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Getting Started in Property Investment and Development

Although this article is written primarily for the UK property field, it can apply equally well to the USA. The fundamentals of Property Speculation have much in common the world over.Many people think about becoming a full-time property developer or investor but simply don’t know anywhere to begin.The earliest step is to decide which method suits you and your circumstances. Do you want to be a developer or an investor?• A Developer looks for an appropriate property for development that is in need of work (to a lesser or greater degree). This can be bought at auction, through an estate agent in the regular way or quite often the owner is approached and a deal is struck. The work is carried out over a period of between 6-18 months and the property is put back on the market, optimistically to be sold at a decent profit. Being a developer offers the shortest route to making A profit through property as you have the best chance to increase the value.• An Investor will every so often buy a property with an occupant already in place. To be purely an investor in property (as contrasting to an investor/developer) would mean that the property is bought with no intention of carrying out any works, just getting in a resident as quickly as possible so that an investment return in the form of rent is provided. This position is unusual as most landlords appreciate that some work is likely to be needed before occupation. This approach is more passive than being a developer. Be aware though, it is unlikely that you will see much financial return in the form of profit for several years. Most landlords only make enough to cover the mortgage, management fees and tax. The benefit comes in the years ahead when the capital value of the property has increased considerably. Using this method is likely to take 10 years or more to see a significant increase in your investment.The next step is to truthfully look at your finances. Clearly purchasing property is never cheap, and it is probable that you will require a mortgage. At the time of writing, the almost all of mortgage providers ask that you supply a deposit of around 20%-25% of the purchase price (or the total development price if your plans are more ambitious). You will also need to cover fees at the point of acquisition (estate agent and solicitor with added VAT) and Stamp Duty. Once the property has been bought, if it is a development project there will be a time where the work is being carried out and you have to meet mortgage repayments. This should be factored in. If it is an investment property, then rent gaps must be allowed for (when no tenant is occupying it and subsequently no rent is being collected). Management costs must also be considered, such as grounds maintenance, decoration and the general running of the property.In common with a traditional mortgage, lenders will want to know what other borrowing you have, such as credit cards and loans. Mortgage providers are very keen to minimise risk and they will feel that if you are committed to other lenders, your ability to meet the mortgage repayments will be Reduced. Also remember that mortgage interest rates can fluctuate a great deal, this will have a substantial influence on the monthly repayments.Many property investors opt for an interest-only mortgage. This obviously means that the capital must be repaid at the end of the mortgage term and the only way to do this (realistically) is to sell the property. The difference between the selling price and the amount of the original mortgage is the profit. This is a bit of a gamble, as it’s impossible to accurately predict what the property will eventually sell for.The deposit necessary to proceed with the purchase should be carefully considered. This might sound strange, as it’s clear that the higher the proportion of deposit compared to the amount to be borrowed will result in more profit and lower risk. While this is largely true, it’s not quite that simple. There is an optimum level of equity (money that is not borrowed) that will produce in the best return and the most advantages:• The level of equity is high; if the venture is being run as a limited company, then tax will be payable on any profit gained. It’s also not good business sense to put so much equity into a single investment. For example if 100,000 of equity is available, it would be better to place 50,000 of equity into each of 2 properties rather than all of the equity into a single property.• The level of equity is low; this situation leaves you very exposed to risk in the form of interest rate fluctuations (and subsequent high repayments) and rent voids. It could be argued that this aspect contributed to the credit crisis because borrowers left themselves far too narrow a financial margin.The next step is to think about the market you wish to appeal to. On the property-related TV shows, the developers always seem to be obsessed with on the ‘young professionals’. This market in itself could be sub-divided into several smaller categories. However, do not forget the other markets such as students, retired people and ‘downsizers’. It is crucial to consider the market before purchasing the property; it is always easier to provide a product for an established demand, rather than developing the product (the property) and then wondering who is likely to use it. Always do your homework, for example if there is a strong student population but a shortage of accommodation……It’s fairly obvious which type of property you should provide.Get to know your target market Inside out, do they own cars or use bicycles or public transport? This will affect where it is best to buy the property and if you need to think about a garage. On the other hand, you might be able to convert an attached garage to increase the floor area of a large house; thereby providing another student flat. If your target market is downsizers, will they need a large garden? Or a lot of storage space?Information on an area’s demographics is obtainable from the Office for National Statistics (http://www.Statistics.Gov.Uk). Although it tends not to provide very detailed data, it is a good initial point. The other way to get to know what is in demand in your chosen area is to speak to letting and estate agents. They will have an excellent idea of what is always being enquired after but supply is scarce.One last thing for now, it is highly recommended that you look for a property close to where you already live. You have a much better feel for values and know whether a property is priced too high. It is also far easier if you have to attend site regularly to deal with builders, Architects or Project Managers.An excellent place to begin looking for a property for development is at a property auction. The Property Speculator has a full guide to buying a property at auction and a list of all the auctioneers in the UK.