Is your residential investment property underperforming?

What will underperformance cost you?

A common mistake is to think that your residential property investment is performing well if it’s producing positive cash flow. It’s a great position to be in – your tenant is paying the mortgage, your property management costs are covered, and there’s a little bit on top to put away or spend. But it doesn’t mean that your property investment isn’t underperforming.

Capital growth creates Real wealth. Professional investors understand how negative cash flow could make you a wealthy investor. I’m not suggesting that you should deliberately invest in a negative cash flow property, but understanding how to assess investment performance will keep you on track to reach your financial goals.

In this article, I’m going to look at:

  • Why your investment property might be underperforming
  • What that underperformance might be costing you
  • How you could eliminate underperformance in your property portfolio

Why your residential property investment underperforms

An investment into residential property enables you to invest using other people’s money (a buy-to-let mortgage) and leverage your capital gain. Buy in the best places to invest in property UK, and you could benefit from rental income, positive cash flow, and capital gains from day one. Historically, residential property investment has outperformed all other major assets in the UK. It does make sense to invest in residential property.

With all these benefits, investing in property has the potential to drive you to your financial goals and create the lifestyle you want. However, if you don’t think like an investor, it could also underperform and miss your expectations by a country mile.

Of all the investors that I’ve met with who have had underperforming properties in their portfolio (or an entire portfolio that is underperforming), the same four themes for underperformance are repeated almost without fail:

1.      Lack of investment strategy

When you go on holiday, or take a journey by plane, train, or automobile, you start with a destination in mind. Only when you know your destination can you plan the route. With a route in mind, you can anticipate your arrival time. You might also factor in a few problems on the way – a late-running train, or a traffic jam or roadworks, for example – and build in a few contingency plans. You now have a strategy to get you from A to B.

Investment needs the same meticulous planning:

  • Start with your financial objectives
  • Consider the route to meet those objectives
  • Expect the unexpected
  • Have a plan B (an exit strategy)
  • Review regularly

By creating a targeted investment strategy, you remove the mistake of investing on emotions. It’s the numbers that count: remember this, and you won’t get attached to an underperforming property investment. If you need to take action, it’s easier when there are no emotions attached.

Your investment strategy should allow you to continue to build your portfolio, taking advantage of the best property investment opportunities, and doing so proactively. The idea is always to be in the driver’s seat – you control your portfolio, rather than your portfolio controlling you.

2.      Investing in the wrong way

Generally speaking, it’s best to invest as an individual (or couple). There are circumstances in which you may want to set up a company to invest in property, but the drawbacks of doing so may outweigh the advantages.

For example, you could find it more difficult to get a buy-to-let mortgage by investing as a limited company. The lender has greater access to your equity as an individual.

The key here is to take advice about the best way to invest. There are a lot of factors that affect the choice of investment structure. These include your income, tax position, marital status, wealth position, and inheritance tax planning.

3.      Residential property in the wrong location

It is a case of a lack of investment research. There are someerrors that you may have made. This include:

  • You’ve listened to the wrong advice
  • You’ve been sold a property rather than bought a property
  • You haven’t checked what you’ve been told
  • You haven’t conducted your due diligence
  • You’ve bought at the wrong time in the property and economic trend cycle

You might decide to hold the property, or you could sell it and move on to a more profitable investment. Whatever your decision, it should be based on the numbers and further research of the property fundamentals. Don’t get emotionally attached to an investment property – it’s a box to make money, nothing more and nothing less.

4.      A failure to review the portfolio

When you’re taking that long-distance journey, the chances are you’ll be monitoring the traffic, listening to travel reports, or watching the departure and arrival boards at the airport or train station. Why wouldn’t you review your investment portfolio equally diligently?

If you fail to review your residential property investments:

  • Your returns could be suffering from an underperforming property
  • You won’t be giving yourself the chance to take advantage of better investment opportunities
  • You could be undercharging your tenants and not maximising profit from rental income

In other words, your portfolio could be underperforming. Your financial objectives could be disappearing over the horizon instead of getting closer each day.

What’s the cost of underperformance of investment?

Now you know why your residential portfolio could be underperforming, let’s turn our attention to what that underperformance is costing you. In the longer term, it could cost you your lifestyle, which is the main reason for investing. Underlying this lifestyle loss are three costs:

1.      Profit Cost

Okay, so this is the main cost that most investors would pick out as the obvious. An underperforming property won’t make the profit expected. How much could this cost you? Let’s say that your property appreciates in value by 5% per year, instead of the 7% per year you expected when creating your investment strategy.

On a £200,000 investment property, after 20 years:

  • At 5% the property would be worth £530,000
  • At 7% the property would be worth £774,000

If you invested in the wrong location, or don’t review and update your portfolio and investment strategy regularly, you could find yourself missing your financial objectives by a long way.

2.      Opportunity Cost

Failing to review, revise, and update investment strategy leads to missed opportunities. While you rest on your laurels, other investors are taking advantage of fantastic property investment opportunities.

You could be sitting on an underperforming property instead of cutting your losses and replacing your portfolio with a property that has the potential to produce positive cash flow and a 50% plus capital gain over the next four or five years. You might decide to sit tight and wait for an underperforming property to turn the corner, but those two or three years of underperformance could end up costing you a fortune.

3.      Emotional Cost

Less well documented is the emotional cost that portfolio underperformance can produce. A property slips into negative cash flow. It fails to grow in value as you had expected, or even falls in value. Holding on too long to a bad investment might make you a forced seller.

Headaches, sleepless nights, poor finances. You become aggressive, distressed, and depressed. Don’t underestimate the emotional toll that a bad investment can have on you – another reason to never get emotionally attached to any property investment.

How to eliminate investment underperformance

Start as you mean to go on:

  • Investment education is key to making good investment decisions
  • Learn how to research property investment opportunities
  • Take advantage of free property research
  • Always conduct due diligence
  • Include cash flow projections with every property investment
  • Review your portfolio with property experts regularly

As you take these steps, continually update your investment strategy so that it stays in line with your current financial circumstances and future financial and lifestyle goals.

Whether you’re starting out in property investment or you have a portfolio that you haven’t reviewed for 12 months or longer, book a meeting with one of our property consultants  on +44 (0)207 923 6100. You’ll have the opportunity to discuss your financial position, your goals, and your ambitions. We’ll help you to review your options, assess opportunities, and refine your investment strategy.

Don’t allow underperformance to ruin your future. Instead,

Live with passion

Brett Alegre-Wood

Brett Alegre-Wood
December 17, 2016

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