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Article > Advice on Buy to Let


Article kindly supplied by Alan Forsyth


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Whenever I am asked what area of property investing investors should go into, I almost always will say go for buy to let and will relate it to business. Many investors however still do not buy the correct property to fit the criteria they should look for. If you think of large businesses and how they measure growth and performance - they will continually talk about growing by either opening new branches or shops, or taking over existing ones.

So for instance a company may say "Our target is to open 30 new stores throughout the UK in 2012." Another company may say we shall consolidate our position and work on performance of existing stores. In terms of growing as a business, this is where buy to let has a huge advantage over buying to sell. If you buy to sell, you have to re-start your company each time, and are not building up any longer term growth - you can make short term profits but you work very hard for this at times and is not very tax efficient.

For me I look to increase the overall value of my portfolio each year by buying further properties in areas I see continued capital growth and a healthy cashflow, and holding onto existing properties. The great thing with buy to let is it takes far less time than buy to sell, and is far more tax efficient in my opinion. Once you target an area and affordable properties - you can pay your deposit, mortgage the remaining amount, and let your money start working for you, and then move onto the next one.

I always think of each house as the equivalent of one store in a large chain of stores e.g. a Marks and Spencer store in an area of the country. If the house is performing well, it can be down to a good tenant/good managing agent/or good local area, vice versa if it struggles it will be down to one or two of these key points not performing. Many people may offer advice on buy to let, but essentially if you keep it simple, and follow some key criteria you will do very well. It is always worth looking at how your overall business is running, but then drilling down and looking at individual houses to see how they are individually performing. For instance overall your portfolio may be going up in value by 10% per annum, and running at a neutral cashflow, which you may think is very good - but if look closer you may see that 50% of your properties are going up by 20% in value and making a net income each month, while 50% are not showing any capital growth and losing money each month. Or you may see that a property you thought was performing very well, actually is giving a low return on investment as has very little borrowing on it.

 

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How do you measure the performance of each investment? Let's look at a couple of example properties:

You own 2 properties in the same area of the country, both bought in Jan 07. Therefore similar levels of capital growth are expected - 10% for the year - and rental yields are similar as they are both 2 bedroom terraced properties.

Property 1: One is worth £70,000 and rents for £350 a month You have an 85% mortgage on this - and your mortgage payments and maintenance costs each month are exactly covered by your monthly rent.

Property 2: You have bought this for cash. It also rents for £350 a month - with no mortgage after maintenance costs you make a net figure of £2000 over the year.

Which has performed better? Well different investors may see it differently - for some the fact property 2 has made £2000 income would put it ahead. I would look at the return on my investment: Let's assume buying costs on each were £2000.

With property 1, you have invested £10,500 + £2000 = £12,500, and at end of year you have made no net income, but have made £7,000 capital growth. So I would calculate this as a ROI of 56%

With property 2, you have invested £70,000 + £2000 = £72,000, and at end of year you have made £2000 net income and £7000 capital growth. So I would calculate the ROI here as 12.5%

A big difference - and shows emphasis is always on high leverage and capital growth. How do you get this? Buy in affordable areas - and mortgage as often as you can - as long as your cashflow is kept to a manageable level. It is also important to realise like any business there will be short term issues but these should never get in the way of your longer term goals. So if you get an issue with your first tenant, or managing agent, but had a goal to get to 10 properties by the end of the year - do not give up at one property, or think there is no money in property! The only thing that is for sure is if you stop at one, you will not make a huge amount of money - you should continue with your midterm goals - this is important advice on buy to let investing! I lost money on one deal early on, but learnt from it, and have had issues with problem tenants from time to time, but have always had a clear longer term goal.

So I would say when buy to let investing treat property as a business, review it regularly, and overall measure the performance of your business by the growth each year, and the return on investment each year.

Regards Alan

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