Guide to sourcing a property
In this guide we look at the fundamental principles of sourcing a property - the why, where, how much, how and what to buy.
First question – why?
When you’re setting out to source a property, be clear what you want to achieve. Will it be part of a long-term portfolio, which you’ll hold for years as an asset, with letting income? Or do you plan to refurbish and sell quickly? Are you aiming to diversify an existing investment portfolio or establish an income stream to supplement your pension?
With a longer-term asset, you’ll need to factor in management and ongoing costs. For example, you may need to visit the property or arrange renovation and repair work. Equally, if you’re planning to refurb and flip, there will also be good reasons to look nearby, so that you can get to the property easily.
Are you looking for a regular source of income, or for longer-term capital growth? A property in an area with strong letting potential such as a busy town or city is more likely to generate regular income than a rural property far from transport links.
Second question – where?
To choose a location for your investment property, it helps a great deal if you know the area well. For most people, this means investing in or near the area where they live.
Through your own local knowledge, you can accept or reject specific locations, because (for example) they suffer from excess noise, traffic or have a poor reputation. Someone who was unfamiliar with the are might not realise these factors, but they can have a major influence on property values and letting prospects.
You’ll also probably know about popular cafes, restaurants and shops, about great transport links, leisure facilities and schools. People can research these factors, but as a resident, you’ll know more about them than most – including anticipated changes such as a new transport route, a new leisure centre or the fact that a school’s status is improving.
To add to your knowledge, do some extra research. Check out property websites such as Rightmove, PrimeLocation and Zoopla, to see what properties are available for sale and rental, how much they’re on for and for how long. Also look at Google Maps if you’re interested in development opportunities – you may be able to spot land with planning potential.
Next, check out local authority websites to see their planning policies. This will tell you where the priority is for Houses of Multiple Occupancy (HMOs), or for student accommodation. The Land Registry portal gives you exact figures for what a property most recently sold for. So you can match this figure with contemporary valuations and earlier figures from comparable properties.
Third question – how much?
When sourcing an investment property, be sure to factor in all relevant costs at an early stage. The purchase price will clearly be the largest single expense, but it’s only one of many costs. Add up any service charges, ground rents, council tax, Stamp Duty Land Tax and income tax, then compare the overall costs with the prospective income – including void periods. In the UK, average void periods in letting properties are 20 days per year.
The yield you should be looking for will vary, depending upon the area of the country in which you’re investing. For example, yields in London are generally 6 per cent or lower, whereas in the North East of England, they are typically 10 per cent or higher.
In terms of an ideal purchase price, this too depends on whether you plan to hold the property for long, or refurb and sell. For longer-term assets, paying the market rate in a certain area and condition could be fine, because you can factor in anticipated lettings income and capital uplift. Whereas if you’re planning to refurb and sell, known as property flipping, you need to calculate how much below the market rate you’re prepared to pay, to allow for your expenses, the costs of financing a property and to give you a profit margin.
Fourth question – how?
Estate agencies – physical and online - are the obvious place to start. It’s worth nurturing agents and contacting them regularly, so that you hear about opportunities as soon as they come in, ideally before they’ve been published. Like most people agents are keen to save themselves time and effort. If they know you’re ready to proceed, they’ll offer you a property before going to the wider public.
Consider working with a professional property sourcing agent or investment company. They may have opportunities which fit your profile, in terms of price, rental yield and location, saving you a great deal of time. You’ll have to pay them a fee, but this could be worthwhile set against other savings.
A relatively new option is property crowdfunding, where crowdsourcing companies provide investment opportunities on a single platform. This form of investment gives you a percentage holding in a property, or group of properties, and means you have exposure to market increases for an affordable sum. It takes much less time to make the transaction and returns on your investment may start coming in within weeks.
Final question – what?
Studio, two- or three-bed apartment, house, bungalow? Consider the pros and cons of different property formations before you set out on your search. Two-bed apartments are generally accepted as the easiest and most profitable to let. On the other hand, a four-bed house on a long-term corporate let can be a secure and high-earning asset. Research the relative demand for different property types in the area you’re focusing on. Are there changes to the market, for example are more single people, or families, moving into the area?
Research local property auctions. These can be a gold mine of possibilities, with properties on offer well below their market rate. But beware: they could also have hidden problems with the legal title, with structural issues, their location or with their neighbours. Due diligence is even more important here. The same applies to repossessions, where the receiver has a short time frame to offload a property. This makes them a highly motivated seller, but it places an onus on the buyer to do their homework.
Read next: The guide to negotiating a property purchase
Read the full guide: The guide to property investment
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