Buy to let, sometimes known as buy-to-hold, is probably the property strategy most people know. It may not seem a natural candidate for the title “killer property strategy” but carried out skilfully and systematically, with proper due diligence and analysis, it can make you a serious amount of money with the passage of time.
But not all buy to let (BTL) investments qualify for the term “killer property strategy”.
The best BTL purchase is one where you buy below the genuine market value and are able to add value before you rent it out. (Of course, if you can only achieve one of the two that is better than none.)
That way you are profiting from the very start and any additional growth you get as a result of house price inflation is a welcome bonus, not something you absolutely need for your investment not to be a flop.
But BTL is not just about achieving capital growth. For many investors the priority is income – with the emphasis on obtaining an excellent rental return – namely a rental return which allows mortgage and all other running costs to be met, with a healthy surplus left over ideally.
BTL is one of the more straightforward strategies to implement. However, if it is not implemented correctly, far from being a killer strategy boosting your wealth it can be lethal to your wealth and leave you with underperforming properties which are more trouble than they are worth.
BTL can be used for residential, commercial or semi-commercial property. The focus of this blog is on residential BTL.
1. Buy low and add value
You should ideally source properties which are below market value with the potential to add value by, for instance:
- Light or heavy refurbishment
- Building additional living space
- Converting non-living space such as a cellar or loft to living space
- Splitting a single accommodation into two or more units.
Adding value following purchase gives you a financial buffer in the event of prices falling after your buy.
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2. Assess the return on investment
When buying a property you want to be able to scientifically measure it as an investment in order to compare it to other properties, with a view to deciding which is best for you – having regard to your own specific property goals and plans.
To do that there are three main things you can and should calculate:
- Gross yield
- Net yield
- Return on Investment or ROI.
The gross yield is the gross annual rent divided by the price of the property.
Gross annual rent £10,000. Price £100,000.
The gross yield is 10%.
The net yield is the net annual rent divided by the price of the property.
To get the net annual rent, deduct from the gross rent costs such as: management fees, insurance premiums, allowance for repairs & maintenance, allowance for voids and (if leasehold) ground rent and service charges.
Gross annual rent £10,000. Costs £5,000. Net annual rent £5,000. Price £100,000.
The net yield is 5%.
The return on investment or ROI is the net annual profit divided by the money that has been invested. ROI is sometimes referred to as return on cash, ROC, or return on capital employed, ROCE.
If you buy without a mortgage, for cash, the ROI and the net yield are the same.
If you buy with a mortgage the cost of the mortgage will need to be taken into account – as set out below.
Gross annual rent £10,000. Annual costs £7,000. Net annual profit £3,000.
Purchase price £100,000. Mortgage £75,000. Cash invested £25,000. The ROI is 12% calculated as follows:
£3,000 x 100 divided by £25,000 = 12%
The yield you will be able to obtain will depend on the location of the property you buy. As a broad rule, gross yields in the north of the UK are typically in the 6-8% range; in the south yields are typically a half or two thirds less.
Properties with low prospects of capital growth often offer the best rental returns.
You will source properties depending on whether you are targeting income or capital or both.
The general view is that ROI is the best, the most accurate measurement to use. You can take account of the costs of buying (valuation, mortgage and legal fees) and taxation (income tax or corporation tax) to achieve even more accurate calculations.
3. Estimate future capital appreciation
As well as calculating the ROI you should also assess the likely future capital appreciation of the property. You can look at historical statistics of the Land Registry, Nationwide Building Society, Halifax Building Society and others to gain an idea of how prices are likely to perform in the long term.
However, past performance is not necessarily an accurate guide to future performance. Experts talk of a 18 year property cycle; but property downturns or crashes can occur unexpectedly and any calculation should be seen as a guide not a certainty.
However, history does show that some locations and types of property do generally outperform others and you should carefully consider such factors when making your final decision – especially if your investment focus is for capital gain as opposed to rental income.
4. Do your sums with care
A key ingredient in securing a bargain purchase is to make sure all your calculations are as accurate as possible – so that you do not unwittingly overpay when buying a property.
Use the spreadsheets of others, or devise your own, to be able to quickly and accurately work out ROI and the cost of building or refurbishment works intended.
5. Devise procedures to secure bargains
Another way to secure well-priced properties is to develop sophisticated systems to identify and negotiate the purchase of such properties.
You can start by selecting specific types of property that you will target in your selected locations. That way you can, in time, build up a high level of knowledge and expertise of such properties and be well-placed to identify genuine bargains when they surface.
You should become an expert at researching properties using the main property portals such as Rightmove and Zoopla.
It may help you to develop good working relationships with the main estate agents in your chosen area or areas.
You may also opt to rely on tried and trusted property sourcers or finders who have the capability and contacts to secure good deals in line with your chosen criteria.
BTL may not seem like one of the most interesting and exciting property strategies.
However, carried out with professional attention to detail, it can fast forward you to property millionaire status.
It has the benefit of relative simplicity. If you have a good credit record and can come up with the deposits and other purchase costs, you will find no shortage of lenders willing to provide you with mortgages – enabling you to build up a sizeable portfolio of properties with relative ease in hardly any time at all.
Are you an existing BTL investor? With the government’s ongoing attack on the strategy, do you think its future is likely to be as good as its past? Please leave your comments below.
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Rebel Property Coach
My website is: www.rebelpropertycoach.com