Buying an investment property is very different from buying your own home. Your own home is a place for you to live. An investment property is a business that should make you money. It is, however, down to you to run that business properly. Here are some points to consider before you decide whether or not you’re up to the job.
One of the major differences between buying an investment property and buying shares is that buying an investment property tends to require a lot more capital. If you don’t have enough cash to buy an investment property then you may be able to get financing. This will, however, come at a cost and your returns will need to cover it.
Buying property generally comes with a lot of upfront costs. These will be amortised over the course of your ownership. As a rough guideline, you should allow at least three years for this to happen. Five would be better. The transaction costs in the stock market tend to be lower and hence can be amortised quicker.
The government is working on ways to speed up property transactions. For now, however, they are still actively slow by modern standards. Even if you find a buyer the day you list your property, you can expect conveyancing to take at least a couple of months. If there are complications, it could take several months.
In the stock market, by contrast, you can sell your shares, literally with a few clicks.
When you invest in the property market, you need to be able to predict and estimate costs and income at least reasonably accurately. In fact, the more accurately you can predict and estimate cost and income, the better your results are likely to be.
This is particularly important in the residential property market. Here, rents tend to be set for fairly long periods. Once they are set, you generally cannot bill unexpected charges to tenants.
The situation is a bit different in the commercial-property sector. In most cases, commercial property will be managed by a third-party company. The main exception is holiday lets (although even here many investors will use a third-party company). In this area, however, it can be easier to change the rent to reflect higher-than-expected costs.
If you own investment property, then you will need to be very careful when you file your tax returns. Any mistakes could see you paying too much or too little. In the latter case, you can expect HMRC to come knocking at some point. They do tend to understand that mistakes happen but they will still expect you to put them right.
It’s therefore highly advisable to have a proper accountant take care of your taxes. It’s vital that you keep full and accurate records.
At this point, most private individuals should probably delegate all work to other people. There are a number of reasons for this. Most of them, however, reflect the fact that the property market is very highly regulated.
The commercial property market currently has lighter regulation than the residential property market. With that said, the law is still very definitely a factor you need to consider. You also need to consider the possibility that regulation will be increased in future.
Delegating work to reputable professionals is usually the best way to ensure that you stay on the right side of the law. It also means that you know to bake these charges into your rent. If you start off trying to run your property yourself and then have to change, your finances may suffer for it. In the stock market, none of this is an issue.
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