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How To Avoid The Problems Of Investment Property
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Ensuring that an investment property isn’t problematic comes down to due diligence.
The lure to invest in UK real estate grows as the country’s population increase fuels a housing shortage. But property investments are tricky and quiet varied.
The widely reported housing crisis in Britain is unquestionably drawing interest from investors large and small. Large real estate companies are buying up raw land and buildings where growth is likely to occur, even if who is going to buy what and how are yet to be determined.
The demand for housing is at the root of this. Since 2001, the UK population has grown at a brisk 7 percent rate. And yet, due to recessionary and stringent lending practices, home building has fallen woefully behind. Young adults cannot afford the necessary upfront money to make a purchase, forcing them to rent or remain living with their parents. Young families are outgrowing the homes they purchased a decade ago and face similar barriers. Given these factors, many property developers are building to-let instead of for sale; indeed, the about a fifth (19 percent) of the UK housing stock is now in the private rented sector, with the value of that stock rising an extraordinary 250 percent since 2002.
But the rising tide does not necessarily raise all boats. There are many ways to achieve asset gains in investment property, and just as many ways to fail. Key factors to consider:
Identify the differences between built property and raw land. Whether it is a single-family residence, an apartment building or commercial property, the advantage of built property is that valuations can be determined in relatively short order. Calculating for comparable properties, current income flow, costs for maintenance and renovations are a simple task. But because those factors are easy to determine and assess, the margins on such investments are narrowed because other investors can determine those valuations just as easily. Raw land that is purchased with the intention of development involves more variables: Will the local planning authority approve a zoning change (e.g., from agricultural to residential designations)? Will there be demand for housing or commercial use in that area, and what kind of buildings? Will infrastructure development costs work favourably within the overall economics of the investment? Will a two- to five-year development time frame provide a favourable return on the investment, given the uncertainties of the economy that far into the future? Call it right and you can do well, but of course the opposite can prove true as well.
Study the volatility of market-traded REITs. Since 2007, real estate investment trusts (REITs) have been available to UK investors. The funds performed poorly even before the economic crisis the following year. And while many have recovered initial losses, REITs have been subject to the volatility of the markets and less evaluated by the economic health of the properties themselves. The advantage of REITs is in their liquidity.
Compare REITs to raw land. In comparison to REITs, undeveloped land is far more illiquid. When purchased in joint venture partnerships, land investors commit to multiple-year development time frames. The difference is where investors can increase the value of land, regardless of market dynamics, through strategic site selection, zoning changes, infrastructure development and the timing of the sale (many land investors do not build on the property but instead turn that over to developers).
The price of entry in strategic raw land investing. Investors are strongly advised to work with land investment consultants and property fund managers who understand the myriad dynamics of this type of investment. To work with a group of investors, one would typically need a minimum of £10,000 to invest.
Understand the direction of Local Planning Authorities. This is a land investment specialist’s skill, to be able to read localized economics and determine where the municipality would be amenable to zoning changes. While sometimes a volatile topic unto itself, national planning policies have provided greater latitude to the local authorities in recent years, which generally favour new and expedited development.
As should be clear, there are many options to getting involved in property investments. But don’t bet the farm on it – you would be wise to work with real estate investment professionals whose life’s work is land and property.
Anyone considering investments of any kind should of course work with an independent financial advisor. Discuss where investments – and the timing of those investments – fit into your overall financial portfolio.
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