We’ve always firmly believed that investing in real estate really is one of the very best strategies for anyone looking to make their money work for them. In the UK alone, property prices have gone up at a remarkable rate over the last couple of decades. In the North of England they have increased nearly sixteen times since the early 1970s, while in London property values have increased over thirty-six times in that same time period. That is a impressive appreciation in value for any asset (particularly if you were lucky enough to buy a house in the 1970s in a now-desirable part of London).
But there is an important caveat to these kinds of figures. Property, unlike stocks and shares for example, is an asset that many investors will own only in relatively small quantities at a time. For this reason, it is harder to achieve the kind of diverse spread of asset types (for example a mix of residential properties in different area, or a number of commercial property types in various geographical locations) that is necessary to give you a return that’s close to these impressive market average figures.
Local knowledge matters
And that is possibly one of the first lessons to learn about making money from property – that just because property prices across a particular region or sector have increased dramatically in a certain time period, it doesn’t mean that the particular property you are considering buying will. Why? Well, because there are huge amount of different variables at play that effect property prices – everything from local demographics, school catchment areas, unemployment rates and consumer confidence. All that, and of course the individual characteristics of the property you are looking at. The big takeaway from all of this therefore is that local knowledge really is the key to making money out of property investment.
In addition to this, it is also important to be very clear about the kind of return you are looking for on a property investment. How much money do you need, and when do you need it? Are you investing in property in order to give yourself a lump sum to retire on one day, or are you looking to generate a regular income?
A clear investment plan
If you need money quickly, then a fix-and-flip strategy might be for you. You’ll research the market deeply, spot an bargain that is currently undervalued, buy it and renovate it in order to be able to sell it on again quickly at a profit. The key with this kind of strategy is to make sure that you don’t take up too much time or money improving it any more than you need to in order to make money on it.
If you are looking for a more regular income then you may well be considering the buy to let option – purchasing a property and then making money in the form of monthly rental income. The key figure to look out for here is yield – essentially the amount of rent you think you will earn in a year, described as a percentage of the property price. It’s an important figure to understand as it is a handy way of seeing which properties offer the best return – it may be that lower annual rental income on a cheaper house is actually a better return than a larger rental income on a more expensive property.
Diversification is key
As with any kind of investment, real estate investors should always abide by another basic working principle as they form a strategy for making money from the properties they buy: the importance of diversifying as much as possible.
Diversification is always a sound strategy for investors because it helps to mitigate the risk of losing money if a particular sector of the market drops in value. And, as we mentioned earlier, a broad and varied portfolio also increases your chances of seeing returns that are closer to the market average.
But once again, it is clear that diversification – at least when it comes to real estate – is not always a feasible or affordable option for many. It takes time to build up a portfolio of property assets – because they are fixed, and relatively expensive – and so it can take a lot of time, and money.
So, for anyone starting out in property investment, it pays to start gradually, taking informed risks only in markets they know and understand well. The potential returns can be huge, but they can take a long time to be realised – so do your research and invest wisely.