Peter Amistead from Armistead Property explains how to build a profitable Buy-to-Let portfolio.
Data from The Council of Mortgage Lenders advised that 40,000 mortgages, worth £5.1 billion, were advanced to buy-to-let investors in the second quarter of this year alone.
It appears that investors are returning to the buy-to-let market for a better return on their capital. With a potential one million extra households in rented accommodation by 2018, rising from 4.8 million to 5.8 million, it is no surprise that we are seeing growing demand for buy-to-let properties across the UK.
However it’s not all good news.
The average buy-to-let rental yield has fallen by 10% over the last year as rising house prices force down returns for landlords, according to the latest BDRC Continental Landlords Panel survey, which found the average rental yield was 6% in Q3, down from 6.7% this time last year.
With this backdrop in mind, the key challenge for many investors is how to make their buy-to-let investment profitable, avoiding pitfalls on the way. Over the years, I have built a successful portfolio of eighty buy-to-let properties in South Manchester. As a seasoned property investor, I have found the path to the ‘Holy Grail’ of profit. It’s been a tough journey at times, but I have learned some major lessons on the way which I would like to share with you:
1. Real profit: The most important lesson is that the real profit is made when property is bought, not when it is sold. If you can buy a £’s worth of property for 80p, then you can super charge your returns. Do not however think that this will be easy and do not think that someone else (for example an investment club) will hand you these deals. They
won’t. You’ve got to spend the time and do the hard research, until you find the real bargains out there.
2. Buy for cash flow: Property is an asset rather than a liability. An asset puts money in your pocket every month. When investors ignore cash flow and invest primarily for appreciation, they’re no longer investing. Instead, they are speculating on higher prices, which is akin to using tarot cards to plan your finances.
3. Invest for the Long Term: Once you have found a property that can be purchased below market value and that cash flows nicely, then you can invest for the long term. Buy and hold is the corner stone of many rich investors’ strategies. Despite the occasional short term fluctuations in the UK property market, the long term trend is up, due to the fundamental reason that demand is greater than supply. Don’t wait to buy property. Buy property and wait. Think long term, but act on short term opportunities. Property is forgiving over time and can bury mistakes.
4. Have a cash buffer: The investors who get into difficulty are often the ones who do not have any spare cash to access in case of emergency. As an investor you will find unexpected costs and so you must have some spare cash to cover these instances. The size of this buffer depends on your personal level of risk. Cash reserves trump cash flow.
5. Opportunities always exist: There is never a wrong time to buy real estate. When times are good, people complain about the deals they have missed. When times are bad, they claim they ‘ buy at the top’ thinking that prices will fall and therefore it’s not a good investment. The lesson I have learned is that you can build wealth in any real estate market, good or bad. The only constant is change. When the market changes, it brings new and different opportunities. You just have to be on the lookout for them.
There is never a bad time to buy, as long as you choose the right strategy. For the individual buy to let investor, there is no such thing as a good market or a bad market, only whether or not he or she has a good or a bad deal.
6. Action and discipline: Once you have your plan then you need massive action and discipline. Look at the top sportsmen. You need this type of discipline to be a successful investor. You need to put in the hard work and the hard hours, do a huge amount of research and then when you have the plan that’s right, you need to take massive action.
7. Avoid big risks: Never risk too much at any one time or on any one deal. In real estate deals, so much lies out of your control. Remember risk and reward are directly related. However a lot of the risk can be removed by doing huge research and work.
8. Research the local economy: Never pursue an investment strategy in real estate without closely monitoring the local economy and local real estate market where you are investing. Property investment is a local game. No one ever bought a house in the whole of the UK. Forget the national price indexes. Focus solely on one or two areas and get to know them like the back of your hand. In order to invest successfully in an area you must know it intimately. The more areas you invest in, the less intimately you can know them, and the more likely you are to miss a change in tempo there, or an important new development in the local market.
9. Buy in an up and coming area: Ideally buy your first property in an area that is about to come up, in order to benefit from higher than ordinary capital growth. Eg New transport links. The higher the yield, the less expectation there is in the market of capital growth. You will need to find the right balance for you by researching the sales and rental market in your chosen location.
