I’ve been talking to a number of people who want to get into property investing recently and a question which quite often arises is ‘What sort of property should I be buying if I want to get into buy to lets’. Sometimes the question is ‘Peter, why do you advise buying cheaper properties rather than more expensive properties’.
I was talking to somebody the other day who was thinking about getting into buy to let and they showed me some of the properties which they had been looking at, they showed me the estate agents details and all of them were really nice properties, quite high value properties. They were somewhat surprised, maybe even slightly disappointed, when I said to them that they look like nice properties but this is not what you should be buying, because they were too good.
What do I mean by that? The general rule of thumb is that for buy to let cheaper properties are best. Not the very cheapest, in some areas the very cheapest properties will be too cheap. You would be going into areas where you wouldn’t want to invest and you are probably not going to resell your property should you buy it and you are probably not going to get great tenants.
You don’t want to go into the very lowest value areas. But you don’t want to go into the very best areas. There is a sweet spot in between where you want to buy in areas which are cheap and not the best areas. Why is that? Because the return you are going to get for your money is going to be much greater and also there is going to be many, many more people who can afford to be your tenants which means there is going to be greater tenant demand.
One of the reasons why I like buying properties which aren’t that great is because if the property needs a good refurb, if it’s a bit down at heel, if it’s been neglected, then it is relatively easy to add value to the property by doing a refurb. A typical refurb for me would be a new kitchen, a new bathroom, maybe new windows if it needs it, decorating and new carpets. That would be a great refurb.
The other reason why a down heel and neglected property could be a good property to buy is because if it has been neglected and if it’s not in a great condition it’s that much easier to be able to negotiate what we could call a bargain price, what we could call a below market value price, although that is a very subjective term and we could have a very good debate about what below market value actually means.
But let’s just say at a bargain price, because if you can buy the property cheap enough then you can add the value. If you can add enough value, and push the value of the property up to the right point then when you refinance it it’s very possible that you can get all or most of your money back out again meaning that you can take the original money that you started with and go and buy another property.
For all of those reasons that’s why I’d rather buy cheaper property then more expensive property. The returns on the more expensive property are going to be lower and there is going to be less tenants wanting to move in, and if it’s a nice property in a nice area it’s probably going to be hard to add value.
So, all in all, as far as I’m concerned, cheaper properties are the best properties.
Peter
Peter Jones
(ex) Chartered Surveyor, author and property investor
https://thepropertyteacher.co.uk
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