Why you should build a 10-year cash flow.
We have tons of videos about why a one year plan can be a poor strategy for you. Most recently have a look at ‘How to effectively target ROI instead of yield or growth’.
So why do we all build a 10-year cash flow for our investments?
The reality is, if we don’t look at the long term plan of a property we will target the wrong areas. Even if you have half the lowest growth for each area you are looking at, quarter the lowest rental growth and plan that into your cash flow you will really help yourself.
Using year one only, not planning in your other overheads, not looking at costs in years 2 and 3, and not planning on growth and inflation will stop your investments from being consistent.
Get a full cash flow on all over 4000 properties by giving one of our specialists a call at Baron & Cabot.
How to effectively target ROI instead of yield or growth.
Clients can often find ROI targeting a challenge. A lot of times we hear “I know the rent in year 1, we can’t know what it will be in year 4” and “I don’t want to factor in property price growth as we don’t know it”.
This is a highly logical argument but can focus your attention on absolutely the wrong properties. Let me tell you why.
First of all if you have not watched it have a look for our videos titled ‘How can I understand the future value of my property?’ and ‘The secret to always finding the best UK property investments.
What these videos should very quickly show you is how to practically, and safely predict the future growth of a property. What we always try to do with a client is agree to use the lowest growth of an area over the last 15 years if they hate using growth in their property choice.
So why do we push our clients to learn this?
One of the major issues you have with planning zero growth in property value or rent is that you will target areas that have historically performed the worst.
You will target the highest yielding properties because they will be the ones that work the best in your forecasts.
Contact Baron & Cabot and we can give you some examples of areas of England where we can show you how this works in practice historically. But take for example Bradford and Ancoats in Manchester.
15 years ago Ancoats was a run-down part of Manchester city centre but had a lot of investment coming in. The new tram line was being rolled out in Manchester and times were looking good.
Bradford, a great town near Leeds was a much higher yield and was around 20% cheaper. At this point, many clients who had a one year plan would naturally have bought there.
Don’t get me wrong, this would have made them money in the last 15 years. They will be pleased with the investment. But the person who looked at a 3 or 5 or 10-year plan would have bought in Ancoats, within 2 years their rental yield would have been higher than Bradford (and still growing) and their property value has tripled.
Not only that, the Ancoats buyer would have been able to refinance the growth of their property, thus meaning they may have also been able to buy 3 or 4 properties with the gains generated, without having to put any more of their money in.
At the same time, the Bradford buyers property has grown slowly in line with inflation.
The lesson here is even if you don’t want to buy on the basis of one area growing faster than another in the future. At very least look at the historical growth of each area you are looking at and factor the worst-case growth into your cash flow.
Also, as mentioned in previous videos. Don’t target a city, target smaller areas of cities.
Get in touch with a Baron & Cabot advisor who can share some of our data on historical examples, or give you charts on the areas you are looking at.
Why targeting as many bedrooms as possible is a terrible investment strategy
We have a lot of clients who, in their initial conversations with us suggest they want ‘as many bedrooms as they can’ for their budget. And this seems logical – right?
When you bought a home for yourself and your family you probably did the same, space is valuable.
Equally, if this is just a personal choice or specific strategy, our specialist will help you do this while giving you the stabilizers and boundaries to keep you protected in your choices.
So why is starting with the size of a property considered a poor strategy?
To look at this let’s take it to the extreme.
Why are you investing in the UK? Because it’s one of the lowest risk investments, with consistent returns. It continuously grows, there is a supply and demand issue pushing prices up.
If the size is important, there are much bigger available at your budget in another country. Equally, in England, while overall it performs exceptionally well on the world stage. There is of course areas with zero government investment, massive unemployment and very cheap property.
Even in the best cities, take Manchester as an example. Overall performing very well, but there are areas that are underprivileged and have property types that will not grow in value.
Never invest without undersupply, over demand, growing wealth and affordability in an area or you have a high chance of being burnt.
The point of all this is, this is an asset you are investing in. This is not your own home it’s your future money. Sometimes we have to forget that it has doors, windows or a roof. Take the emotion out and look at the numbers.
The most successful investors work off spreadsheets, not images.
