How to measure the risks of buy-to-let property investment

How to measure the risks of buy-to-let property investment

The considerations that professional investors make before investing

Before you take advantage of buy-to-let property investment opportunities, you’ll need to consider several factors. These include the location, property condition, investment financing, and more. Professional investors appear to buy instinctively. However, their success comes from following property investment news and staying up to date with the views of property experts. They also understand how to measure the risks associated with buy-to-let property investment.

In this article, we examine the seven risk measures that professional investors assess before committing funds.

1.      Location risk

Buying in the best places to invest in property UK is the most important factor in the property investment process. The reputation of a town or neighbourhood can make or break an investment property. Investing in an area because it is cheap and offers a high yield is a dangerous strategy. There is a reason that property is cheap there. If you want to sell, liquidity may be severely diminished. You could struggle to find a buyer, and be forced to take a loss on your investment capital.

Instead, consider what facilities and amenities are provided in the local area. Consider, too, what development is planned. Research the local area and ensure it benefits from the property fundamentals that make the area a buy today, and will support investment in the future – specifically, shops, schools, transport links, major employers and major investment. About future potential, plans are no more than that until money has been committed to making those plans become a reality.

2.      Property risk

Property in poor condition could be a bargain. A strategy employed by some investors is to buy the worst house on the best street. However, this strategy has also caused investors to suffer a lot of losses (the ones that never make it to the television screens on programmes such as ‘Homes Under the Hammer’). You could end up buying a money pit. Hidden problems tend to surface while refurbishment work is underway, not before.

Consider all facets of a property before investing. Look at elements such as proximity to local amenities, interior design, parking, heating, plumbing, electrics, and structural deficits. All these issues will adversely affect selling value and rental potential. Older properties always carry a higher risk than new build.

3.      Tenant and Lease type

Consider your target tenant and the type of tenant which is most common in the location in which you are investing. Successful buy-to-let landlords never let to tenants on benefits. Long-term lets to middle-class tenants are less risky. Holiday lets can produce the highest yields, but the risk of damage and default is higher, too.

If you let on short-term tenancy agreements, you’ll also suffer from longer and more regular void periods. The benefit of shorter-term tenancies is the ability to raise rents more often, but the risk is that it takes longer than you expect to find a new tenant.

4.      Market rental rates

It’s important to understand the rental dynamics of the local area. Average rental prices are more likely to attract demand from tenants, and retain them for longer. If your property is fitted to a high standard, you may be able to charge a higher rent; but it could be harder to find tenants who perceive better value at average rental rates.

5.      Finance availability, cost and benefits

The more debt you take on to invest, the bigger the risk. However, one of the major benefits of investing in property is the ability to take advantage of the benefits of leveraging – making money on other people’s money. The real return on your invested capital increases because you are profiting from money that isn’t yours.

The amount of mortgage you use to invest in a property should be assessed in line with your aims. If you want positive cash flow, the yield should be more than the costs of financing your mortgage and other expenses. If you are investing for capital growth, how much negative cash flow can you subsidise from other income?

A lower loan-to-value (LTV) ratio also provides a better cushion should property prices fall, and makes it an easier call for lenders when they assess whether you are a viable borrower.

6.      Taxes

Property investment in the UK has been hijacked by the government as a revenue-raising asset. Over the next few years, mortgage tax relief at the higher rates of income tax is being phased out. By 2020/21, higher rate taxpayers could find themselves paying more tax on their property investment income. Foreign investors no longer receive the beneficial capital gains tax treatment they used to.

There are various strategies and investment structures that might be used to mitigate tax issues, but whether these work for you will depend on your personal situation. For example, you might transfer some or all your properties to your spouse, who pays tax at a lower rate. Or you could invest as a limited company. If you invest in hotel rooms, you could invest via a personal pension plan and benefit from the tax advantages of doing so.

Your most important decision should be to ensure profitability of your investment, before considering tax issues. And if you live overseas, you should be wary of any double taxation issues before investing.

7.      Investment property management

Especially for foreign investors (but increasingly for UK-based investors), the need to have your property professionally managed is a consideration that shouldn’t be underestimated. Many property investors (like me, for example) have no desire to become entwined in the day-to-day duties of property management. I want to ‘Set and Forget’. So, I employ investment property managers to do all the landlord stuff for me. It reduces my risk, increases tenant care, and makes sure my time is my own. For me, lifestyle is the only reason to invest. Without that free time, I can’t enjoy the lifestyle potential I’ve invested for.

If you want to invest in providing the lifestyle you desire, property investment in the UK is proven as a wealth creator. To discuss your financial objectives and receive a personal evaluation of the benefits of property investment, contact one of our team today on +44 (0)207 923 6100. We’re here to help you make a profitable and hassle-free property investment that allows you to sit back, relax, and enjoy your life.

Live with passion

Brett Alegre-Wood

About the Author

Brett has over 20 years experience in all facets of property, he owns various companies centred around property and is the driving force behind the education and training at Gladfish. His companies have sold over £850 million in UK and London property and he manages over 1200 properties through his estate agency chain. Today he shares his time between UK, Australia and Singapore. He is married to Arlene and together they have 4 kids.

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