Sunday, November 10, 2013

Property Investment – Why an Investment Appraisal is so crucial for Buy to Let Investors



The formulae to successful buy to let property investment will depend on a range of different factors, which will vary from investment to investment.  Before taking the plunge to invest, careful consideration should be given to weighing up or calculating what the likely costs (outlay) will be, balanced against the likely return. 

Source: http://www.bridgingmortgage.co.uk
Even during times of recession when property prices are stagnant or possibly even in decline, wily property investors will find opportunities to make a good return on their initial investment, particularly in the buy to let market.  Generally, there are two primary ways in which investors will make money from property, either through capital growth or through rental income. For the purposes of this article I will focus on the latter, where I suggest a number of ways in which a buy to let investor can help to make, and maximise a return on their investement.

The formulae to successful buy to let property investment will depend on a range of different factors, which will vary from investment to investment.  Before taking the plunge to invest, careful consideration should be given to weighing up or calculating what the likely costs (outlay) will be, balanced against the likely return.  Failure to undertake this initial assessment or be tempted to ‘take a chance’ is extremely unwise and can result in significant losses being made. 

Once a property has been identified for potential investment an appraisal should be prepared, which will assess the likely costs required, balanced against the likely return.  If, through research, an investor calculates the likely annual rental income, and then divides this into the purchase cost of the property, which will include any costs associated with purchasing together with any repair or renovating cost, and any professional fees, then this will give something referred too as the ‘net rental yield’.  As an example, if the net rental income of a property is estimated at £15,000 per annum and the total investment cost of the property is calculated at £200,000, the net rental yield will be £15,000 divided by £200,000, which equates to 0.075 or 7.5%.  You will often hear investors and those involved with property comparing the net rental yield to the returns on a similar investment if placed in a bank account. Inevitable with low bank interest rates over recent years it is not difficult to understand why investors are choosing to put their money into property rather than letting it sit in a bank account.
Source: http://www.buckinghams-residential.co.uk
In order to do establish the net rental yield an investor will need to understand property prices and rental values in the areas that they plan to invest, to consider the condition of a property and the amount of money that they will NEED to spend (notice the terminology) and establish how they will finance the investment.  All of these factors have different variables based upon location, size and nature of the building and the amount of money that may need to be borrowed.  Every investment will be different and investors will need to be thorough in every appraisal they carry out to help them to maximise their rental yield.

If, following an investment appraisal a property is then purchased, then the investor needs to ensure that they stick too and keep control of costs, based upon their budget, which would have been a key part of their appraisal. From this point onwards any unexpected costs will start to impact on the return and if this is allowed to get out of control the investment starts to become less and less attractive.  In order to minimise this happening the investor should have reviewed and understood the legal pack (auction purchase) and understood any specific legal responsibilities applicable to the property.  Once contracts have been exchanged the investor will not be best pleased if they find out that the building is listed (protected), or there is a right of way running through the middle of the rear garden, or there is a restrictive covenant preventing certain types of development, all because they have not taken the time to read a legal pack or to get appropriate legal advice.  This can prove very costly and has the potential to wipe out any investment return and could actually result in a loss.

Experienced property investors will realise that an investment is business and not personal, and they will therefore keep a tight control of what they are spending.  They realise that costs of any work to a property will depend on the likely rental income and they will not make extravagant alterations and purchases that are not going to add anything to their investment return.  It sometimes takes newer property investors a number of years to grasp this, where they will often ‘personalise’ a property to their tastes, assuming that everyone else likes and appreciates the same as them.  Renting in certain areas will not demand high quality fixtures and fittings, therefore including these because an investor wants the building to ‘look good’ does not make any business sense whatsoever.  

Making a profit from buy to let property investment is often portrayed in the media as something that is reasonably straightforward.  Why this may be true for some, the truth however is that success will very much depend on how the investor assesses each investment to calculate the likely outlay and return and this will depend on how well they research a property before making the decision to purchase and how well they keep control of their budget.  Of course, there is also managing tenants including collecting rents, property maintenance and repairs and complying with statutory requirements to consider once any works have been completed and tenants are in occupation. All in all there is money to be made from buy to let property investment however there is much more to it than people often realise.  If you are considering a buy to let investment for the first time then hopefully you will find the content of this article of use.


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