When it comes to residential property everyone is an expert – or so it seems. Of course, whilst we all live in property and many of us own property the reality is that we are as likely to be experts in property as we are able to dismantle and rebuild the company car.The last fifty years has seen a dramatic increase in the capital and rental value of property in most parts of the UK, especially the South East and London. In fact, in 2015 Halifax undertook research that indicated that the net increase in the average house price in Bracknell over the two previous years had outsripped the average annual wage by 133%. That means on paper, you were likely to earn more as an unemployed homeowner than as a tenant on an average wage! Add in rental income too and you have an impressive overall return on property in the South East and London over the last few years. Of course, past performance is no guarantee of future performance, so here are 5 critical factors to consider if you are considering an investment in property any time soon.1. Allow yourself financial ‘wiggle room’House prices, like stocks and shares, can go down as well as up. Make sure you allow some financial ‘wiggle room’ when considering the size of the loan you take on and the impact any loss in rental income will have on your monthly cash flow. It’s worth noting that if the equity in your investment falls below the lender’s set loan-to-value criteria due to a fall in house prices, you might find yourself with a cash demand from the lender to reduce your borrowings. The more you borrow, the more gearing comes into play, meaning that in a rising market the return on your capital (the deposit you invested) is likely to be higher. However, this works both ways and rising interest rates, a stagnating or falling housing market and low tenant demand will quickly erode those expensive rose-tinted spectacles you were wearing when you bought the place.Some first-time investors over stretch themselves both in terms of the loan they take and because they ignore hidden costs such as Stamp Duty (now hugely punitive for buy-to-let investors) and rental voids. 2. Look at the UK economy as a whole and the local marketThey say that economists have predicted fifteen of the last three recessions and that’s probably not far from the truth. Post BREXIT being the most recent example – so far.Property prices are largely a result of macroeconomic fluctuations and influences, most particularly relating to the cost and availability of debt. Best illustrated by the housing crash in the USA and parts of the UK post 2008, most property purchasers rely on debt in order to buy. If debt is expensive or hard to come by then the demand to buy property will fall. If supply is constant, this will likely result in a fall in prices, which in turn will increase the risk to lenders’ existing loan books and may result in further tightening of mortgage availability. When markets crash, they become self perpetuating, and the property market is not immune.If you could predict the economy and call the market accurately you’d be reading this from a private yacht in the Caribbean, but that doesn’t mean you should invest without caution. Look at what factors might affect house price inflation or deflation such as availability and cost of mortgage debt, legislation (such as MEES regulations, changes to SDLT and income tax regulations for buy-to-let landlords), housing supply and tenant demand locally and factors that might affect the latter.Returns from investment will come from three potential sources. They are;
A: Capital appreciation of the market as a whole
B: Capital appreciation through enhancement or development of the property
C: Rental Income (after expenses, mortgage interest and tax)
If you have borrowings, you cannot just rely on (A) above. You will need rental income to service mortgage payments. Make sure the property you buy is right for the local area and that a tenant demand exists. A good rule of thumb is not to buy property in an area you couldn’t see yourself living in – at a push.3. SpecializeConcentrate on what you know best or get to know the market you consider to offer the best medium to long term returns. Property should almost always be considered a medium to long term investment. If you are a developer or trader then you might be looking at the short term, but most part-time investors should be looking five to ten years ahead as a minimum.Stay active in an area you know and don’t spread yourself too thin. If multiple occupancy and/or student accommodation is your preference, make sure you understand the special regulations that relate to that market and make sure you invest in the right areas. There is no point investing in property that will suit students in a town or city with no higher education campus!Investing in property far from home is probably a mistake and certainly adds to the management hassle you should expect.4. Do the MathsMake sure you understand all the costs and risks involved with buying, letting and managing an investment property. Regulation has increased dramatically over the last decade and landlords are now burdened with a variety of costly annual inspections requiring certificates – each one usually costing over £100. Rental voids can hurt and you still have to keep paying insurance, mortgage payments and marketing costs to find a new tenant. Maintenance is regularly underestimated by new landlords, especially the hassle factor and the cost of your time wasted finding reputable tradesmen.As well as costs, consider whether you need a cash fund for ‘abortive costs’ incurred when deals fall through and don’t forget that time is money, whether it’s your time or interest charged on debt. An overdraft facility or draw-down mortgage can be very useful for property developers and investors.5. Try to add valueNo-one got poor buying low and selling high. If only it were that easy. Many of us in the South East might catch ourselves patting each other on the back for doing awfully well out of property when our good fortune might be largely or entirely due to economic vagaries entirely out of our control.Many amateur ‘property developers’ that have made tens of thousands of pounds refurbishing a property for sale would have done just as well if they’d saved their refurbishment budget and waited for the market to rise on its own. However, if you have the skills (either as a tradesman or project manager) and you have the time and energy required (the need for the latter should not be underestimated) then buying property that needs attention can pay dividends and can automatically increase your equity and reduce your debt requirement in the medium term.Unfortunately, too many people buy property to ‘do up’ and forget they need to include a profit for their efforts. This cardinal error is regularly disguised in a rising market by a general increase in house prices, but in a static or falling market the error is punished harshly.If you have the skills, consider using them. If you’re a property lawyer, perhaps you concentrate on property with defective title? If you’re a plumber, carpenter or brickie, don’t under value your contact network. You already know what things cost and who best to employ to do them.It should be remembered that investing in property is not for the feint hearted. Just because we live in property does not make us experts but neither should buying property for investment be considered rocket science.