What to look for in an investment property
More often than not in property, and life more generally, we’re inclined to set our sights on the headline rather than the substance. Sensationalist titles take precedence over the sensible, and a quick buck takes priority over profitable long-term investments.
There has been a tendency recently for the media and economic commentators to focus on property prices in an alarmist way when they’re not rocketing up by over 5% every year, like in the mid 2000’s, forgetting that this was standard practice for almost half a century previously.
Whilst interest rates have been historically low, lower than at any other time in modern history, investment strategy has shifted almost unrecognisably from the quick turnaround get rich quick schemes of the mid-noughties. At that time, buying a buy-to-let property on an interest only mortgage could bring you a five figure profit in a matter of months, and so started a trend that had a deep long-term impact on our collective understanding of property investment.
A quick Google search of ‘house prices’ brings you headlines such as ‘Will house prices rise after Brexit?‘, and ‘Will house prices go down after Brexit? Or will house prices go UP?’
Ultimately, the tone doesn’t help those looking for sound investment advice and often leads to investors believing that if a property doesn’t increase rapidly in value then it isn’t performing well or that they’ve made a mistake.
Yields mean long term income
What much of the mainstream coverage of buy to let fails to address is the long-term rental income required to make a success of property investment.
As with many investment vehicles, success is achieved most reliably in the long term, rather than seeking to turn a quick profit on assets that often take years to appreciate in value significantly.
With any type of buy-to-let property investment, landlords and investors should instead seek to find reliable and profitable yields. Put simply the ‘yield’ of your property is the percentage of its value that you earn per year in rental income. For example, if your property is worth £100,000 and you earn £5,000 per year in rent, then your ‘yield’ is 5%.
This itself is where successful investors and landlords make their returns in the long term. Of course, you can be sure that your property will more than likely appreciate in value over the medium to long term, however, this is likely to be somewhere around 1% or 2% per year, depending on location. If you’re looking for regular income whilst this asset appreciates in value, then you need to be sure you’re getting the best value.
Expect the unexpected
With this in mind, many are surprised by the best locations for property investment. If we take prime property in London as an example, there can sometimes be better appreciation in asset value across the short to medium term, but you’ll struggle to gain a decent rental income on property that’s so expensive.
That’s why cities like Sunderland, and the outer boroughs of Manchester, often provide the best value for money on investment. If the price of entry into the market is lower, this allows landlords to buy more assets, but make a greater return through rental income.
If the average house price in Manchester is, for example, £100,000 but the average rents are £600 per month, then this represents better value on your investment than a £400,000 property offering £1000 per month in rent. (7.2% vs 3% yields)
This should be explained better in the wider media to create a much healthier property market, but speak to any savvy property investor and they’ll agree that those in it for the long haul prefer to concentrate on strong long term yields rather than turning a quick profit.
