This is a market where most of the property investors are questioning if buy-to-let is still a viable investment strategy.
Personally, I will take an optimistic view and say that I haven’t seen anything different to what it was before other than the fact that we have been hit with section 24 and a little more stronger criteria to evaluate mortgages.
That to me does not stack up to say buy-to-let is dead.
A much more realistic argument will be a comparative difference between the cash flow a buy to let can return against the other advanced investment strategies.
Having said that:
I haven’t come across an investor who started investing in advanced strategies like HMO’s or commercial and hasn’t gone back to invest in buy-to-lets.
Buy-to-let strategy provides that comfort and stability within the monthly returns that an investor expects.
With that in mind:
Here is a view into the basic criteria we applied to analyse most of our buy-to-let investments so far.
This post is going to help if you are starting out on property investment or want to take a corrective action on your portfolio going further.
Table Of Contents
- Demand & Supply: What Are Tenants Looking For In Your Area?
- Value: What Value Can You Add To Your Buy To Let Property?
- Ease Of Living: What Does Your Tenant Think?
- Cash: Are You Able To Take Your Money Out?
- Deal: What Is Your Buy To Let Deal Profile?
- Investment Period: How Long Is The Property An Investment For You?
- Liability: Do You Know How Much Is It Going To Cost You?
- Exit Criteria: What Is Your Exit Criteria For The Investment?
Demand & Supply: What Are Tenants Looking For In Your Area?
First things first.
There is no point in investing in something which is not pre-qualified with demand or supply to that demand.
Simple and easiest way to have that initial view into what is trending and which type of property has demand is by using Rightmove effectively.
You are as good an investor as your ability to assess the demand and provide the supply within your investment area.
Below two screenshots give a criteria of how many properties have been advertised within an area for letting versus how many have actually gone on to let.
Without the “Let Agreed” filter checked, the system shows 109 properties.
With “Let Agreed” filter checked, you get results of 160 for same postcode.
If you now do this search with and without “Let Agreed” filter for a 1 bed/2 bed/3 bed/4 bed houses or flats, you can arrive at a sensible conclusion on which property are tenants looking for in the area.
This is a basic level research and investor can do to assess the demand but the investor has to drill this down further speaking to letting agents, existing investor community and other means.
Value: What Value Can You Add To Your Buy To Let Property?
Buy-to-let investment is profitable only when you are able to leverage its value over a period of time should you take an approach to just let it out without doing any work.
However, it’s easier to grow your portfolio if you are able to purchase below market value properties which needs a bit of modernization.
Those ones that have been neglected for a long time without any updates and specifically those where no one is living in them.
Such properties gives out potential to add value via refurbishment and allow you to take your money out when they are refurbed to living standards.
Ease Of Living: What Does Your Tenant Think?
Buying a property is one thing, but if you are not able to let it out easily and quickly then its a money draining investment for investors.
I have one of those which I purchased when I started my property investment given my urge to grow my portfolio quickly.
But lesson learnt…..and am glad that was the only one so far.
Our ideal tenants are a family with one or two young children.
You don’t have a property avatar if you don’t know your tenant avatar.
If I now think what such a family will look for, I can create below list that they would be looking for.
- School/Nursery catchment area
- Safety and security
- Transport facilities
- Car park
- Groceries and other shopping
- Restaurants and Recreation facilities
The more choices you can tick for an ideal tenant profile you have, the quicker you can let the property out.
What is your tenant profile?
Cash: Are You Able To Take Your Money Out?
This probably is a critical point which differentiates people who are able to develop their portfolio consistently from those who aren’t.
A deal is a deal if you are able to potentially achieve following things from your investment.
- Ability to add value and take as much money out
- Able to generate cash flow each month consistently
- There is a natural growth within the area pushing the house prices up
When you are able to pull your money out, you are able to invest in buying other properties and continue the cycle of recycling the money from each deal into another.
Deal: What Is Your Buy To Let Deal Profile?
You must be wondering what the hell is deal profile?
Here it is:
When investors view properties and place offers to purchase properties, there are a lot of factors that influence the decision.
Emotional attachment to the properties, urge to build portfolio quickly and failing to see the pitfalls well in advance are few of the key issues where investors take a hit on the longer run.
So we came across a small concept to have offers given in three phases.
- The lowest offer you as an investor can give which makes the deal a money-in/money-out deal.
- An offer that falls within the range of what you think is a fair price.
- Maximum offer that you as an investor can give beyond which you would walk away from the deal.
This maximum offer is where we have set a criteria for which we termed “Deal Profile”.
Our deal profile for a standard buy to let in our investment area, for example looks like this.
- Minimum 20% Return on investment (ROI)
- Minimum of £100+ cash flow at 5% interest rate
- Maximum cash left in the deal not to exceed £5000 post refinance
Having a deal profile ensures that we are not carried away with emotion or market sentiment and end up building a toxic portfolio.
Investment Period: How Long Is The Property An Investment For You?
Refurbishing a property and letting it out and earning the cash flow each month is great.
There is a point where the property is going to depreciate in value and wears out with changing tenants year on year.
The question then becomes:
What is the exit at that point when it is no longer a house that meets your quality living standards for a tenant?
You have two choices again:
- Refurbish the property again
- Sell the property for good
Refurbishing the property again may not be a good idea unless you see a huge growth in property prices.
However, if you are inclined towards selling the property, then it becomes prudent to put a timeline on how many years you wish to retain that property to earn you cash and cash flow.
That period is the investment period for that buy to let property. Have an initial view into this investment period before you buy a buy-to-let.
Liability: Do You Know How Much Is It Going To Cost You?
Investors as a practice have a good understanding of how much the refurbishment costs will be.
Not many really think about how much costs would they incur on a yearly basis or take a look back each year and understand how much is it costing them year on year.
The moment you start having those average costs across each property in your portfolio, you will have a fair idea if you are actually going to earn as much money within the investment period or not.
That alone will determine if the property has remained an asset or has become a liability within the investment period.
Exit Criteria: What Is Your Exit Criteria For The Investment?
Lastly, if you are buying a buy-to-let, you should have a minimum of two exit criteria for the property, should things not go as you planned.
Two simple exits that an investor always takes into account is
- Let out the property or
- Sell it post refurbishment
It doesn’t work that way.
Your second exit to sell it because you haven’t been able to let the property does not work because anyone who is trying to buy will have the same issue.
It becomes hard to sell.
An entry should always have an exit and an exit should always open doors to another entry.
Logical, isn’t it?
The question then becomes do you have those two exits planned before you buy a property?