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For a first time investor interested in investing in property, what are the options? Would they be better off buying their own home and holding it for capital growth, or a buy-to-let property they rent out to pay the mortgage while hoping for positive cash flow and capital growth?

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    A home to live in is not an investment. – littleadv Mar 4 '15 at 15:01
  • A lot of home owners would beg to differ, many people consider there home as an investment as they will release equity to reinvest or sell up and downsize to release money for retirement. – Luke Fitzy Mar 4 '15 at 15:25
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    You may use equity to reinvest, but if you buy a home with the intent to live in, it is for most not a good investment. Similarly, when you buy a rental - the question "whether I'd live there" is irrelevant. – littleadv Mar 4 '15 at 15:28
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    @LukeFitzy - I agree 100% with littleadv. A lot of homeowners can be wrong. And there are brief periods during which there's the illusion of good returns, but in the long run, the value grows with inflation and not much more. Expenses eat into the "free rent" aspect. – JoeTaxpayer Mar 4 '15 at 15:30
  • Some people have had success with purchasing a duplex or other multifamily property. They live in one unit and rent the others out. There are some benefits in such an arrangement for a new investor. – Raze Mar 4 '15 at 16:07
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I'm struggling to understand why someone who has never owned a home before is considering purchasing such property as an investment to lease out.

The only tip I have in such a situation is for the person to buy a home and live in it for a few years. Then they'll at least have a starting point in understanding the true costs involved. Otherwise they are going to end up spending an awful lot of money for negative gain.

Home "investing" really isn't for people that haven't been through this experience.

There are three ways to make money on property.

The first is buying it at a discounted rate (below market), making whatever repairs are necessary to make it attractive, then, hopefully, selling it at market rate. If all of the expenses are less than the price it sells for then you win. This needs to be done in a short amount of time - less than 90 days. Otherwise your risks in the housing market increase. This absolutely requires that you be savvy enough to know how much things cost. Most of the people I've seen doing this handle the repairs themselves, which means a lot of manual labor.

The other way is to buy a home then lease it out. The lease amount needs to take into account that there will be months that it is just sitting (between tenants) as well as that things break and need repair. Again, if you haven't owned a home before, especially in the area you are considering, then it is very easy for you to lose big time here.

The third is property speculation. This basically happens where you buy a piece of land hoping that some event occurs which causes the price to go up. There are many possible situations here, most of which involve being able to predict the future. Mileage may vary.

  • Thanks for the advice some useful info to consider. The reason to invest in a buy-to-let rather than buy a home to live in is that the area of London I work and currently live in is very expensive and not really affordable but if I look else where outside of London for example like Manchester or Liverpool I can afford a property and these cities are also experiencing good capital growth that experts predict to continue for the next few years at least. So therefore I get on the property ladder , gain some positive cash flow, get the mortgage payments paid & hopefully benefit from capital growth – Luke Fitzy Mar 4 '15 at 15:23
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    @LukeFitzy: I'd seriously caution you against this. In the US, most of the "experts" predicted that the housing upswing in the early 2000s were going to continue for a long long time... it didn't. Maybe they are right. Maybe it'll be easy money. But that is far too much risk for anything I'd be willing to consider if I had little to no experience with it. – NotMe Mar 4 '15 at 17:11
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    If you are going to chase property value growth you might as well dump your money in a mutual fund and hope for the best. If you are buying property to make money you need to be proactive and get a place that creates monthly passive income. This, and only this is how you generate trust worthy wealth from a property. Riding the value roller coaster is a crap shoot these days – Anthony Russell Mar 4 '15 at 18:29
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Investing in property is a great way to build your asset portfolio. It is also a great way to crush your financial dreams for all time.

Property investment SHOULDN'T be done on a whim. You need to have a solid understanding of the type of property you're investing in, what you plan on doing with it and what you're going to get out of it. "Start with the end in mind" many savy real estate investors would say.

I currently own and operate two four family homes. I have also owned a few others that I have sold and profited from. So my specialty is buy and holding rental properties. I can't speak to buying a single family home because I haven't worked with that yet. All I can tell you is if you plan on getting multifamily properties, dip your toe in to make sure it's for you. Get something small like a duplex and see if it's something you can handle. Not everyone has the intestinal fortitude to handle tenants. You have to run your properties like Stalin. If you give tenants an inch they will bankrupt you.

All of that said, it's not rocket science either. Anyone that can do basic math can usually find a deal. Use tools at your disposal. Don't guess. If you're looking for a rental property, look at the comparable properties on the street and in the city. See how much they are renting for. Look at the asking price and use the Gross Rent Multiplier to determine if you're getting a deal or not. No book is ever going to give you a difinitive answer if you're getting a deal or not. You need to do the work and research yourself. Don't be scared off by it. Just put in the leg work, make sure you know your numbers and make sure you consult professionals, not your best friend or family. Talk to a REAL accountant. Hire a REAL real estate agent that you can trust. GET AN INSPECTION....

Finally, run your finances like a fortune 500 company. If you don't know how to produce an income statement, create a budget, track spending ect you are in trouble. Just because you buy a house doesn't mean you're going to instantly know how to do these things. Start now and be ready. Don't be an amature, and don't cook the books.

These are the fundamentals of successful real estate investing.

Suggested Reading:

  • Rich Dad Poor Dad
  • (Most) Donald Trump books
  • The Richest Man In Babylon

Those books will get you started. Also read about rental tax law. This is probably the single most important thing when you are dealing with rental income. When Uncle Sam comes for his cut at the end of the year, you want to know how much of that rental income you're going to need to pony up. It could be a ton if you don't use the deductions you can.

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    It's in the UK. Uncle Sam's tax reach isn't quite that far... Otherwise, good info. – NotMe Mar 4 '15 at 17:12
  • LoL Yeah saw that after the fact. I wasn't sure if Uncle Sam the UK you or not. He seems to have his fingers in everything else lol – Anthony Russell Mar 4 '15 at 17:25

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