Selecting the ideal properties

Return 'buy to let' contents

What is the ideal property?

• Is it the one that will appreciate fastest in value. Many property companies who deal in commercial property feel it is and they are not even that worried if it stays empty, as long as the value goes up far faster than the outgoings in mortgage payments.
• Is it the property that is in great demand and you could let a hundred times over, and therefore you can be confident that you will have few if any voids (unlet periods).
• Is it the property that has the greatest scope for initial equity increase, due to buying below valuation or being able to do something to it to enhance its value.
• Is it the property that has the largest potential for a windfall profit, for example the paddock that you could get planning permission to put an estate on.
• Is it the property that will fit into your plan and give you the greatest gearing, or allow your compound gearing to happen faster.
• Is it the property that will generate the largest return in rent against capital employed.
• Is it the property that one day you would like to give to your children or grandchildren to live in.
• Is it a property that can be used by your children while at university.
• Is it a property near your home you can keep an eye on.
• Is it a property in another area so you can spread your risk.
• Is it a type of property you prefer.
• Is it a size of property you prefer.
• Is it in the location you like.
• Is it the school catchment area, public transport or similar that is the deciding feature.
• Does it have a wow feature such as a fireplace or original features.
• Is it the bargain that you cannot resist.
• Is it the only one that you can currently afford.

These and many others will be specific reasons that might attract you to a property, and you might optimistically look at all of these features that a particular property provided, or pessimistically look at those it did not. 

Another approach would be to create yourself a profile of the above and other features you consider important and to fit properties to the mix to fit your profile. However this may be like only interviewing candidates that attended a specific institution for a job, you may well miss the best ones.

In reality for most interested in creating wealth through property, you will need to look at each property as a separate and distinct business investment opportunity, with plus and negative points and decide which mix of properties over time will enhance your plan. Once you start to do this you will quickly start to see which properties and propositions just are wrong for you, are set up to trap the person who has not taken the trouble to fully understand the market and how to maximize things to their plan. Over time you will develop a natural ability to spot likely winners, and know where to go looking for them before they become available and in the public domain. You will no longer first look at the price, but the potentials to you. 

The costed route or developer route

Another approach is to say that any property is ideal if it was at the right price.

To use this approach you determine what the property currently is worth, and what the asking price is. Then you look at the options, for example could you take walls out or add them in, add a new feature, tidy something up, change the colour scheme.

With each of these options and combinations of options you both cost up the cost to you of doing this and the improvement in value. This is not as hard as it sounds as there are standard look up tables in books you can get that allow you to look at the costs of various steps in the process and so, as long as you can use a calculator or have a laptop with a spreadsheet, this is straight forward.

Some things you will discover will make a great deal of difference to the valuation but at minimal cost, others cost a great deal and add little value, for example outside swimming pools in the UK.

You then look at the time this would take and therefore the interest on a bridging loan to cover this.

Developers mostly like to make 20% (their profit) on the capital they have employed, this is the deposit, interest payments, insurances, stamp duty on purchase, legal fees, and of course the cost of the improvements.

Now you can work backwards, from the projected selling price after the work has been done, taking off the cost of selling (agents fees and legal fees), 20% profit, and all the costs we have discussed above, except the deposit. This gives you the maximum price that you could consider buying the property at.

You also have a great bargaining tool in that you can show what you feel you need to spend on the property, although you may not want to show what you think it will then be worth.

As a potential development opportunity you now have a maximum price, but is it a good buy to fit your portfolio. Using the costed route you now could start with your 'worth now' figure and fine tune or reward the property as you feel it matches or misses features that you want within your portfolio, and then compare the outcome with the actual negotiated price you can obtain it for. There are no look up tables for these pluses and minuses, and it is completely subjective.

The advantage of this approach is that it is completely removed from the romantic, gut reaction, and perhaps helps ugly ducklings show where they may become a swan. 

We would not suggest this was practiced as a religion, but as one of many tools you use in considering if there is real scope for the property and how to get the ideal mix of properties within your business plan.

 Making sure the property meets the demand

In many areas you can identify quite easily what the rental demand is for, is it smaller houses or flats for single people or couples, family homes, or executive country homes.

