Most female lawyers rely on one income stream: their salary. In my opinion, this is a risky position to be in. For me, property investment has been the best way to generate another passive income stream and long term cash flow.
Disclaimer: The information in this blog is my personal opinion and experience and is not legal or financial advice in any way! Also, just FYI, this post may contain affiliate links.
Property investment is passive because, once you’ve purchased the property and got a tenant in, there is very little that you need to do (assuming you use a property manager).
You basically get paid every month while paying off your mortgage. How great is that?
But in the early stages of my property investing journey, I made a lot of mistakes. So I’ve written this blog as is the sort of blog I wish I’d have read when I first started out!
Tip 1. Set a goal
You should never go into any investment without having a clear goal in mind.
As we know from our legal training, goals need to be “SMART”: Specific, Measurable, Achievable, Realistic and Timely.
I didn’t have a concrete goal when setting out, so I went into investments not knowing what I wanted to ultimately achieve. This was a mistake.
My goal now is to have £10,000 per month of passive income by the age of 34 (bold, I know)!
Of course, I’m not quite there yet – but having this very clear goal keeps me very focused and ensures that I tailor my property investment strategy towards maximizing monthly cash flow (see Tip 10).
Tip 2. Buy below market value
Buying below market value (BMV”) enables you to lock in equity from day one. This means that, even if you were to sell the property for market value the day after you bought it, you’d still make a profit.
This also protects you in times like the present when some experts are predicting that property prices will fall in coming years due to recession.
Buying BMV takes research to first understand what the market value of a property actually is.
You can get an idea of the market value of a property by looking at similar recently sold properties within the same area and by getting insights from estate agents.
It often means buying from motivated sellers as they are people who want to sell their properties quickly. Meaning they are more likely to sell for a “discounted” price.
But trying to build up relationships with estate agents can take a lot of time and effort (trust me, I spent months doing this in the early days).
So if you’re like me (and most other female lawyers who struggle for time), you could appoint a property sourcing expert instead.
These are people who source “BMV” properties for a living. They either have direct contact with motivated sellers or very good relationships with estate agents (feel free to ask me for recommendations)!
I only work with sourcing agents who can find deals that are 20% BMV. This gives me a good cushion if house prices fall.
Tip 3. Buy in areas with high rental demand
Buying in areas with high rental demand is massively important. The rental demand determines the profitability of your investment – if you can’t rent it, you won’t make a profit.
When considering rental demand you need to think about areas that are close to local amenities and have good transport links.
Properties that are close to universities, schools, hospitals etc also tend to have good rental demand.
But you also need to consider the type of tenants you want to target (e.g. students vs working professionals).
Personally, I target working professionals. So I place a lot of emphasis on transport links and local amenities when looking for properties.
Tip 4. Be aware of yield
The key to a knowing whether an investment is a good investment is in the numbers.
Rental yield is the rate or percentage of return from your property income. It’s useful because it allows you to compare properties to assess how good of an investment they really are.
There are a few different ways to calculate yield. But I prefer to keep things simple. So the calculation that I use is:
Annual rent / purchase price x 100 = yield.
For example, an annual rent of £9,000 (£750 per month) divided by a purchase price of £150,000 would give a yield of 6%.
Many commentators say that a 6% yield is a good yield. However, I always aim for 10%.
Tip 5. Crunch the numbers (again!)
The numbers must stack up for any investment to be viable.
Be aware of exactly how much capital you need in advance (including costs such as purchase price, conveyancer fees, broker fees etc).
Always try to use a “worst case scenario” approach when calculating the expected rental income.
This will keep you realistic and will force you to only consider investments where the numbers genuinely stack up.
Tip 6. Factor in a buffer
No matter how many times you crunch the numbers, there’s will always be something unexpected that crops up.
As a general rule of thumb, factoring in a 10% contingency for any refurbishments is very helpful.
Hopefully you’ll never have to use it. But it’ll provide a very useful buffer if you do.
Tip 7. Buy to keep
This essentially means buying a property with the intention of renting it out long term.
If you adopt this strategy you’ll be more likely to benefit from capital gains (through house prices increasing).
You also won’t be phased by any dips in the market because a drop in house prices are only an issue if you are planning on selling at the time of the market drop.
I always consider capital appreciation as a bonus, rather than an objective. My objective is always to maximize monthly cash flow (see Tip 9).
Tip 8. Don’t get emotional
This is easier said than done.
When shopping around for a property it’s natural to favour properties that you would like to live in. But that shouldn’t be your criteria.
Your criteria should be: what property would a tenant live in.
Don’t let your personal distaste for the colour of the tiles in the bathroom prevent you from making a profitable investment.
Tip 9. Buy for cash flow not capital growth
Some people prefer to invest in property that is likely to increase in value.
For example, a property worth £100,000 today might be expected to be worth £130,000 in 2 years, giving you a £30,000 profit if you wish to sell. But this is not guaranteed.
As we approach a recession, it is important to buy for cash flow – i.e. the month to month profit – rather than betting on house prices increasing.
Capital growth is just a bonus.
Tip 10. Determine your strategy at the outset
There are several property investment strategies. The one I prefer is the BRR strategy. This stands for Buy Refurbish Refinance.
I like this because it enables me to buy a property, refurbish it to increase the value and the refinance (by getting a mortgage) and pulling all of my original cash out.
Other strategies include:
- Buy-to-Let (where you buy a property usually with 25% deposit and let it out to a single tenant or family);
- Flips (where you buy a property, renovate it and then sell it straight away for a profit);
- HMO (where you rent out the house to more than 3 non-related people as a Home of Multiple Occupancy);
- Serviced Accommodation (where you provide services such as cleaning and laundry for a profit) and many more.
Tip 11. Don’t be afraid to venture outside of your area
There is comfort in buying a property that is close to where you live. It means you can look at it from time to time. But that’s it.
Chances are, there are much more profitable areas of the country than on your street.
Don’t be afraid to have a property that is miles from where you are.
If you get the numbers right and get a good property manager, you won’t need to spend much time on the property anyway.
Tip 12. Don’t try to “time the market”
The predictions suggest that property prices are going to fall at some point. But no one knows when or by how much.
If you wait for this to happen, you might never invest. The best time to invest is always now in my opinion.
You can cushion yourself from a loss in value by buying below market value (see Tip 2).
Tip 13. Find a core team
Your team will be key to making property a success.
Everyone from tax advisor, conveyancer, surveyor, mortgage broker to workmen (plasterer, capreter, kitchen fitter etc etc) are needed when buying a property.
So ask around and do your research (and feel free to ask me for recommendation).
Tip 14. Network
There is huge value in talking to other property investors and learning from their experience.
Join property investor networks, forums and blogs and make sure you talk to people.
Tip 15. Get educated
Anyone can learn the basics of property investing. However, if you do what I did at the outset, you’ll spend hours (actually, years) reading and learning before any sort of execution.
Don’t fall into this trap.
Get educated as quickly as possible and then move to action.
Find a way to continue your learning on the move so that you can save time and get started sooner.