying rent when I'm retired.

How much is the house worth - have a look at the local estate agents to get an idea based upon similar properties. If the rent you are paying covers more than just the interest on a mortgage then it could be a good buy

MWild_2

well wed like to do it up and sell it in say 5 years or so and hopefully make a profit on the mortgage wed take out on it, obviously theres no way of telling how the economy will be in 5 years

just wondering if theres anything that can be looked at in a certain way tat would make you say, if i did this to this house it would make a profit

well we pay £400 rent and we know the mortgage on it is £350

cheers

Fire_Fox

Property is always a sound investment looking over the long term (ten years plus), but it's much more of a gamble over the shorter term. What profit you make over five years depends completely on the market in the local area, how much of a hard bargain you drive, whether you can see beyond your own taste when doing the house up, the quality of the finish. Rarely do FTBs get all of this right!

Have you researched for sale and land registry sold prices in the local area over the last five years? Do you know what sort of buyers are attracted to houses in that street and area? Do you know someone experienced in property development to recommend local trademen? Do you have any idea of what work is required and how much this might cost? Are you planning on living in the house whilst you do it up?

MWild_2

yeah i can see the trend in prices from the same street

it went from 80k in 2005 to 100-110k in 2008 and now there back down to 80k

its a row of terraced houses, classed as cottages there about 4m wide but about 25m long
our neighbors are older people
yes my girlfriends family are all tradesmen and know of tradesman that can do whatever they dont, so big bonus there

work i would do so far is,

as its on a main road, can be quite noisy in the living room and cold too, so some A grade energy saving sound proof windows around the house will help alot, especially with the energy saving market everyone's into nowadays
all the doors need replacing - not a big job but nevertheless
needs a new modern kitchen
bedrooms need decorating
garden repaving and modernizing
modern fireplace
a little bathroom work

but not that much really
id estimate putting about 8k into it
if we got it for 85-90k that would put us at a spend of 93-98k and at their peak they some of them where worth 110k but, so probably just a small return, but it would be the nicest house on the street so oculd be worth more than the others
but im not an optomist so a small return or break even would be more likely yes?

thanks

princeofpounds

Property is always a sound investment looking over the long term (ten years plus)

Whilst you are right for modern history in the UK, that's not always the case; just take a look at Japan.

Investment is a really serious and very large area. I could talk you through the simple or the complicated version. If it is the former, I'd struggle to feel I was really telling you the truth, if the latter then we would be here all day and you'd realise that there is no firm conclusion even for experts on whether a property will be a good investment.

But here are some simple pointers - when you invest, you are aiming to maximise your return for your acceptable level of risk. Bank accounts are low risk, which is why they return so little. Shares are high risk, which is why they can potentially return a lot. There are various other asset classes floating around all of which have different characteristics.

Property has some of the following characteristics. They produce an income, which tends to be fairly fixed and grow with rental inflation. They require management, maintenance and repair as they are physical assets. They also provide you with exposure to the capital values of property (i.e. the selling price). You can improve them and add value, although it's only big things like planning permission that add much value above the cost and time you put into them in the first place.

So, out of all these you can reliably expect a rental yield if well-managed. How would the rental yield on a propery compared to a bank account, and is it worth the extra risk and trouble?

Are there any opportunities to add serious value? Probably not. You could add value by doing work but its likely that you will only get paid for materials and your time, so you might as well do extra hours as a builder if that's your thing (only benefit being tax-free realisation of gain on primary residence!).

Will capital values move up? That's the big one. My personal belief is no (in real terms - if you don't know what that means look it up). But you have to have a view on it because it is massively important due to something called gearing, which lies at the heart of property investment....

Gearing is borrowing money (a fixed liability) to take on an asset that has a variable income and value. When you buy a property, you do this with a mortgage. By paying the price of the interest, you keep the value of the principal (the amount of the mortgage) constant.

You would be hoping that that return on the income and capital appreciation is greater than that on the debt. This excess return goes straight to you and so enables you to return a higher amount on your equity, your initial investment.

A practical example. You buy a house for 100. You pay 10 equity and get 90 from your mortgage.

Roll time on a year. You might have made 5 from the rent (or from avoiding paying rent by living there yourself) but spent 5 on mortgage interest, so those two cancel each other out.

The value of the house might have also gone up 5. You sell and pay off your 90 debt. You have 15 profit, which is a 50% return on your actual investment! In just one year! The path to riches!