Clearly the larger the number of people and the wider the group of people that could be attracted to a property the faster you should be able to find tenants. lf the need you are meeting has been missed by others and there is therefore a great shortage, perhaps you can increase the rent to take advantage of this.

If there is no current market for what you are considering providing then you need to question if this is a wise move. 

In some areas you will also discover that the time people want properties for vary considerably, a person renting  a large house for example might only want it until they can find a house to buy or while work is being carried out on their home, while a couple who just cannot buy at all, may be looking for a very long term let. As every change over involves you in costs and you risk a void (unlet period)  as well as more damage to the property by moving furniture in and out, a good long term tenant can present a greater profit.

If you have invested in a  very large property and it becomes empty for a period all your income has stopped, but your expenses continue, however if you had spent the same amount on a larger number of smaller units, it is unlikely they would all have become empty at the same time.

Particularly when starting out, it is essential that the property meets the need of the area now and if things change will continue to.

Keeping down running costs

Some properties create frequent bills for maintenance, and support in the garden, equipment that is expensive to service. An older property with regular large bills and a contract you are paying to maintain the grounds, can be far less profitable than a property that has stood for some time and needs no regular repairs, but is bringing in a lower rent. 

Brand new properties on average have over 100 minor problems to get sorted out, also need extra spent on them such as floor coverings, curtains, possibly a kitchen and other finishes. Sorting out these problems can take up quite a bit of your time.

As you go up market, tenants will expect things to be kept smarter, grounds to be more manicured, and to receive a VIP service, although by the time the mortgage payments has been taken out, you may be providing this on roughly the same budget as a lower priced property let to less demanding tenants.

The cash flow approach

If you are or have ever been in business you will know the importance of understanding and managing the cash flow, knowing for sure sufficient moneys will arrive before cash has to go out. You would know for example that it is essential to pay some bills, payroll, rent, utilities etc.

Life is far more pleasant in any business if the cash flow is permanently positive and you never have to go and ask the bank manger to tell you how he would run your business, and ask for an overdraft. However the discipline of managing the cash flow becomes the key business tool if you are not going to ever need one.

How many business people have you heard complain that the banks are begging them to borrow money when they don't need it, but reluctant to when they need it  Similarly if you were to go and ask your bank for a loan to fritter away on a holiday they would be far more likely to give it to you, than if you needed the cash for something important like a private operation, when the NHS had a long wait, even if this wait would mean you would end up off work and therefore it made sound sense to you financially to get the loan.

We are not suggesting you should not ever use bank loans or other loans, but that perhaps for some people and in some situations if the cash flow could be self supporting life might be somewhat better and you may end up with a larger share of the profit, as well as being able to do what you want and far faster.

For this reason each new project or property that you consider adding to your plan should have a cash flow calculated, when are payments going to go out, what up front costs are there, from survey, legal fees, stamp duty and insurance to decorating, renovations and fitting out with basics such as cookers, carpets and curtains before you can let it. When is rent going to actually come in, and what fees or costs are going to be involved in letting, when are mortgage payments going to go out, and what allowance do you have for the unforeseen, breakdowns etc.

What could cause time slippage, and what would be the cash flow cost of this. 

You then need to add these projections to those of all your other properties to see what the overall effect is. If you decide to go ahead with it, you need to constantly change all actual and projections across all properties so that you can see what effect everything has on cash flow and can make decisions or react before it becomes essential. 

The situation may be that a property that would be ideal in many ways is just too large a drain on your cash flow, while at another stage you may have cash flow surpluses running at a level  where you can go for a project that is highly profitable even if a major drain on cash flow. You may have a choice early on  of going for two new properties where the cash flow is good, while you can only get one where the cash flow is not so good. It is also often the case that getting a  property early in a  good condition so it can be let immediately will fit the plan far better than buying at a larger discount and having to do it up first. 

At some points, for example where property prices are not rising, getting growth by added value is essential if you are not to stand still at this time and then the management of both cash flow and time slippage becomes a key feature and the difference between those that make real progress and those that just sit these periods out.

The intention of this article was to look at what was the ideal property to obtain and to highlight that there is more to it than looking for period features and a nice area.

To many this comes as a shock and accounts for why so many people can make a profit in a rising market, but only a fraction of the real potential.

Return 'buy to let' contents