Month: July 2019

Interest rate rises, and what they mean for you?

When interest rates start to go up, individuals who like to save their money are going to benefit. Banks and building societies often raise their interest rates based on the Bank of England doing so, meaning the amount you have in your savings account will go up.  On the other hand, having a mortgage, loan or credit card debt means that any interest rate rises means the amount you’re borrowing rises depending on the conditions of the loan. This is where fixed-rate mortgages have an advantage: if rates increase then your mortgage repayments won’t fluctuate with the interest rates unless you plan to remortgage.

Though small interest rate rises don’t seem significant, they can have a big effect on the amount you’re paying. For example, if we take a £150,000 mortgage repayment, a 2.5% interest rate rise on the base rate would result in an extra £230 a month to be paid. Instances like this would require the mortgage holder to raise additional funds or cut spending or to switch to a new fixed-rate offer before the base rate changes. With this being said, there are ways in which we, as investors can turn these potential issues into opportunities. 

1. Fixed-Rate Mortgages

Five and ten-year mortgages are available depending on the current market, meaning home-owners can rest assured their mortgage payments won’t go up for the duration of the loan. This method is a sure-fire way of protecting yourself against interest rate rises and will allow you to take any variables out of your mortgage repayments. The flip side to having this peace of mind is that you will often overpay for fixed-rate mortgages compared to a variable rate mortgage (also known as a tracker mortgage). Banks use fixed-rate mortgages as a form of insurance that they won’t vary your payments, but will charge you more, and tie you into them for longer as a result. This being said, if rates don’t increase, then you may well have spent much more on a fixed-rate mortgage that could have been utilised elsewhere. 

If a borrower with a 30% mortgage took out a five-year fixed rate over a tracker, they would pay a 2.3% premium. Comparing an average 2.49% tracker with the 4.79% five-year fixed rate shows that by going with the fixed-rate, you add £181 a month to your monthly repayments on a £150,000 mortgage.

2. Tracker mortgages 

If possible, it is best to vary your mortgage products between a tracker and fixed-rate mortgage so that you spread the risk. You may be restricted to whatever mortgage products are available at the time but to be safe, it is best to have a balance of fixed and tracker mortgages within your portfolio and to ‘self-insure’.

3. Self-insure approach 

One approach is to compare the tracker and fixed-rate mortgage options, take the tracker but pay the difference amount each month into a savings account.

Essentially, you are creating your own insurance policy against rate rises as you are paying the fixed term rate at the same time as covering yourself for any potential increases. If the rate rises, you have the same level of cover as if you had been paying the fixed-rate. If the long-term tracker ends up costing less, then you will have a nice pot of cash in your savings account.

4. Equalise

The last option is to use all three of the strategies mentioned above across different markets to limit against the effects of any major market shifts and average out the profits/losses from each option.

We hope you’ve found this article useful in explaining interest rates and how they can affect your investments. If you would like to know more about Nichol Smith Investments, click on the link below to book a call.

How to flip a property for profit

‘Flipping’, ‘Trading’ and ‘Buy-to-Sell’ are all terms commonly used when describing a specific property investment strategy. The terminology we prefer is ‘Buy-to-Sell’ as it does exactly what it says on the tin. It is the strategy of buying a property to sell it on for a profit, usually involving some form of property refurbishment first. It can be a very lucrative property investment strategy.

Why would I want to flip property?

Tens of thousands can be made on a single successful flip if appropriately done, and this can then be reinvested into creating a rental portfolio for yourself. If possible, it is worth considering selling the property through a Limited Company as you may find paying corporation tax more tax-efficient than paying income tax. It is important to remember that we are not attempting to provide financial advice in this article. Always make sure you engage with a qualified professional when making an investment decision.

How do you give yourself the best chance of success with property flipping? 

Use our guide below to identify the critical considerations before making any big decisions. Buy-to-Sell can be a highly profitable and relatively straight-forward strategy to replicate, but only if you take the time to do your research.

The top three things to consider before deciding on whether to purchase are property type, area, and situation.

1. Property type

Think about whom the property will appeal to. For example, a three-bedroom house will be more desirable to a broader range of prospective buyers than a top floor flat in a high-rise building. The desirability of the property could affect how long it takes to sell, which will ultimately have an impact on your profit margins. You will need to factor in general bills such as utilities and council tax, and six months of mortgage payments if a mortgage was required to secure the property. Sometimes bungalows can be a good investment provided you can add real value through renovation or extensions. Move-in ready properties often appeal to more buyers than properties that will require refurbishment. 

