Landlords and investors are feeling the pressure as average buy-to-let rental yield has fallen by 10% over the last year, as rising house prices force down returns for investors. The average rental yield was 6% in Q3, down from 6.7% this time last year*. (Source: BDRC Continental Landlords Panel survey 2013).
Yields are down partly due the a drop in the average cost of renting a home in the UK, which fell by 4.6% in October 2013, but tenants were still paying 2.7% more than a year ago. (HomeLet Rental Index 2013).
Peter Armistead, Director of Armistead Property comments: “Whilst the recent property price rises are generally a good thing for home owners they can be a double edged sword for investors. With yields falling, monthly profit margins will be squeezed and investors now more than ever need to make sure they have a solid business plan which is risk management focused.
“Investors need to carefully assess any purchases and make sure the properties they already own are operating very efficiently. If a property is under-performing then there are a few things to consider such as managing the property yourself, rather than using an agent; ensuring all the maintenance is up to date; and carrying out renovations to improve the yield.
“If investors are acquiring buy-to-let properties, it is vital that they purchase below market value in the right area. This may mean taking on properties that require refurbishment. As long as all the refurb the costs have been accurately factored into cash-flow with a contingency budget, then investors have the potential of higher yields on ‘nearly new’ properties.
“As a seasoned property investor, I have built a successful, mid-sized portfolio of buy-to-let properties in South Manchester. The most important lesson I have learned is that landlords need to treat their property as a business. Treat it seriously and get yourself surrounded by a great team of professionals who are better than you.”
Armistead Property has put together some advice to help you build a profitable property portfolio:
1. Real profit: The most important lesson is that the real profit is made when property is bought, not when it is sold. If you can buy a £’s worth of property for 80p, then you can super charge your returns. Do not however think that this will be easy and do not think that someone else (for example an investment club) will hand you these deals. They
won’t. You’ve got to spend the time and do the hard research, until you find the real bargains out there.
2. Buy for cash flow: Property is an asset rather than a liability. An asset puts money in your pocket every month. When investors ignore cash flow and invest primarily for appreciation, they’re no longer investing. Instead, they are speculating on higher prices, which is akin to using tarot cards to plan your finances.
3. Invest for the Long Term: Once you have found a property that can be purchased below market value and that cash flows nicely, then you can invest for the long term. Buy and hold is the corner stone of many rich investors’ strategies. Despite the occasional short term fluctuations in the UK property market, the long term trend is up, due to the fundamental reason that demand is greater than supply. Don’t wait to buy property. Buy property and wait. Think long term, but act on short term opportunities. Property is forgiving over time and can bury mistakes.
4. Have a cash buffer: The investors who get into difficulty are often the ones who do not have any spare cash to access in case of emergency. As an investor...
you will find unexpected costs and so you must have some spare cash to cover these instances. The size of this buffer depends on your personal level of risk. Cash reserves trump cash flow.
5. Opportunities always exist: There is never a wrong time to buy real estate. When times are good, people complain about the deals they have missed. When times are bad, they claim they ‘ buy at the top’ thinking that prices will fall and therefore it’s not a good investment. The lesson I have learned is that you can build wealth in any real estate market, good or bad. The only constant is change. When the market changes, it brings new and different opportunities. You just have to be on the lookout for them.
There is never a bad time to buy, as long as you choose the right strategy. For the individual buy to let investor, there is no such thing as a good market or a bad market, only whether or not he or she has a good or a bad deal.
6. Action and discipline: Once you have your plan then you need massive action and discipline. Look at the top sportsmen. You need this type of discipline to be a successful investor. You need to put in the hard work and the hard hours, do a huge amount of research and then when you have the plan that’s right, you need to take massive action.
7. Avoid big risks: Never risk too much at any one time or on any one deal. In real estate deals, so much lies out of your control. Remember risk and reward are directly related. However a lot of the risk can be removed by doing huge research and work.
8. Research the local economy: Never pursue an investment strategy in real estate without closely monitoring the local economy and local real estate market where you are investing. Property investment is a local game. No one ever bought a house in the whole of the UK. Forget the national price indexes. Focus solely on one or two areas and get to know them like the back of your hand. In order to invest successfully in an area you must know it intimately. The more areas you invest in, the less intimately you can know them, and the more likely you are to miss a change in tempo there, or an important new development in the local market.
9. Buy in an up and coming area: Ideally buy your first property in an area that is about to come up, in order to benefit from higher than ordinary capital growth. Eg New transport links. The higher the yield, the less expectation there is in the market of capital growth. You will need to find the right balance for you by researching the sales and rental market in your chosen location.
For further information, please visit www.armsteadproperty.co.uk©LandlordZONE® – legal content applies to England and is not a definitive statement of the law, always seek professional advice. If you have questions on these issues go to the LandlordZONE® Forums