Valuing a property when you’re deciding on somewhere for your family to live in is very different to choosing a property to buy as an investment. When you are considering a buy-to-let investment one of the first things to consider is ‘Residual Value’ but, of course, there are other things to think about as well.
> The potential to add value
> It’s Re-sale potential if your strategy is to buy – refurb – sell
> Location and let-ability
But when you leave your emotions to one side and value a property based on the cold hard facts and figures, it becomes much easier to see which properties can work as an investment.
For this blog post, we’re going to focus on the ‘Residual Value’ of the property, and what return you will get as a yield, as the method of how you can value the property.
Valuing a Property Based on The Yield
Let’s say the rent for the property is £450 per month – so £5,400 per year.
For single lets, we would typically only consider properties with a minimum of 8% yield. So for this level of rent and to get this yield, we wouldn’t pay anything more than £67,500 for the property.
The reason why we use this method of valuation is because an investment property should give you a return after all costs, not cost you money. If you go lower than this level of yield then you run the risk of the property losing money on a monthly basis when you factor in possible mortgage rate rises, void periods, maintenance and tenant arrears.
By using the yield as your guide it helps to analyse properties based on their potential to make money on a monthly basis as cash flow, rather than just potential for future capital growth. Because when you’re in a market like we are today, capital growth is less than certain and may not be seen for a couple more years. So it’s best to think of capital growth as the cherry on the cake, and the cash flow as the deciding factor for a buy to let investment strategy.
Now, this doesn’t mean that there aren’t any properties that are being sold for above this price. There most certainly are, all over the country. But these properties when considered as a buy to let investment have an inflated ‘Residual Value’. This is typically in areas where there is still a good level of demand from first-time buyers keeping prices high, or where investors are buying based on the long-term plan of capital growth (like London for example) and aren’t worried about the cash flow.
So if your strategy is to buy and hold and is mainly about cash flow, not capital growth, then I would say stick to valuing properties based on the rental yield and you should then be better placed to cover unexpected costs and run the property as a cash flow investment instead of a long-term bet on capital growth.
Valuing A Multi Let Property
If Multi-Let properties (Houses of Multiple Occupation) is your strategy, we would suggest looking at yields of around 12%+ to cover the extra costs of management, furnishings & bills, and to make extra profit as that’s what multi-lets are all about.
Remember though the yield is just one method of looking at how much you will pay for a property, and how to negotiate.
Other key tips are:
- Really understanding the vendor’s motivation for selling and what they want to achieve.
- Consider comparison properties that have sold recently to give you an idea on the current market
- Consider on the market comparisons, as these will be your competition if your strategy is to buy-refurb-sell
Some good tools to help you find property values, area information and Motivated Sellers, take a look at the websites below: