The 3 Pillars of BTL
The three pillars of successful residential investment
I’m often asked by newbie landlords do I have any basic tips about investing in residential property. I respond by highlighting 3 essential aspects to making a landlord’s residential investment a success. These
I have called my three pillars of investment and they are:
I always advise any prospective landlord that there is no magic wand to making a landlord’s residential investment a success. In recent years, the press have been full of stories about individual landlords who have made a fortune just by buying a few houses, and there are plenty of books and websites that feed on this kind of misguided ‘claptrap’.
We at Property Hawk have said all along that our message is all about how landlords won’t make a million in six months. What Property Hawk is about, however, is giving landlords and other property investors an insight into how to avoid the pitfalls that are out there and how, with a little skill and effort, landlords can invest in a residential property to improve their long-term financial prospects.
Landlords – taking a deposit? You need one of these.
There is no one secret to successful property investing, but there are three core pillars of wisdom that offer landlord’s a foundation on which to build their property investment approach.
You need to be a patient property investor to be successful
The problem for many novice property investors is also one of their biggest assets – their enthusiasm. Like children at Christmas, they have too much energy and are so excited that disaster is almost sure to follow. Similarly, the novice property investor, having made the decision to buy, wants to ‘dive in’ and buy a buy-to-let property straight away. A few years ago, when the house price boom was in full swing, there was the philosophy that if you didn’t buy straight away you would miss out altogether and never be able to secure an affordable buy-to-let property. This is no longer the case.
Experienced landlords always recommend playing a waiting game. While the UK is building approximately 40,000 too few houses annually, a prospective landlord cannot escape from the fact that there are still approximately 25 million existing residential units out there. If you as a potential landlord miss out on one purchase, there are always plenty more around the corner. Residential investors should, rather than embarking on a frenzy of activity, pace themselves for a potential ‘long-haul’ of identifying and then securing the right property. That is not to say that if the right residential investment property and a clear bargain presents itself a landlord should be slow to act, but landlords should be aware that there is a danger of buying a buy-to-let property purely to invest, and not because it represents a good investment.
By having patience, landlords can cultivate an approach where, having identified a suitable property, they make what would normally be considered a silly offer at, say, 10%-15% below the asking price. This should be based on the investment value to the landlord.
Having made their offer, landlords should continue to view and make other offers. Eventually, somebody will accept a landlords offer and they will have the basis of a ‘sound investment’ secured below its market value. Patience is not only a virtue for landlords, but an essential element of, and pillar to, a sound residential investment. Remember – shrewd property investors make their profits when they buy investment property, not when they sell.
Research is key to the success of your property investments
Access to the internet provides us with a wealth of data and information that 10 years ago landlords would have paid a fortune for – or it simply wasn’t available.
My advice to prospective landlords is use it. If you are looking to buy an investment property for the first time, there will be a stream of questions to ask.
The basic area-specific research is something only the landlord can carry out – in other words it’s down to the landlord. This is all about potential landlords scoping the residential investment – finding out about prices in the area, and how the area has performed against other areas. Landlords should ask are there any local or national developments that could influence property values? What, if any, is the rental demand like in the area and what is the current and proposed rental property supply? By the end of the exercise prospective landlords should have figures for rents, values, yields, annual property price changes, the planning pipeline and property build costs per square feet.
All this information will mean that landlords obtain a thorough understanding of the local market and what have been (and could be) the returns in the future on their property investment.
By the end, a prospective landlord should be an expert on the area they intend to invest in, knowing at a glance how much a property is worth to buy and will rent for. This will allow a prospective landlord & property investor to watch the market and spot which properties are a bargain and which are overpriced property.
Many ‘novice’ landlords have not done this. Instead, they have put their trust in ‘advisors’ to invest their money, or have bought in areas they don’t know or do not understand, on the basis of glossy marketing spiel.
This has led to the problems that are now emerging in many towns and cities concerning novice landlords and ‘discounted’ investment schemes. Here, properties are sold at what the agent purports to be a bulk buy ‘discount’ of, say, 15%-20%, though the reality is that the discount is applied to a price that may be 35% inflated, which still means the investment properties are a rip off.
Careful research by any buyer would have revealed that it was possible to buy similar residential properties down the road at 80% of the cost and that a huge number of properties were being built at the same time, all largely aimed at buy-to-let investors, causing a glut in the rental market. Proper research means you as the landlord will be nobody’s fool, and you won’t be left with an investment ‘lemon’ having filled the pockets of the property developer and disingenuous scammers.
Timing is critical if you are going to maximize your return
Good investment is all about timing. Unfortunately, no landlord has the insight that gives them perfect timing – buying at the bottom and then selling precisely at the top of the market. It is not rocket science to figure out that if a landlord buys at the bottom of a cycle and sells at the top they will make more money than investors who buy and sell depending on personal circumstances.
The effect of timing on a landlord’s overall levels of return can be dramatic. For instance, anybody unfortunate to invest in property in 1973 saw a loss of their capital over the period 1973 to 1977 of 40%. In 1989, I invested in a property that took a full 10 years to recover to its original purchase price. But it did – and then proceeded to double in value in one 12-month period. If only I had had the foresight to buy just before it doubled.
However, the overall value of residential property is largely outside a landlord’s hands, being influenced by macro economic factors, such as interest rates or consumer confidence. It is as well not to get too hung up on these factors.
Residential investment is a ‘long-term’ game, which means that peaks and troughs, particularly in the short-term, will have less impact on your overall returns the longer the investment is held. This again is another reason for landlords to exhibit patience. By buying property at regular intervals over the long-term, a landlord will inevitably buy some cheaply and some when prices are higher, but, overall, landlords should see a steady and long-term rise in the value of their residential investment portfolio.