Buying Criteria for Rental Property
When buying for rental property you have alot of options. You have new build city center luxury…..you have 100 year old buy to lets as well as professional & social HMOs. As we have completed close to 50 Professional HMOs and social HMOs, we strive for the later. However it is no magic bullet or simple task. You have to pick the right properties for either a professional or social HMO. This means layout….this means location etc. There are areas in which there is saturation. However with professional and social HMOs you have higher returns if all accomplished correctly.
I have several things for you to consider regarding your acquisition for rental properties:
- Cash Flow & Numbers
- Cash Flow Sustainability
- Ideal Cash Flow Amount/Month
The other issue is some things above mentioned can easily change…all that matters with any property investment is the numbers.
Think about it….How likely is your cash flow to continue at the level you predict it should? Can you sustain your predicted cash flow? To some degree there is alot of speculation. There are no absolutes! You do your best when selecting the property….Do not simply jump. Do your homework. This is not rocket science.
While the market you buy in can strongly dictate the sustainability of your cash flow over the long-term, the tenants you put in your property can strongly dictate the sustainability of your cash flow over the short-term. One bad tenant can almost immediately tank your returns. So the best option is to have the largest and highest-quality tenant pool that you can pick from. Do tenant searches. You’re more likely to find higher-quality tenants in a stronger market. Last week we had one room open in one of our HMOs. We turned down 3 prospective tenants.
The whole point of investing is to get a return on your money, so if the numbers don’t work, what are you even in it for? You need to know how to run the numbers. The most useful and accurate equation for determining the return on your money is the cash-on-cash return. Why we don’t do buy to lets in Manchester at the moment is they do not stack up….we would get approx 425 to 450 for a 2 up 2 down. Our gross yield will be 5-6%…then you have voids…maintenance …management…Is it worth the risk to get a net 4-4.5% on your money….Positive monthly cash flow means the income you receive on the property is more than what you pay out in expenses. It means you pocket money every month. Pocketing money every month, rather than paying out money every month, is obviously desirable, but you’d be surprised how many people don’t realise that should be happening. There are people that justify having a property with negative monthly cash flow. They look for that London appreciation that has seemed to stop. Investing in property for cash flow and investing for appreciation are two different strategies. We shoot for the professional and social HMOs with strong cash flows. Any appreciation is a gift!
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