You have to look at yourself and decide whether the number of rooms is an emotional decision or a financial one. If a 3 bed at the same price delivers a better return than a 1 bed, buy it.
Equally, if the 1 bed delivers more than the 2,3, or 4 bed over the period of time you are planning to own it for, that is the investment.
The final point to make on this is in reference to our video called ‘Are city centre properties the safest investments?’ which you can find on our website or by looking back in these videos. Sometimes getting into the safest and highest returning locations means you will have a smaller property than in the outskirts.
If this delivers more returns, with more occupancy, your life will likely feel a lot more relaxed!
Get more information by contacting one of our specialists at Baron & Cabot.
See also:
Should I target student properties?
There are two real types of student property one is a normal residential property that is in an area popular with students, this property type can be for students and can also be for traditional tenants.
The alternative is purpose-built student accommodation, generally small 12-15 sqm properties which are restricted to students only.
Many people find these student accommodation offers attractive, they give high yields which catch the attention of novice property investors, after all, if there is an 8% rental yield why wouldn’t we take it.
The latter of these two property types is a commercial investment. One of the reasons many people buy them is that they have not factored in an exit strategy, and have the belief that they are buying something that has resale value.
The challenge with the latter is if the building doesn’t perform you won’t get your 8%. Forget if it is ‘assured’ rent, most of the time the rental guarantee is not in the name of the company who sold it to you, only the management company of the building itself, so if there is no rent, no assets, and no retained cash, who will you sue for unpaid rent?
There are some fantastic student property companies who we will happily share with you, however, at Baron & Cabot we don’t carry them.
So why don’t we?
The main reason is an exit strategy. As the property isn’t generally self-contained, and you are restricted to just renting to students, what happens when or if the development isn’t tenanted (which happens – ask us for examples to google).
Equally, what is the resale value? You cant buy it with a mortgage so it’s only going to be sold to an investor. There is no resale market so you will have to advertise it somehow.
The company who sold it to you said they would sell it? Go and ask them how much they will charge as a percentage of the property value.
You’re never going to sell the property ever? – Maybe this can work, but have you really calculated how high risk this is?
Truth is its only value is a multiple of the rental income. If a residential property has a lower rental income yield, it will often not cause an effect on value. In actual fact when it happens it normally means the area has been gentrified and there are more buyers than renters, your rent yield drops but value significantly increases.
In a student property (and we’re only talking about the ones restricted to students only) drop their rental income the value drops. The reason is that as there isn’t really an asset unless you own the whole block, you can only sell for a multiple of rental income.
Any experienced investor would want over 10% NET for this kind of risk, from you.
Ask yourself the question. If the full block really is getting an 8% rental guarantee, why sell it to individual investors and not sell the full block to a pension fund?
Establish how many years you will be keeping a property for, even if it’s for life which properties will overtake your student rental yield within a couple of years? Don’t make the mistake of a 1-year cash flow when buying a property.
As mentioned earlier there are some very good student property firms, and while we choose not to sell them we will happily share those names with you.
Before you do anything at all, get some free advice from a specialist at Baron & Cabot.
How to invest in areas where the government is investing and why that sky rockets your ROI.
Much like our previous video on investing near transport links, buying near or in an area of significant government investment will see your investment go incredibly well (so long as you only invest if the area matches the fundamentals of property supply & demand, affordability and mortgage availability).
To understand why we must understand how the government works.
If they want to invest £300 million or £3 billion in an area they need to prove to a lot of people in local and national government that its both worthwhile and create more revenue for the city.
How do they do this? Prove that it will create more jobs and a higher GDP.
Higher output and more jobs, means more affordability, which as we know drives back into the fundamentals. More jobs also mean more demand, another critical factor for growth.
The bigger this investment and more jobs created the more demand, which means the more your property is likely to increase in value and more demand for rentals.
Why buying near a new transport link makes so much money.
Most investors know that if you buy a property and a new transport link subsequently opens your property price and rental price will increase steeply. There have even been reports on this for many cities across Europe by Lloyds bank which you can read if you have the interest give us an email for a copy.
But why do these properties increase in value?
Go back to the ‘basics of property investment’ videos, and ‘how to be consistent in property investment’ where you will see we covered the fundamentals.
