The biggest mistake I see time and time again is that buy to let investors put very little thought into what they buy or why they are buying it. As a consequence, many buy the wrong property or properties, which are totally unsuitable for their needs or goals.
The key to becoming successful in property is to always keep in mind the investment fundamentals so as to avoid buying in a random and haphazard way. This may be stating the obvious, but overlooking this is something which is sadly the case with many investors, especially those that are just starting out.
Let me give you an example of what I mean by this. I’ve come across many investors who own property but who are not entirely sure why they own them. They’re not sure whether their investments are going to give them much in the way of cash flow, and quite often the figures suggest that the returns are actually quite poor.
Many are also uncertain as to whether these properties will give them much capital growth; and quite often, they are located in areas where this may be limited. And, on further questioning, some are even unsure as to why they actually bought them in the first place.
Trying to make sense of their situations, they’ll say something along the lines of: “I thought I’d buy it because it would be handy to manage as it’s just down the road”. Or perhaps, “My managing agent had a client who was selling a property and offered it to me and so I bought it”.
Even more common are the scenarios where investors go to local estate agents and browse the photos in the window. They see what looks like a nice house in an area that they are familiar with, and they go in and ask the estate agent if they can look at the details. When the estate agent passes the details across the desk they may say, “Okay, I’ll buy it”. Or, if they’re feeling really sophisticated, they may offer 10% below the asking price with a view to settling on 5%, so that they can then feel they’ve bought themselves a bargain!
I have to admit that when I started in buy to let, I did exactly this before I realised I had to buy in a much more systematic way and be far more aware of the investment fundamentals.
Although no doubt well intentioned, very few buy to let investors buy “correctly”. By this I mean using thought-through investment criteria, which is backed by a process to make sure that they buy the properties that fit these criteria.
The vast majority make investment decisions with somewhat wishy washy strategies such as, “I’ll buy a property and then I’ll wait for it to go up in value”. If this is the extent of their investment rationale, then this is no more than speculating – particularly as many will do only basic due diligence, if any at all.
It seems that for many, any property will do.
If you have taken this route, then please don’t think I am being critical. (Remember, I too bought in this way in the early days and so can fully understand how it can happen). What I would say, to try and redress the balance, is that at least these investors have taken action.
One of the biggest stumbling blocks I see in property investment is those with a desire to be involved but who procrastinate, or who are bound by fear, and who never take action. I read once that taking action is the sign of a superior person, and so in that regard they should be proud.
But rather than just buy any property, at the very minimum, a buy to let investor should be thinking in terms of the following:
- What gross yield or return could be received from the property. In other words, the rent expressed as a percentage of the capital value. This should then be compared with returns from other properties (of other types and in other areas) and other types of investment.
- What will the return be on their own cash invested.
- What are the prospects of future capital growth (for that particular property, and in that location).
- How easy it will be to achieve the required level of rent.
- How easy it will be to keep the property occupied by the right type of tenant.
- How easy it will be to sell the property if they ever need to exit and to sell in a hurry.
It’s only when they can answer these questions that they should think about putting in an offer. In my opinion these are the bare minimum investment fundamentals that need to be taken into account if an investor really wants to succeed, prosper and make real money in buy to let.
Here’s to successful property investing.
Peter Jones B.Sc FRICS
Chartered Surveyor, Author & Property Investor
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