2. The area

When considering potential locations to flip properties, it is essential to think about your potential customers. What are the factors that will appeal to them? The property may tick all their boxes, for example, it may have a garage, garden and en-suite, but if the property is in an area with a high crime rate, then you need to consider if are buyers still going to be interested. If you are selling slightly bigger properties to interest first or second-time buyers, then the facilities and infrastructure are going to be as valuable as the property. Think about ease of access to the area; can you travel there by road, local bus or on train service. A less desirable house in a good street may be a better investment than a lovely property in a rougher neighbourhood as properties can always be refurbished, but you can’t pick them up and move them to a better area.

3. Seller’s Situation

The ideal situation for property flipping is when you are in a strong financial position and able to act quickly, and you find someone that needs to sell fast. Quick sales benefit you as a trader as you avoid properties that are tied into a chain of transactions but also helps the seller by allowing them to move on and reduce their expenditures. Often there is value to be added to properties that have been in long tenancies or when the owner has lived there without updating for an extended period. These types of properties are extremely sought after and can sometimes attract strong competition. Do not be lulled into a bidding war with someone that is willing to pay over the odds as they will often be less experienced or seeking less profit. Other bidders could genuinely be interested in living in the property, or they haven’t worked out their costings properly and are making a stupid decision. If the property can be updated or refurbished, generally speaking, the profits you see will be good provided you buy at the appropriate price, manage renovation costs effectively, and secure a good sale price. If you don’t believe you can do this, it is better to walk away and find a different property to invest in.

How to flip the property

Before fully committing to a sale you must double-check all of your figures, making sure you have an educated projected sale price as well as being realistic about the amount you will sell on for. It is reckless to say you will achieve £25k over the sales of comparable properties in the area just because of your personality. You must compare like for like in the area, and that’s where online resources are your friend. Websites like Zoopla will show you the recent sale prices of property in the neighbourhood and the current trends in that area. Price check your property with properties that match what you are trying to achieve to establish a realistic sale price. Once you determine your end goal price, you should work on getting quotes for the renovation costs. Make sure you get at least three quotes to ensure you are getting value for money. It can be cheaper to hire individual tradespeople and project manage the project yourself. However, it may be easier to hire one contractor to manage the whole project, allow you the freedom to source your next project. Sometimes traders will require a minimum return on investment (ROI) when contemplating taking on a buy-to-sell project. Don’t forget to factor in the appropriate stamp duty, buying and selling costs, and general utilities as well as professional fees. You will also need to take into account the interest you will pay on any finance you need to fund the project.

It is also wise to consider the implications of proceeding with one property sale over another. You would be surprised by the number of traders that will buy-to-sell, do the work themselves and then expect a high profit only to be disappointed because they didn’t do their research or know their top line figures. To minimise risk in your investments, you need to take the time work your numbers, find tradespeople you trust and respect, and remove the emotion from your decision-making process. When you have your figures, it will be easier for you to work backwards to decide an offer price, which will allow you to meet your ROI expectations.

Although every property flip is different, the fundamentals for property flipping remain the same:

– Add value to the property without over-stretching your budget.

– Sell for the best possible price without being over-ambitious.

– Pay a sensible and well thought out purchase price.

The list above is very simplistic, but it shows you the key areas for consideration. People often think anyone can flip property, and they probably could, but to flip a property effectively, you need to be strategic with your decision making. The reality is most people won’t ever give property flipping a thought, but you are reading this article so you are obviously interested and we want to provide you with the tools for success. Good luck and please let us know of your success.

If you are interested in property and would like to discuss working together in your property journey, please click the link below to book a call.

Buying your first property investment: 10 things to keep in mind

When you’re new to property investment, you want to make your first investment count to give yourself the best possible start. No matter how much experience you have, success is not 100% guaranteed. We have put together some simple steps to help you make sure you are on the right path. It can be used as a framework for making the right decisions.

1. Make a checklist and stick to it

Creating a step-by-step checklist for yourself will ensure you don’t miss out any crucial steps when buying a property. A simple list of activities including everything from filing paperwork to arranging surveys, mapping it out on a piece of paper means nothing is overlooked. This will give you peace-of-mind knowing you haven’t forgotten anything essential. 

2. Keep your business head on 

Remember that buying a home for you to live in personally is not the same as looking for a property to invest in, and you should approach the situation from a business perspective. When it comes to property investment, you need to take your emotions out of the situation to avoid overpaying and focus on the purpose of the investment – making money.

3. Research, research, research

Not to state the obvious but make sure you know the area you want to buy in inside out, and this will help you make smarter decisions. There are thousands of resources available to you both online and offline. Use these resources to your advantage, arm yourself with all the information available, and you will be giving yourself the best possible starting point.

