Before we look at the various elements which indicate a “good property deal” it is worth reminding ourselves that everything is relative. At this moment in time, we live in a world where interest rates are near historic lows and finance is quite cheap. As a consequence, in relative terms, not as much income is required to cover ongoing finance costs although there are other costs associated with buy to let properties. However, let’s take a look at what constitutes a good property deal in the wider context.
Acquiring a property below market value
It goes without saying that acquiring a property below the market value, for a variety of different reasons, is the Holy Grail of property investment. This effectively means that from day one, even taking into account mortgage debt, you have positive equity in the property. This opens up a myriad of different options further down the line when looking to use property as collateral for additional acquisitions or even re-mortgaging.
Adding value to a property
It is very easy to underestimate the power of sight, first impression and how this can impact the perceived value of a property when potential buyers visit. If a house looks unattractive from the outside, perhaps the garden is unkempt and the inside could do with refreshing, this does not exactly encourage premium offers. The ability to add value to a property via simple tasks such as redecorating, landscaping the garden, repainting the outside and replacing broken tiles and aged bricks/timber should not be undervalued. There may also be more complex changes you could make to add value but very often these require specialist skills, additional capital and obviously a greater degree of risk.
Positive cash flow
We live in a world where cash is still King and the ability to lock in a significant buy to let rental yield is extremely good for cash flow. Historically a buy to let rental yield in the range of 8% would likely comfortably cover finance costs and any “unexpected expenditure”. In reality, this could be a little lower today when you bear in mind the cost of mortgage finance but as we said above, everything is relative. If you have strong reliable cash flow then in effect the property is “paying for itself” while building up your equity.
While it is easy to assume that all “good property deals” relate to purchases, it is worth taking a look at the sales side. Knowing when to sell a property is just as important as knowing when to buy a property because a profit is only a profit when it is in your bank account!
Selling when demand is high
In general there is a shortage of housing stock in the UK which can lead to pockets of excessive demand with limited supply. Even though Gordon Brown once thought he had cracked the “boom and bust scenario” this is a natural occurrence and effectively unstoppable. So, if you’re able to take advantage of excessive demand for property in your area, and bank a premium above the perceived market value of your property, this must be classed as a good deal – in fact a great deal.
The ultimate goal is to buy properties below their market value, secure a healthy rental yield, limit your financial expenses and watch the money roll in. If you can add an element of additional value along the way then even better. The reality is that you will never buy at the bottom of the market and you will never sell at the top of the market. However, selling when buyers are paying a premium because of excessive demand and low stock is the perfect scenario. The exact opposite is true of buying, with sellers pushing prices well below their real market value as a consequence of a lack of buyers and a “race to the bottom”.
Once you decide that a particular property looks good value in the longer term, the short term timing of the purchase is simply tweaking with the numbers. Yes, we all want to buy at the bottom and sell at the top but this is not always possible. Compare and contrast the value today, the rental income and the potential value 5 years, 10 years or even 20 years down the line. Does the property pay for itself with cash flow? Is there potential for long-term capital growth? If the answer to these two questions is yes, that is a “good property deal”.