Choosing the right property to invest in is a tricky affair. With so many options around, how do you know you’re getting the best value for the money? What exactly is it that makes the best buy-to-let properties so great, and which ones should you focus on?
Buying a property is no longer a short-term gamble to get quick returns on capital gains. It’s all about the cash flow; the rental income your prime piece of real estate is generating.
The rule of thumb when it comes to choosing a suitable place for investment is – buy low rent high. That’s the secret to owning a property that’s not only going to give you a substantial return on your investment in the long term, but also allow you to reap the benefits of having a significant cash flow.
With that in mind, let’s explore some of the strategies top investors use to cash in on high-value properties acquired for a fraction of what they’re worth.
Buy Low Rent High 101: Identify Below-Market-Value-Properties
This is the number one strategy for pro property investors. They have a knack for identifying properties that are priced way below their prevailing market value. A great investment is one that brings back the highest return, so if you want to become a successful property investor, you need to apply this to all the purchase decisions you make.
The challenge lies in knowing where to find these properties. Here are some excellent tips you can use to point you in the right direction.
Look for Repossessions
Property in reposessions means that the owner failed to keep up with the mortgage repayments, so the bank seizes the property to sell it and recover its initial investment.
The main reason why repossessions are an excellent buy low rent high investment is the fact that the bank’s main goal here isn’t to sell the property at a profit, but rather, sell it within the shortest possible time.
To do this, banks list the property for sale at a price that’s significantly lower than the market value to attract potential property investors who would be more than happy to grab the opportunity. If you’re looking to get the most out of your investment, looking for properties in repossession should be top on your list.
Find a Fixer-Upper
In this type of buy low rent high investment, the idea is to find a rental property that’s in dire need of repairs and renovations. Because of the significant amount of work they require to spruce them up, look for a piece of property that’s priced far below the market value, but in a prime area with a high demand for housing.
Keep in mind that this category of investments can be risky since you would have to cover the costs of refurbishing. Plus, there’s no guarantee that the property in question will yield a good ROI even after you do. It’s always a good idea to consult with an investment property analyst to help you establish whether or not the entire project is feasible.
Purchase Properties With Positive Cash Flows
When looking for a below-market-value property, that’s guaranteed to give you a good return on your investment, it’s important to find one that generates a positive cash flow. This is the secret to successful buy-to-let investment.
A positive cash flow means that the property is generating more in rental income than it spends on expenses. It’s never a smart investment decision to buy a property that doesn’t generate a positive cash flow, even if it’s priced below market value.
Attend Property Auctions
While the thought of attending property auctions may not sound like the ideal way to spend your evenings or weekends, the truth is, that’s precisely where you need to be if you’re looking to invest in a cheap rental property. The one thing you need to keep in mind when attending an auction is that you need to think and act fast. You have to be able to assess the value of a property on the spot.
Nonetheless, ensure that you do your due diligence beforehand to become familiar with the properties up for grabs. Stay up to date with the current listings and make a point to visit the locations of the properties you’re interested in, to determine whether investing in them is the right move.
Liaise With a n Estate Agent
Estate agents are have access to a large amount of stock from which there may be some opportunity to find a property below its market value.
Get in Touch With Property Sourcers
Aside from estate agents, you could also get in touch with top property sourcers. They are experts at finding distressed sellers with property in prime areas and convincing them to sell at a below-market-value.
They then find interested buyers willing to jump at the opportunity. All you have to do is identify a property sourcer, express your interest in acquiring a cheap investment property, and they’ll get in touch with you when something lucrative comes up.
Consider the Property Location
Location is one of the most important factors property investors consider when choosing a suitable property investment. It determines what the current demand for housing in the area is – which is directly proportional to the rental income you’ll get. Investing in a location with low demand means that you may have to contend with negative cash flows, which is not a sustainable long term venture.
Do the Necessary Due Diligence
So far, you know how to identify potential investment properties. The next step involves making sure that the property in question is a profitable investment.
Do your due diligence and learn everything you can about the property, its location, why the current owner is selling at below market value, and the projected outlook for the area over the next 10-20 years. You need to look long-term by conducting a property investment analysis to find out the projected ROI in a wide range of economic scenarios.
Then, stress-test your decision to make sure that the numbers hold up even when the bank hikes the interest rates and your buy-to-let isn’t at full occupancy. That way, you’ll know if you can make the mortgage repayments even during void periods.
Renovate the Property
One of the realities of buy low rent high investments that you have to contend with is the fact that in most cases, they are distressed properties. While it may not be severely dilapidated, they may not be in the best condition either, which is partly why they’re so cheap in the first place.
Be prepared to carry out some major renovations to rehabilitate the property. This may involve:
- Changing the floor tiles
- Fixing the roof and ceiling
- Upgrading the kitchen
- Updating the fixtures and fittings
- Replacing the windows
- Fixing leaks in the plumbing system if you notice any signs of dampness in the walls like mould or flaky plaster
- Fixing faulty electrical wiring
- Sealing cracks in the walls
- Sprucing up the external parts of the house
- Etc.
Even something as simple as changing taps, painting the wall, or installing new light fixtures also qualifies as renovating.
Carry Out a Comparative Market Analysis
A comparative market analysis (CMA) answers the question, “How much rent can a property in this location fetch?” It analyses similar properties in the neighbourhood to assess what you would realistically expect to get in rental income once you buy and renovate it.
The rule of thumb is to ensure that you don’t price the rent too high or too low. The rental income also needs to maintain a positive cash flow throughout.
Find an experienced property appraisal expert to conduct a CMA on the buy low rent high property you’re interested in. If the numbers make sense, then you know you’re investing in a good piece of property.
Maximise Your ROI
The best buy low rent high property to invest in ultimately depends on the rental yields for the area in question and the tenant profiles. Areas in the North East like Newcastle, Durham, and Sunderland, for instance, achieve 7.5%+ rental yields, with most homes in the region attracting long-term tenants.
In the meantime, are you looking to build your property portfolio for sale? Check out our blog for tips on how to do this quickly and safely.