Everything has risk. Manchester real estate is not in a bubble like London real estate, however all aspects of real estate have their inherent risks. Adding leverage to the mix even makes simple terraced houses a potential risking bet depending on the level of leverage or if one is using capital repayment or interest only.
The reason why the single family property feels like a much safer bet is because it requires a smaller capital investment. But the amount of capital invested in the property has no bearing on the risk of that investment. A simple analogy is a $10 million office building in Springfield in Manchester which is a prime location is a lower risk investment than a $30,000 house in a dilapidated neighborhood or an area like Nelson. However I have met so many investors who chase yield in areas like Nelson or Burnley and simply end up with their fingers burnt as they thought they could get a 20% return without risk.
The key is to properly evaluate risk in a property investment, you must first clearly define what you stand to lose ( Yes you really can lose money even in a terraced house investment). When you invest your capital in purchasing an investment property, you have two return expectations: return ON investment and return OF investment. In other words, you are hoping that the property will produce a return on your invested capital via cashflow and a return of your invested capital when you sell the property. Myself and my JV partners look to maximize our returns by investing in HMOs. For the same risk as a terraced house with a low yield of maybe 7%…with Professional HMOs we are more than double that return. With Social housing we are also much higher than that and have a 5 year guaranteed contract, no voids, no management and maintenance is covered up to 5,000 per year. It is very clear our risk is reduced by these attributes. Failed management is one of the main reason property investors fail. They think an estate will take care of all issues regarding your investment property like Daddy. Sadly not the case and more risk.
Risk is uncertainty. Risk is the probability that either of those outcomes will not materialize as expected in your real estate investment. When you perform due diligence, you’re actually trying to determine the risk that your investment will not produce cash flow or that (even worse) you will not recoup your invested capital back. For example, when you purchase an older property, you might underestimate repairs, and the cash flow you thought you would receive will actually cover those unexpected costs. Or if you purchase a property in a neighborhood where values are declining over time, you risk that when you sell your capital, it will not be returned to you in full.
The factors that determine risk are the same factors that determine returns: quality of location, construction, schools, tenants, market. It’s not the amount invested or the purchase price. So when you are sizing up a deal, pay attention to the quality of that asset, its ability to attract great tenants, and the overall market prospects for growth. If all three are present, you are dealing with a lower risk investment than a property that requires a smaller cash infusion but doesn’t possess those qualities.
We will only buy in desirable areas like Salford, Swinton, Pendlebury, Worsely etc in which there is home ownership pride and potential price appreciation. Myself and my JV partners make our HMOs to a very high standard which attracts higher level tenants and these tenants pay more and stay longer. Yes it costs us more initially however we are lowering our risks in our property investment while working in this fashion. With HMOS we maximize our rents, we maximize our time and we maximize our profits for ourselves and our JV partners.
How are you dealing with risk…it is a very intuitive question.
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