Tips for would-be property investors

Monday, July 23, 2012

Figures just released show that rental yields on buy-to-let properties have held their own over the past three years and have even increased to record levels on certain types of property, despite the economic downturn.

Chris Baguley, Director of Auction Finance Limited, said: "According to the Association of Residential Letting Agents (ARLA), the average rental yield on houses in quarter one of 2009 was 5.1%. This has remained constant over the past three years, while rental yields on flats have increased from 5% to 5.2%.

"The most significant figure, though, is that average rental yields on 'houses of multiple occupancy' (HMOs) have reached an all-time high of 10.7 per cent, especially in cities with large student populations. Of course, this figure can be enhanced even further by buying a property at auction.

"Things are definitely heading in the right direction. The proof is there for all to see that there are financial benefits to be had from investing in buy to let property.

"With property prices and interest rates still low and rents projected to increase over the next twelve months, bricks and mortar provide an attractive alternative to poorly performing savings accounts."

Although property presents a good long term gain, most investors still expect it to deliver a regular income.

Baguley has the following advice to help would-be property investors calculate the likely return on a property investment and assess the attraction of entering the buy-to-let market:

1)      Make sure you understand yields

Many financial definitions exist, some confusing. The only one you really need to get your head around is 'net yield'.

This is the annual rental income you expect from a property minus the annual outgoings such as insurance, repairs and agency fees divided by the purchase price. Here's a simple example to illustrate:

                Annual rental income (12 x £600) = £7,200

                Minus annual running costs (£1,200) = £6,000

                Divided by purchase price (£100,000) = 6% net yield

2)      Be realistic with your calculations

It is far better to err on the side of caution than over-inflate your likely returns. So, don't forget to take into account things like empty periods.

Using a simple spreadsheet, look at the net yield you can expect based on full 12 months occupancy, right down to just six months.

3)      Benchmark your yields

Yield levels vary regionally and by the type of property. Stay abreast of changes in the market.

ARLA and the Essential Information Group (EIG) both produce quarterly statistics which are worth keeping an eye on.

4)      Buy at auction

Figures from EIG show that properties bought at auction deliver significantly higher yields (8.52% for terraced houses and 8.54% for flats).

This is because the prices of properties up for auction are generally lower than the prices set by agents and because less fees are incurred.

If you're new to auctions, attend a couple to get a feel for how they work. And remember, if you are tempted by a bargain but haven't got your funding in place, Auction Finance Limited will be able to help you there and then.

5)      Set a sensible rent

Do your research and get a feel for the going rate for similar properties in an area.

Remember, over-pricing and under-pricing can be equally damaging to your investment plans. Make sure you set the rent at a sensible level to attract tenants and hit your yield target.

6)      Bigger isn't necessarily better

All the evidence shows that smaller properties deliver higher yields. If you have a budget of £100,000, far better you buy two smaller properties than one big one.

7)      Go out of town

Don't be wooed by the bright city lights. It is often better to buy a property outside the city centre where purchase prices are lower but demand remains high.

Again, do your research and know the area you are considering. A couple of streets can make a huge difference to the appeal of a property and the rental you can expect. Take into consideration things like proximity to bus routes and shops.

8)      Weigh up the benefits of improvements

Give careful consideration to the question of improvements to the property.

Will the cost lead to higher rental income? How long will it take you to recoup the investment? It's all about getting the balance right. If you do decide to make improvements, set a realistic budget and stick to it (again, your spreadsheet can show you all the permutations).