I’m asked regularly to look out for a good deal by prospective landlords. So what is a good deal? What does a good deal look like? Has a good deal changed over the years?
Many experts have written books on how to source a good deal by explaining what should be the main buying goals of a landlord. I have taken some of these thoughts and added a few of my own.
- Buying at a discount. Your first profit point is made by buying a property at a discount to the current market value.
- Buy a property to improve. Your second profit point is having the opportunity to complete a light or full refurbishment on the property that is purchased.
- Buy a property to extend. The third profit point is to buy a property to extend as each square foot added to the property increases the property’s value.
- Buy property with land. The fourth profit point is to buy property with land that could gain planning permission, that then could be sold or the land used to build a second property which could then go on to be sold.
The next thing is to understand your numbers:
So you need to research the market to understand your yields. Some people wrongly believe that they can control yields without understanding the free market framework and the controls put in place by the first tier tribunal system (a type of rent control).
Most local markets will have a standard range of yield returns and you will generally find these yields will have some link to the capital value of the property being purchased.
So how do you work out your gross and net rental yields:
Gross yields = (Annual rent / property value) x 100 = yield
The gross yield helps you to understand if the investment you are looking to purchase fits within the expected local yield range.
Net yields = (Annual rent – operational costs / property value) x 100 = yield
Net yields help you to understand and control your operational costs. I find this especially useful when managing an HMO property where you can find you have variable rent and variable costs throughout a year.
Capital value = (annual rental return / yield) x 100
This is a useful calculation to understand the capital value of a property. And to understand if you are buying at a discount or a premium.
I have come across many a purchaser who has bought an investment property and then worked on these calculations. At this point many realise that the operational costs are too high, that rental returns are too low or that they have overpaid for a property. All of these mistakes can be overcome with time as rental returns improve, capital values increase and by reducing outstanding capital loans.
What is difficult to achieve is to manipulate a free market and a rent control structure when these mistakes are made in the short term by believing that a property can achieve a higher gross yield and investment return than the market will support.
Finally there is the different types of investment property.
Each type requires higher funding and each type has a different level of risk and reward based on a landlords / investors experience and market conditions.
These property types include:
- Single units (family homes)
- Team GB have brought home the medals at Tokyo 2020, but property not gold has proved the best investment proposition in recent years.
- The average price of residential property has increased by 46% over the last 10 years, over double that of gold.
- Over the same period the FTSE 100 has risen just 18%, as it remains below its pre-pandemic high despite a positive economic recovery.
- At present there is little sign of a slowdown in property market conditions. Mortgage approvals in June were over 20% higher than the long-term average (Bank of England) and demand in the market remains high.
Easy to source compared to other property types. Easy to compare yields and capital values to the local market. Residential BTL mortgage can be used.
Normally smaller rental yields than other property types.
Small HMOs (Houses of Multiple Occupation up to six bedrooms)
No planning application required. Normally higher yields compared to single let properties. Residential BTL mortgage can be used. Purchasing costs similar to normal family homes.
Selective licences / mandatory licences are normally required. There is normally a conversion cost when purchasing a normal family home that requires a re-fit /conversion.
Large HMO’s (Houses of Multiple Occupation over six bedrooms)
High rental yields on multiple units (6+). Can produce a a high capital appreciation based on a growing rental yield.
Planning and building regulations required. Mandatory licensing required. Normally a high cost of purchase and conversion. Commercial mortgages normally required.
More young professionals are looking for Co-living rather than traditional HMO accommodation. Can have a high rental yield.
Planning and building regulations required. Mandatory licensing required. Normally a high cost of purchase and conversion. Commercial mortgages normally required. A larger floor area is required so may need to be purpose built.
Multi-unit investment property (blocks of apartments)
This is for the professionals. Normally involving joint venture capital or investments backed by commercial property companies.
Planning and building regulations required. Normally a high commercial size cost / investment required to purchase / build or convert a commercial / office building. Commercial mortgages normally required. Specific professional sourcing of sites and locations required.
So what does a good deal look like? That’s a personal opinion dependent on your aims, just remember to understand your numbers, the balance of risk and reward and the property type you are working with.
If you need any help with the purchase or management of your next investment please feel free to contact us here at Tortoise Property on 01733 592020.
Source: Dataloft, Nationwide, LBMA, FT
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