Investment Property – Will It Make Money?

The whole point of buying investment property is to make money. The more money you make from a property the better off you become financially, and consequently (should you want to re-invest) the more properties you can buy…which will hopefully make you even more money. The key to this cycle is to make sure your first investment property has the potential to earn you a healthy profit, and by this we mean in excess of a few thousand pounds each year.

Finding investment property that offers a healthy profit


Profit from an investment property comes in two forms:

  1.  Instant equity
  2. The difference between the monthly rental income and the monthly outgoings on the property, also known as the positive cashflow.

 Finding an investment property that offers both is your goal, and the best way to do this is through a property auction.

 Buying properties from auction


The vast majority of properties sold at auction are bought as investment properties and not as homes for buyers to live in. In addition most auction properties are repossession properties being sold quickly on behalf of the mortgage lender and so the selling price is invariably lower than the market value.

On a good day it is possible to purchase an investment property from an auction house for around 30% less than its market value; the result being that you get a property with a good amount of instant equity regardless of the condition it’s in when bought. It is common knowledge however that most auction properties are in need of modernisation at the time of the sale, and so some of the saving you make will need to be used to make the property rentable.

Generating a positive cashflow


So, you’ve purchased an investment property with instant equity. Now you need to generate a positive cashflow, and with an auction property this isn’t too difficult to do.

For example, let’s say you buy a property with a market value of £100,000 for £70,000 from an auction. This gives you instant equity of £30,000. Of the £70,000 purchase price you pay £21,000 in the form of a deposit (30% deposit), and take out a buy to let mortgage for £49,000. With terms of 20 years and an interest rate of 5% your monthly mortgage payment would come in at around £335.

Because the property has a market value of £100,000 though you could ask around £650-700 per month in rent (depending on location), so making you a profit of around £300 each month. Even after landlord insurance and letting fees (if applicable) you’d still generate £250+ in positive cashflow each month, or around £3000 per year. This profit far outweighs even the best savings accounts and most other forms of investment.

So, providing you research the private rental sector carefully in your local area and buy an investment property with potential there is no reason why it shouldn’t make you a healthy profit from the first year. Given a couple of years, the equity in your first property can often be used to finance the purchase of a second property and so on, until you have a portfolio that provides you with an ever-growing amount of new investment money each year.