Investing in Your Home and Other Real Estate
See also: Understanding MortgagesInvesting in property used to be the preserve of the very wealthy. However, in the UK at least, changes in pension rules and access to cheap buy-to-let mortgages have led to a boom in property investment. This has been fuelled by rapidly rising house prices, which have made property an attractive investment option.
Many people are also choosing to invest in their own homes. The challenges and costs of moving house have led people to consider extensions and renovations that both make their house better for them and add value. This page discusses how you can successfully invest in your home and other property.
Investing in your own home
Your own home is probably one of the most expensive purchases you will ever make. However, it is not like any other investment, because you are also planning to use it. Your investment will therefore be both financial and emotional.
Some experts suggest that you should not see owning your own home as an investment, but as a choice. In some areas, the cost of buying may be higher than renting, meaning that the decision to buy does not necessarily make financial sense. However, there are some significant advantages to owning your own home, such as the ability to do whatever you want to the property (within the constraints of local planning laws, of course).
The decision to buy should therefore not be considered an investment decision. However, once you have bought, you should consider your home as an investment, and manage it as such.
With that in mind, one of the most important aspects of owning your own property is keeping up to date with maintenance.
Looking after your property may seem expensive, but it is essential if your home is to hold its value. Regular painting and decorating, especially external, and checks on the roof and guttering, will ensure that your home remains waterproof and in good condition. Maintenance should really be seen as an ongoing investment, not a cost.
However, what about if you want to add a significant amount of value to your home? The best thing that you can do is to add space: either bedrooms or living space.
Experts suggest that the ideal investments are loft, cellar, basement or garage conversions. Extensions either to the side or back of the property are also good investments. These all add extra rooms to your house from what is often unused space.
Top Tip! Check your budget against property values per square metre
Before embarking on any extensions or conversions, make sure that your project will add value by a simple calculation:
Cost per square metre created / price per square metre of property in your area
Your cost needs to be lower than the price to create value. In other words, this calculation should give you an answer between 0 and 1. If the answer is more than 1, you will lose money on the work.
Adding a conservatory can also increase value. However, conservatories can be difficult rooms to use all year round. They tend to lose heat in winter and are therefore expensive to heat—especially if they are not fully separated from the house. They can also be too hot in summer, unless you invest in high-quality glass that limits solar gain. A cheap conservatory could therefore be a liability, rather than an asset.
Investing to sell
There is a sub-category of investing in your own home: investing to sell.
Property experts will offer you plenty of advice about how to maximise the sale price of your home. This advice will range from putting in a new kitchen, to painting over any bright coloured walls, and making the garden look attractive.
However, all these options have costs. The question is whether you will recoup the cost of the change in the increase in the sale price.
This is impossible to judge without detailed knowledge of the property market in your area.
If you live in an area that is popular with ‘doer-uppers’, people who wish to buy a property to improve it, then a more run-down property may actually be more attractive. If, however, your home is likely to be bought by people who simply want to move in as seen, a bit of decorating could pay off.
Before you embark on any home improvement projects designed to increase the selling price of your house, it is advisable to talk to a few local estate agents to get their views.
Investing in rental properties
The second way to invest in property is to buy property to let: either residential or commercial.
Buy-to-let mortgages, and the high rental prices available in many areas, have made this an attractive option for many people. However, you need to be sure that rental income will cover your mortgage and any maintenance costs.
It helps to have the skills to manage tenants yourself, and also to sort out the majority of repairs, because having to pay agency costs will rapidly eat up any profits. This also means that you need to live relatively close to your properties and have enough time to manage them yourself. You also need to budget for periods when the property is vacant, and for the costs of repairing any damage done by your tenants.
The bottom line is that owning rental properties is not an easy option. However, for people with the right approach and skills it can become a good business.
If you do not want to invest directly in your own rental properties, there are investment vehicles that you can use.
For example, in the US, real estate investment groups are small mutual funds that invest in property. They allow you to invest without the hassle of property management, and with reduced risks—but the flip side is that there are fees to pay.
You can also invest in funds that focus on property. You therefore get the gains in property value, but without having to manage any properties yourself. However, be aware that it is advisable to take advice from an independent financial adviser before making any investments like this. This will ensure that you choose the right funds for you, and that your portfolio fully reflects your attitude to risk.
‘Flipping’ properties
‘Flipping’ is buying something that is undervalued, and quickly selling it on at a profit. Property ‘flippers’ therefore use two approaches:
They buy an undervalued property, for example in an auction, and simply sell it on at its full value; or
They buy a property, do some repairs and renovations to add value, and then sell it.
The first is generally a very rapid process. The second can take longer, meaning that flippers who repair and renovate properties tend to have just one or two properties in progress at once. They may even live in the property will renovating it, to reduce their costs.
WARNING! Flipping properties is a risky business
Flipping properties is not for the faint-hearted and carries considerable risks.
You need to be confident that you will be able to sell the property on quickly to make your profit. Hanging onto it for too long is likely to result in high costs from the borrowing you need to fund the process. There is also a risk that you will lose money, especially if the property market changes suddenly.
The second approach (buy and renovate) has fewer risks, because you are planning to add value to the property during your ownership and are therefore less dependent on the vagaries of the housing market.
A Final Thought
There is no question that investing in property is becoming a lot more popular. However, it should not be seen as ‘easy money’. Managing property, whether as owner-occupier or landlord, is hard and often expensive work. Whatever your approach, it is advisable to know what you are getting into before you start!