4. Set clear goals

When starting out , it is a good idea to set some clear goals for yourself around what you are trying to achieve financially. Having a target wealth figure and timeframe will influence the property investment strategy you choose. If you choose the wrong investment strategy for your goals, you could end up disheartened by your returns.

5. Think about everything long term

Property investment should not be thought of as a ‘get rich quick’ scheme. It should be done in a careful and thought-out manner, taking the time to consider the best course of action at every stage of the process. That being said, it’s still very achievable to see substantial returns within five to ten years, bear in mind that rushing into things too quickly increases the possibility of failure due to overstretching yourself. 

6. Make sure you know the area

As we’ve said before, there is a wealth of information available to you. Make sure you use this to your advantage and research the area before making any investments. Statistics on previous sale prices or the growth in the population should give you a good indication on whether investing in the area is a smart decision. It’s better to take the time to do your research than risk your capital by investing too quickly.

7. Include the relevant professionals 

When starting out, it’s useful to identify professionals that can help you on your journey. Having trusted local estate agents and a mortgage broker can benefit you when you need to make difficult decisions. There is no point trying to do everything yourself when there are people whose job it is to help, make sure you utilise the experience of other professionals.

8. Make smart investments

To be profitable in your property investments, it’s important to buy properties that match the current market needs. Look out for properties in an area that are let quickly or on the market for short periods. This is when being in contact with your local estate agent is useful – they can guide you on what is happening in your area and let you know the best places to invest.

9. Cash Flow is King 

Having an understanding of cash flow is vital to property investment as there will continuously be  payments and expenses to track. There will be a mixture of monthly fees and one-off payments to be made, sometimes quarterly and sometimes annually, so ensuring there is enough money in your account to cover this is crucial. Additionally, you may want to have contingency cash in your account in case of emergencies or unexpected property maintenance.

10. Choose an investment strategy and stick to it

Sticking to one approach with your property investment will help you get the best returns. Over-complicating matters when you are first starting out can make your journey unnecessarily tricky. By having one strategy and sticking to it, you will become an expert over time and make you a successful property investor. 

We hope our ten tips for first-time property investment have been helpful. By following this guide, you could stand to make a lot of money. If you ignore the advice, you might find yourself in a difficult situation with a bad investment that you can’t get out of. If you would like to hear more about the services we provide at Nichol Smith Investments, click the link on our homepage to book a call.

Paying off your mortgage early – is it financially sensible?

Most homeowners dream of paying off their mortgage early and dream of the day they can be mortgage free. The fantasy of being mortgage free is easy to get caught up in. However, it is essential to take some time to think it through and consider if it is the most financially sensible decision long term.

This applies to your mortgage, whether it is for residential properties or buy-to-let. The financial implications of paying off your mortgage early will vary depending on your personal and business circumstances, and therefore, it requires careful and deliberate consideration.

Below we have provided you with questions you can ask yourself should you ever find yourself in this position. It’s a pretty comprehensive list, and it may even help you to think of your own questions depending on your personal situation.

Question 1 – What is happening with interest rates?

Current and predicted mortgage rates for the upcoming year will guide you on whether or not it’s the right time to pay it off. This is especially true for the buy-to-let market as there are some excellent fixed interest rate mortgages available at the moment. Interest rates remain low, but how long these rates will be available is hard to predict. It may be more advantageous to spend the money that could pay off your mortgage in further investments for a higher long-term return.

Question 2 – What is happening with inflation?

Realistically, what you can buy with £200K now will change drastically in the next twenty years. The longer you can hold onto a property, the more you will make when you decide to sell it. With this in mind, it makes sense to invest in property sooner rather than later to benefit from capital growth. If you rent the property straight away, then this income should cover your mortgage payments, meaning there will be less outlay for you.

Question 3 – Can your mortgage be paid off early?

Not all mortgages allow you to pay them off early. Unless stated in your mortgage terms that you intend to settle early, you may incur penalty charges for doing so. Generally, there’s a maximum amount of the loan that can be repaid within a fixed timeframe, usually around 10%. However, it is equally possible to have a mortgage without any repayment restrictions, particularly if you’ve been repaying the mortgage for a long time. We would always recommend checking your mortgage terms before attempting to settle early.

Question 4 – Are there smarter investment options?

Leveraging the equity in your property to invest in other properties with a good return is a viable option depending on finance rates. If you’re someone who views owning property as a career, rather than as a consequence of needing somewhere to live, then the cost of borrowing is going to be important to maximise your earnings.

Question 5 – What is your reason for settling your mortgage early?

