Member Article

The Basics of Property Investment

There is a great deal to consider when looking to invest in property, especially for first time investors who may be unfamiliar with the processes involved. Below is a compilation of questions aiming to outline the basics of Residential Property Investment and help to define some of the terminology that you may encounter.

• Define Residential Property Investment?

Residential Property Investment is a real estate property that has been purchased with the intention of earning a return on the investment.

• What is a buy-to-let property?

A buy-to- let property is the process of purchasing a property in order to rent it out to tenants.

At ERE Property, we focus solely on residential apartments, and offer these to our diverse clientele. With regard to buying an apartment, you may have some of the following questions in mind:

• What is the difference between ’leasehold’ and ’freehold’?

The difference between ’leasehold’ and ’freehold’ is that ’leasehold’ means that a person has the right to use a property for a set period of time and at the end of the term, the property reverts back to the freehold owner. Whereas ’freehold’ means the property is owned for an unlimited period of time.

The average term of a leasehold is between 100 – 999 years.

As an owner of a leasehold apartment, you must pay ground rent each year, which is paid to the freeholder – the person who owns the land.

• Explain what a Tenancy Agreement involves.

A Tenancy Agreement sets out the rights and responsibilities the landlord and the tenant have to each other and the property. All Tenancy Agreements should also state the parties involved, the rental price, any deposit, the address of the property, the start and end date of the property and the obligations of the tenant and the landlord.

• What are the most important factors when picking out an apartment?
  • Price
  • Size (SQ FT)
  • Return on Investment (ROI)
• What is the Ground Rent and who is this paid to?

Ground Rent is what the leaseholder must pay to the freeholder each year. The land belongs to the freeholder, so this rent must be paid to them for the ownership of the apartment.

• What is the Service Charge?

Service charge is what the management company charges the landlord in order to cover the costs incurred when providing services for the tenants. This charge usually covers things such as general maintenance and repairs, insurance of the building and where the services are provided.

The Block Management Company are responsible for allocating an amount of the service charge budget into a sinking fund, this builds up over time and is put towards key communal maintenance.

• Explain what Rental Management is.

Rental Management is the process of managing property that is available for lease and may involve looking for tenants, collecting rents and maintaining the property.

• How much Net Income will an apartment generate per annum? What other costs are involved?

Net income per annum is the total rent income received minus all the management costs, for example, service charges, ground rent and rental management.

• Explain the different yields – what is the Net Yield? What is the Gross Yield?

Net Yield is basically the Net Income per annum as a percentage of the sales price. The Gross Yield is the yield on an investment before the deduction of taxes and expenses.

• What is a Block Management Company? What are they responsible for?

The Block Management Company are responsible for the upkeep and general management of the whole block of apartments. Any maintenance or issues related to the block/communal areas should be reported to them, and they ensure that all public areas and in good shape.

There are differing processes involved when purchasing property, depending on whether you choose to buy your apartment with CASH or with a MORTGAGE. Generally speaking, a CASH purchase completes far quicker than a MORTGAGE purchase because of the fact that there is less administration involved. Below are some frequently asked questions that many investors have about the MORTGAGE process:

• What is a Decision in Principal? Is this necessary to have before purchasing a property with ERE Property?

This will involve a full credit check by the lender and confirmation in writing of how much they are prepared to lend to you, subject to them checking the information you have given to them. This DIP can then be used to confirm your credit worthiness and is useful to have before you choose a unit.

At ERE Property, we do advise that you get your mortgage agreed in principal before proceeding to choose an apartment that you wish to buy. It ensures that the sales process moves a lot more fluidly.

• What details will a mortgage broker need to know about your chosen apartment for the full mortgage application process?

A mortgage broker will need to know information such as the sales price of the unit, the size (SQ FT), number of floors, the length of the lease, the full address and the rental income details.

• What documents will you need to provide your mortgage broker with?

You will need to provide your mortgage broker with various documents such as proofs of income, address and identity to pass to the lenders so that the underwriters can then approve the mortgage.

• What is an underwriter?

An underwriter is usually a large financial service provider which assesses the eligibility of a customer to receive their products, for example, a mortgage.

• A valuer must carry out a survey on your chosen apartment – what is involved in this process? Why is it carried out?

A survey will decide the value of the property and points out any faults which may affect the value and any future problems which may occur.

To find out more about property investment and the opportunities that we have, please get in touch with us on 0113 380 8930 or email us at info@emergingrealestate.com.

This was posted in Bdaily's Members' News section by ERE Property .