It’s not surprising that property is seen as a good investment by many people. While the entry point is higher than for some other investments, the returns are twofold, particularly when you follow Warren Buffett’s advice and ‘buy to hold’.
Becoming a landlord means you have an asset that grows in value as well as an asset that can actually make money.
Most assets decline in value – they say that the moment you drive a new car off the forecourt, its value decreases by about 20%. But the value of property typically continues to grow.
A property can be let to one or more tenants and the rental will cover not only the mortgage payments and maintenance, but also give the property owner a profit.
The basic maths mean that unlike a car or other asset that depreciates, you’re making profit from the growth in value of a property – and also earning an income from letting the property to others.
In an ideal world you would be looking for a property that is well below a market value deal, in an area that property prices are rising rapidly and with high rental value. However, that kind of property is a bit like hen’s teeth. All these are achievable, but it’s rare to find a property that ticks all three boxes. That means you need to decide which is the best route for you.
Do you want to buy an asset that appreciates quickly or are you looking for a healthy yield from rental income? Which one is most important to you? Your answer will help you to get focused on the right properties that will meet your goals.
If you do your research it’s possible to find properties that can be purchased well below market value (BMV). This might be because they need work doing, or they have motivated sellers who just want to get the property off their hands or even because they’re unmortgageable, which reduces the market. In the latter instance you’ll either need to be able to buy cash or to have alternative finance, such as bridging, but that doesn’t mean there aren’t some excellent bargains to be had if you know what you’re looking for.
If you’re looking for capital appreciation it’s important to target areas where property values are rising quickly. Another way of getting a rapid increase in property value is to buy properties off plan. This needs commitment as the property completion and increase in value will depend on the project completion date and your intentions longer term (resell or rent).
Check out the areas where inner city regeneration is taking place or commuter belts, especially near good (or new) transportation exists for potential properties.
Where property values are escalating , like in London, you may find that you don’t make much on rental, the profit is in the asset itself.
A refurb will add value, whether you plan to resell or keep the property to let. However, if you’re planning to build a portfolio of buy-to-let properties, your focus is likely to be on the potential yield of any property you buy. Yield becomes more important if you’re looking for a monthly income.
If your property is in an area where property values are rising slowly, it’s still possible to make a good income from rental.
Yield is usually calculated by dividing the annual rental income by the property value – and multiplying it by 100. In simple terms, if your rental for a property is £18,000 and the property value is £200K your yield would be 9%. However, a more realistic equation would be:
(Annual rental – maintenance/other expenses) / property value x 100
You need to research the potential rental for your property so you’re competitive, while still making a realistic profit after outgoings. This is especially important if you decide to put the property into the hands of a management company as you’ll need to factor their management fees in too.
Most investors will look for both, but it’s rare to find very high levels of both in the same property or area. This doesn’t means that a property in an area where prices are rising won’t attract a good rental income or that a property in a popular area for good rentals won’t appreciate – just that you need to decide what your first priority is.
To make doing your research easy use the Property Deals Insight tools to find great deals, check out comparative values, accurate rental prices and yield.