Treat Property
as a Business
When I sit down with investors and they ask me
what area of property investing they should go into, I almost always will say go for buy
to let and will relate it to business.
If you think of large businesses and how they measure growth and performance - they will
continually talk about growing by either opening new branches or shops, or taking over
existing ones.
So for instance a company may say "Our target is to open 30 new stores throughout the
UK in 2012." Another company may say we shall consolidate our position and work on
performance of existing stores.In terms of growing as a business, this is where buy to let
has a huge advantage over buying to sell.
If you buy to sell, you have to re-start your company each time, and are not building up
any longer term growth - you can make short term profits but you work very hard for this
at times and is not very tax efficient.
For me I look to increase the overall value of my portfolio each year by buying further
properties in areas I see continued capital growth and a healthy cashflow, and holding
onto existing properties. The great thing with buy to let is it takes far less time than
buy to sell, and is far more tax efficient in my opinion.
Once you target an area and affordable properties - you can pay your deposit, mortgage the
remaining amount, and let your money start working for you, and then move onto the next
one. I always think of each house as the equivalent of one store in a large chain of
stores eg a Marks and Spencer store in an area of the country. If the house is performing
well, it can be down to a good tenant/good managing agent/or good local area, vice versa
if it struggles it will be down to one or two of these key points not performing.
It is always worth looking at how your overall business is running, but then drilling down
and looking at individual houses to see how they are individually performing.
For instance overall your portfolio may be going up in value by 10% per annum, and running
at a neutral cashflow, which you may think is very good - but if look closer may see that
50% of your properties are going up by 20% in value and making a net income each month,
while 50% are not showing any capital growth and losing money each month. Or you may see
that a property you thought was performing very well, actually is giving a low return on
investment as has very little borrowing on it.
How do you measure the performance of each investment?
Let's look at a couple of example properties:
You own 2 properties in the same area of the country, both bought in Jan 11. Therefore
similar levels of capital growth are expected - 5% for the year - and rental yields are
similar as they are both 2 bedroom terraced properties.
Property 1
One is worth £70,000 and rents for £400 a month
You have a 75% mortgage on this - and your mortgage payments and maintenance costs each
month are covered by your monthly rent, and still give you a positive cashflow of £150
pcm - £1800 over the year.
Property 2
You have bought this for cash.
It also rents for £400 a month - with no mortgage after maintenance costs you make a net
figure of £3600 over the year.
Which has performed better?
Well different investors may see it differently - for some the fact property 2 has made
£1800 more income would put it ahead.
I would look at the return on my investment, let's assume buying costs on each were
£2000. With property 1, you have invested £17,500 + £2000 = £19,500, and at end of
year you have made net income of £1800, and £3500 capital growth. So I would calculate
this as a ROI of 27%
With property two, you have invested £70,000 + £2000 = £72,000, and at end of year you
have made £3600 net income and £3500 capital growth. So I would calculate the ROI here
as 9.9%
A big difference - and shows emphasis is always on high leverage and capital growth. How
do you get this? Buy in affordable areas - and mortgage as often as you can - as long as
your cashflow is kept to a manageable level. With limited capital growth in some areas
youwill want to esnure buy at a good discount, making the most of current market
conditions.
It is also important to realize like any business there will be short term issues but
these should never get in the way of your longer term goals.
So if you get an issue with your first tenant, or managing agent, but had a goal to get to
10 properties by the end of the year - do not give up at one property, or think there is
no money in property! The only thing that is for sure is if you stop at one, you will not
make a huge amount of money - you should continue with your mid term goals. I lost money
on one deal early on, but learned from it, and have had issues with problem tenants from
time to time, but have always had a clear longer term goal.
So treat property as a business, review it regularly, and overall measure the performance
of your business by the growth each year, and the return on investment each year.
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