WINNING INVESTMENT STRATEGIES
There has been a lot written about winning property investment strategies. After many years of investing I’m convinced that there are only two strategies that a property investor should employ.
These strategies are basic, but fundamental to your investment selection.
When evaluating any investment property you should ensure that it clearly meets one or the other criteria. In doing this you will ensure that you have a clear focus and investment rationale.
My winning strategies
The two winning strategies relate to the types of property you are investing in and the relationship between capital growth and income.
We are all aware that you derive a return form property investment in two ways.
Firstly, through capital appreciation and secondly from rental income.
Property investment is practically unique amongst investment products in that it is part funded by borrowing; in other words you employ loan capital to effect your investment. Traditionally property investors have utilised rental income generated from rent to repay their debt leaving them with an income and a property asset at the end of the loan.
My two winning strategies are derived from successfully focusing on the source of your potential returns: capital growth or through the maximisation of income & in order to repay your debt.
The danger is that you try and do both and in so doing lose your investment focus thereby failing to maximise your potential returns on either count. Therefore, when considering your investment you should first ask yourself; do I want to invest in either a:
- TROPHY ASSET or
- CASH COW
A ‘trophy asset’ is a term used by many property investors to describe those properties that everybody wants to get their hands on. Examples of these would be the Oxford Street premises of Selfridges or the Lloyds of London building in central London. They are both iconic buildings, widely recognised and in prime locations, which means that what ever happens to the economy or the property investment market there will always be strong demand for them.
What’s this got to do with buying a residential investment property?
You are right; the term ‘trophy asset’ is normally associated with commercial property. However, the principles can be directly applied to residential investing.
All we are saying when describing a property as a ‘trophy asset’ is that it is in a prime location and that it is a building of a unique character, both potential features of residential property.
If you think of where you live in the country, there will be an area, a street even which everybody aspires to live in. There might even be one house that shines out above the others. These are all ‘trophy assets’.
The nature of property is that each parcel of land is unique. The very spot you are currently standing on cannot be replicated because part of its uniqueness is its location. Applying this principle to property means that there are only so many trophy houses, streets and areas. The supply of these is largely fixed.
Demand is however constantly growing as people aspire to live in the best areas. The result is that over the long-term these area and places will always appreciate more in value than houses in less desirable areas. Evidence of this is all over.
Look at London where prices in Kensington and Chelsea have rocketed 20-25% in a year whilst those in less affluent areas have risen at a much more pedestrian rate. Ok I know what you are thinking, this is London it’s different here because of billionaire Russians and city bonuses.
However, I bet you that the same is probably true in your local town or city. Think of the nice village, the posh part of town. I bet if you studied the figures they would show that despite other areas going up in value, these areas will have gone up by more and faster.
Just looking at my home town in Nottingham using www.upmystreet.co.uk to compare average prices in ‘posh’ West Bridgford with lowly Bulwell over an 11 year period. Whilst prices in Bulwell have risen by a respectable 3 times in West Bridgford they have shot up by over 3.5 times.
Simply put, at the end of the 11 years for ever £100 invested in property in Bulwell the same amount invested in property in West Bridgford would be worth £117.
It’s all about demand and supply and whilst demand keeps rising supply is largely fixed. Therefore if you want to maximise your long-term capital growth, buy a trophy asset. Tips on buying a trophy asset are:
- Find the best areas in your locality; they will have the best schools, the nicest parks the most affluent inhabitants.
- Always buy an older property with as much character as you can but don’t worry if there are no or few period interior features. These can always be replaced or added to.
- Remember your yields will be low. This is because capital values are likely to be high. Try to maximise incomes where possible by buying smaller units which tend to generate more rent per sq metre.
- Because your aim is capital growth and your income is less you will probably have to use an interest only mortgage and a loan to value of less than the maximum of 85% to enable you to meet the payments from your rent.
The two big downsides with ‘trophy assets’ are one, they are expensive. Not everybody will be able to afford them and because of limited supply they are not always that available. The second is that they are potentially high risk, in the short to medium term.
This is because if there is a slump in the housing market, because you are relying on capital appreciation, the source of your potential returns will be wiped out. In the long-term though ‘trophy assets’ recover faster and more strongly but this may be of little compensation if you are nursing a large capital loss for several years.
Therefore, for most investors a ‘cash cow’ is more accessible and less risky. With these investments your primary focus is income generation. It is all about an investment that will maximise your income in relation to its cost and produce the most reliable income stream.
It’s no good having a place that produces a good yield when let but is empty for long stretches of time. What you want is an investment that consistently brings in rent so that you can pay down your loan. This is the primary difference between this type of investment and that of the ‘trophy asset’. Because you are not relying on the capital appreciation of the asset, you are less exposed to the risk of a market down turn. All you are banking on is that the value of the property does not fall and after the loan is repaid the asset still has a capital value; which can either be realised through its sale or that you decide to take your returns as rental income.
How to buy a ‘cash cow’
- For cash cows it is the yield that is most important. Look to buy properties with the highest yield and ‘rentability’.
- Use either a repayment loan or one with some sort of repayment vehicle. Remember your primarily goal is to repay the loan.
- Refurbishment projects often provide ideal ‘cash cows’ being cheaper and generating relatively high yields and being very ‘letable’ once the project is complete.
These two strategies should give you a basis for your investment decision making. Before you make an investment make sure that you are clear on what you want either a ‘trophy asset’ or ‘cash cow’.
For those people that are looking to buy an investment that will supplement their pension income, then a ‘cash cow’ is ideal.
If a ‘lump sum’ is your objective or an asset to pass on to your children then a ‘trophy asset’ could well fit the bill.
Remember, either way you should always be clear on your investment priorities before you start thinking about your property selection.