And indeed that is how people have generally got wealthy through property quickly over recent years.

But here is the catch. Imagine if the price went down by 5. You sell your place for 95 and have only 5 remaining after paying off the debt. You LOST 50% of your money in just one year.

Gearing only looks like a great idea in big bull markets such as property since the 90s crash. It can be fatal in even a small crash if your gearing level is high which is why so many seemingly rich buy to let types can be wiped out in a matter of months. It is in fact nothing more clever than amplifying the risk to amplify the returns.

The reason so many ordinary people seem to get wealthy on property rather than shares is that because there is a physical asset to repossess, and prices have historically not gone down all that much over long periods of time, banks see it as safe to lend cheap money on. So it is the easiest way for Joe Bloggs to access a lot of debt to gamble with.

If any of this goes over your head, I suggest looking at a house as a home, paying a sensible price by comparing it to others, and forgetting ideas of a property empire.

clutton_2

""You sell and pay off your 90 debt. You have 15 profit, which is a 50% return on your actual investment! In just one year! ""

this argument is how the "INside Track School of Property Invesment works!"

by the time you have factored in buying costs/selling costs (estimated at £10k)repairs, maintainance, insurance costs, voids, advertising, court costs, agency costs, mortgage interest payments, gas certificate, EPC, electrical periodic inspection, office costs, phone, travel, etc etc etc and then paid Capital Gains Tax on the capital gain at 20% - you wont have made much profit........

princeofpounds

this argument is how the "INside Track School of Property Invesment works!"

Clutton is absolutely correct by the way... that was a very, very simplified example and there are all sorts of frictional costs in dealing with property.

Fire_Fox

MWild wrote: »

yeah i can see the trend in prices from the same street

it went from 80k in 2005 to 100-110k in 2008 and now there back down to 80k

its a row of terraced houses, classed as cottages there about 4m wide but about 25m long
our neighbors are older people
yes my girlfriends family are all tradesmen and know of tradesman that can do whatever they dont, so big bonus there

work i would do so far is,

as its on a main road, can be quite noisy in the living room and cold too, so some A grade energy saving sound proof windows around the house will help alot, especially with the energy saving market everyone's into nowadays
all the doors need replacing - not a big job but nevertheless
needs a new modern kitchen
bedrooms need decorating
garden repaving and modernizing
modern fireplace
a little bathroom work

but not that much really
id estimate putting about 8k into it
if we got it for 85-90k that would put us at a spend of 93-98k and at their peak they some of them where worth 110k but, so probably just a small return, but it would be the nicest house on the street so oculd be worth more than the others
but im not an optomist so a small return or break even would be more likely yes?

thanks

Your neighbours may be older, but (sorry to be crude) old people have a habit of dying. Have the older folks been in the same property for many years or are they the people who have moved into the street in the last five years?

Is this a period or modern cottage? If period you may find you will devalue the property by changing the windows, doors and fireplace. If it's period are you confident there is no rising damp, are you confident stripping wallpaper won't take the plaster with it?

£8K will not buy you a quality kitchen and quality windows! Unless you are getting massive trade discounts and free labour from all trades ... Why on earth would you do all that work for a return of only £10K? No self-respecting property developer would think that a good investment. Your profit will be completely wiped out by surveyors, estate agents and solicitors fees.

Also do you have any idea how disruptive that much work is? You will be living in filth for [STRIKE]weeks[/STRIKE] months, you will have to clean the kitchen before you can make a cuppa - that's if you have a kitchen! If you are getting free labour your schedule will be at the mercy of others goodwill.

mlz1413

Buy a house because you want that house, because you like the area, its near the things you want access to. In other words buy a HOME.

If your house goes up in price so will everyone elses, if your house goes down so will everyone elses.

If you intend to stay for 5 yrs then buy a home if the house you are currently in fits all your requirements then buy that one, buying without an EA saves fees so it will probably be a cost effective buy. But if there is a different house in the same price bracket you prefer buy that one.

If you decide to rent because you actually want a bigger/smaller place, may move for work etc then be happy with your decision.

clutton_2

never buy ANY investment property unless there is a rental demand for it ... too many amateurs buy a house then look for tenants.. it ther is no demand... dont buy

either, put a small ad over a few weeks in your local paper advertising this house, and when you get the calls, (if you do) apologise that the house has been taken, and/or ask local letting agents if there is a demand (but they have a vested interest in getting you onto their books so will almost always say "yes")

P.O.P - great post part from that one paragraph by the way