How to hit the investing ‘sweet spot’
Last month we explored the two main ways to create profit through investing in property. Either of these strategies (capital growth or income generation) is great in isolation, but what if we could have the best of both worlds? I like to achieve the ‘sweet spot’ between these two by looking for properties that not only give me cash flow but also the potential to experience a decent level of increase in value. The icing on the cake is always to add as much value as possible upon the purchase of your property so that you, in effect, force the appreciation as soon as possible after you've bought it. I will cover this aspect in more detail in next month's article.
When working with clients, the main demand I have is to help them to achieve this balance. The theory is simple, but the practice is somewhat more challenging to pull off effectively! We now have a tried and tested and proven model which facilitates this process meaning that our clients can benefit from our experience and contacts to help them acquire such properties. So, how do we achieve it? Drawing upon my investing experience over the last thirteen years, I believe there are a number of factors to take into consideration. Here is a checklist of what (in my opinion) to look for in order to fulfil the criteria of 'sweet spot' investing.
Property values between £60-125K.
(To stay within the Stamp Duty tax-free bracket.)
Rents between £400-800 pcm producing gross yields of 6.5-8%.
(Any less and you won't get cash flow, any more and you reduce the possibility of capital growth.)
Look for areas with obvious or planned regeneration.
(i.e. New housing, new infrastructure such as schools, hospitals, retail parks or transport services, etc.)
Make sure there is good rental demand...
(Yet with a balance of owner occupiers versus renters.)
...and a buoyant resale market.
(Determine ratio of properties on the market to properties sold; this can be checked out on Rightmove.co.uk. For example, compare the number of properties of a certain type on the market in total versus how many without sale agreed upon.)
Ideally ten minutes walking distance to amenities, good local schools, transport services, etc.
Refurbish or purchase to a high standard of workmanship to ensure maximum rent achieved and attract the best long-standing tenants as well as ensuring the property is sustainable for the long-term.
Aim for as low an LTV (Loan-To-Value) as possible which gives maximum cash flow.
(If you're just starting out, maybe 75 to 80% will have to be the case, but in my opinion 50 to 60% is a 'sweet spot' area. If you can afford to buy more properties at this level with a higher LTV, then this may be preferable than buying fewer at 50 to 60% LTV. It all depends on the level of return from each property and your own personal risk profile.)
I hope this has been a useful set of indicators to look out for when considering maximising your return on any property purchase you make.
All the best,
Hazel de Kloe | Why Property Works