The basics are, invest in areas with growing demand without enough supply, and growing wealth. So long as the area can get good mortgages we have ticked the basics, the non-negotiables.
Baron & Cabot know which areas are getting new transport links, and we want to know this because if an area has the above basic fundamentals of investment, then additional transport, means more people can commute to work, this means more people can live here creating more demand. Add to that a transport link will generally connect to the city centre where higher paid jobs are, we will also see higher affordability.
This cycles back into the fundamentals, and creates a faster and faster property price and rental growth.
Never invest without making sure you cover these basics
How to check if a city is saturated/ too many properties?
One of the biggest problems we have with UK investors is presuming a city or area is saturated because there is a lot more properties being built there compared to when they were younger.
We all have a habit of doing the same, properties ‘feel’ too expensive and there is too much. Its normal, this is why we invest in the UK, the market keeps growing and will continue to grow while people can afford them too.
For affordability, we check average price v’s average salary or gross disposable household income, but that is for another video!
So how can we check if there are too many properties? The best way is to check up on an area of the UK you need to get the postcode and go over to the government website – I have included the link below this video.
Here we want to see the ‘long term vacancy rates’ report (see report and article here). If a property is vacant in the UK you can get some discounts on council tax. When this happens the government will make a note of this property is vacant and we get copies of this each month.
By simply pulling a report of how many properties are in that area we can get a good idea of the % vacant at the moment.
The UK has always been a favourite for investors as there is a huge undersupply of property due to not being allowed to build on green belt land, and it taking a long time to get planning permission to build.
This means that many areas we target for investment have 1% or below vacancy rates. This would mean you will rent your property out for 99 months before seeing a month vacant.
Link to check Long Term Vacancy: https://www.gov.uk/government/statistical-data-sets/live-tables-on-dwelling-stock-including-vacants
Why you should use a mortgage instead of cash.
Most of us grew up with the ethos of buying property as our first investment, and if you are in Europe getting a mortgage and paying it off as soon as possible. After all, why should we pay interest on the money when we can clear it off.
With investment property, however, the solution is different. With a buy to let property, we look at lending like business leverage.
Imagine for a moment you have a mortgage that offers a deposit of 1/3. The property is worth £150,000 and you deposit £50,000 with the mortgage, paying the rest.
- Your tenant pays the rent which in turn pays off all your bills and the mortgage.
- Now not only is your mortgage being paid off, but you also have some income above that.
- Even better the average UK property grows at 4%.
If using some investment strategy we get 5% per annum, but have only invested 1/3 we get triple the returns, meaning we get 15% return on investment per annum before we even account for the rental income.
For more mortgage information including why all international clients can get a mortgage see our other videos linked below the video or on our website.
Should I be buying properties at auction?
Auctions can get you bargains, and also some nightmare issues. In a down market, they can perform better but in a buoyant market like at the moment, when someone can sell a property in a couple of weeks at the asking price, even desperate people don’t need to use Auctions.
Many people would say that an auction can help sellers get cash, though there are many companies (including our own) who advertise online and will buy a property for cash at a discount in a couple of days without the need for an auction.
All in, if you have the cash that if the auction property you bought fails it’s not a big loss go ahead, you may also make massive wins. Equally, if you are into construction and have some time they can be another option in your portfolio.
I would suggest they are not for the novice, someone who doesn’t live in the area, or the faint-hearted.
There is no such thing as too good to be true in the UK market by the time it got to an individual client.
Why should I use a broker to buy my property?
It’s relatively straightforward to google properties in England, there are probably tens of thousands in each area of the UK. Using a bad broker is as bad as not using one at all, it makes very little sense in using a poor broker.
With a company like Baron & Cabot, you have to understand why the major funds, financial advisors and most experienced and largest investors in the world use us.
It is unusual for a client to have a data analytics team to source the best stock, a team in England trained in property for due diligence and an economy of scale to purchase at volumes which demand discounts.
We are working in property 24/7 meaning that we are hugely experienced in delivering consistent returns, if we couldn’t we wouldn’t have major investment firms working with us for years, 42% of properties bought by repeat investors and a global network of some of the most experienced staff.
We take a commission but it’s from the discount we get for you, this is why you should always speak to us before you make a decision. Our specialists will give you support and will never try and sell a property in the initial meetings.