Despite seeming like something to aim for, paying off your mortgage early shouldn’t be seen as the be all and end all. There is a common misconception that paying off your mortgage early will be the most beneficial for your next of kin should anything happen to you. However, most life insurance policies will cover mortgage repayments, which reduces the need to repay early. If the cost of repaying early is going to have a detrimental effect on your personal circumstances, it may not be worth the trade-off. Of course, an early settlement can be beneficial, but try not to get caught up in the notion that it’s a must.

Question 6 – Are you close to retirement?

If you are approaching retirement age, it might be worth considering an early repayment of your mortgage as your financial situation is likely to change when you stop working. As we get closer to retirement age, the less you want to have in the way of liabilities, which makes paying things off a much more attractive proposition. On the other hand, have you thought about cash flow from a property portfolio for retirement income?

Question 7 – Do you need your capital to be fluid?

When faced with the decision of paying off your mortgage or reinvesting, it is important to consider how you could be affected in a worst-case scenario such as sudden unemployment, serious illness, or unexpected repairs on properties. Repaying the maximum amount allowable could be a better long-term plan than paying off your mortgage entirely as this gives you wiggle room on your mortgage, as you will be ahead of your minimum payments.

In Summary 

The purpose of this post is not to tell you what to do one way or another, but to get you to stop and consider all of your options before making a decision. If you decide to go ahead with your mortgage repayments, you should have peace-of-mind that this is the right option for you. If you decide to invest your money in other ways, we hope this has helped you identify how to make your money work harder.

The property market is ever-changing, and life can be unpredictable, so taking the time to re-evaluate the best course of action for you is essential.

If you would like to know how Nichol Smith Investments could make your money work harder for you, book a call with us via the link on our homepage.

Five ways to reduce risk when investing in property

Risk in property investment is always relative to the current economic climate. Before the 2008 financial crisis, property investment wasn’t considered to be particularly risky. However, even with property prices currently on the rise, there are many individuals who would question investing in property in the current market. Your property investment strategy will make a big difference to the amount of risk involved. Even though there will always be an element of risk with any investment, you can mitigate this by adopting a low-risk strategy.

1. Take a long-term view

Throughout your property investment journey, the fluctuation in the property market as well as interest rates will influence your decision making. Despite these variables, it is relatively safe to say that house prices will continue to rise. The cost of property has risen substantially over the last twenty years, and the chances of this continuing are almost guaranteed. Our advice would be to buy smart, invest without overcommitting yourself financially, be prepared for some potentially tricky times, and persevere, you will see good returns.

2.Don’t be hasty

Carrying out thorough research on the area you are investing in is vital to ensure you pay a fair price for the property. In the beginning, it is easy to get excited and make rash decisions which could lead to you overpaying, thus making your investment less profitable. It’s important to remember that for every pound you spend, you will need to recuperate this at the point of selling the property. Researching the area you intend to invest in will stand you in good stead when it comes to agreeing on the initial purchase. This is particularly true for buy-to-let investments as this research will give you an understanding of the current rental demand and how long it typically takes to let a property.

3. Get the right insurance

Making sure you have the right buy-to-let insurance cover will save you a lot of sleepless nights if your tenants stop paying rent or damage your property. Some letting agents will offer to find you the right level of cover as an additional service (for a small fee). Typically, your protection will start when your tenant stops paying rent and will continue until the issue is resolved. However, all insurance policies are different, so it pays to read the fine print to make sure you know exactly what is and isn’t covered.

4. Check your tenants

Make sure you complete background checks your tenants before agreeing to let. Requesting references and having them verified is a crucial step in any buy-to-let investment strategy. It is much more difficult to remove bad tenants, so taking time to go through proper processes and procedures will save you any hassle in the long run. You may also wish to show any potential tenants around the property before entering an agreement as this will give you a chance to get to know the type of people they are. By following these simple steps, you will lower your chances of letting to bad tenants considerably.

5. Make allowances for rate increases

Paying close attention to interest rates is important for budgeting before you buy, which should help you avoid over-committing yourself financially. If you borrow the maximum amount available to you and interest rates go up, you could find yourself with mortgage payments higher than the rent for the are. If long term fixed rate mortgages aren’t available to you, we would always recommend giving yourself some wiggle room to account for potential interest rate changes. 

In summary, there are sometimes things that happen in the property market that are entirely out of your control and they can be stressful. However, some factors are under your control, so avoid costly mistakes by following the advice above. Planning ways to minimise risk for yourself may seem tedious in the beginning, but the long-term benefits far outweigh the extra time it takes. Don’t leave things to chance, do the necessary preparation work, and make sure you set yourself up for the best possible outcome.

If you would like to know more about how Nichol Smith Investments could help you on your property journey, please book a call with us through the link on our homepage.