How To Effectively Target ROI Instead Of Yield Or Growth.
  • January 23rd, 2022

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.

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