Minimising risks by maximising returns

by Peter Stephenson

15:52 PM, 3rd March 2014
About 7 years ago

Minimising risks by maximising returns

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Minimising risks by maximising returns

Whether you’re new to investing in property or a seasoned investor, you will no doubt be keen to minimise the risk of your investment whilst maximising the return, and it may appear that striking the balance between the two is the key to success in the field of property investment.

When I speak to investors and other agencies the consensus is that safe investments are those properties yielding comfortable returns in the 5-6% region in popular areas of Bristol. When I advise investors I take a very different viewpoint. I would argue that minimising your risk goes hand in hand with maximising your return. What we’re actually looking for is the highest return in order to minimise our risk. Minimising risks by maximising returns

To mention all of the risks involved in investing in property could fill a book, let a alone an article such as this, but in the end as investors we’re looking to avoid the situation where the rental income doesn’t meet the mortgage repayments and we are forced to sell the property. The main factors which bring about this disastrous scenario are:-

  • mortgage payments increasing (usually as a result of the interest rate of the mortgage increasing); or·
  • rental income decreasing (this is usually a supply and demand issue but we’ll deal with this more in a later blog post)

Of course I’m assuming here that the investor is taking out a mortgage – for those in the fortunate position not to have to borrow the main concern will be the asset value and we’ll be considering both the ways in which we can maximise the increase in the property value over time (short and long term) and whether it is better to invest with or without a mortgage in future blogs.

At the time of writing it seems interest rates will inevitably go up, it’s just a case of when. If we take an average buy to let mortgage rate based on an interest rate of 4% and borrowing 75% loan to value ratio (LTV) it would seem to me to be a very high risk strategy to invest in a property with a 5-6% return. There are plenty of opportunities to invest in properties which offer returns of 8-9% by thinking a bit creatively about the property you’re buying.

For example, I recently helped a client find a 3 bedroom, 2 reception room house in the north of Bristol, purchased fully renovated for just under £165,000. The purchase was completed in December 2013. We advised the client prior to the purchase that the second reception room could be used in a house share as a fourth bedroom and that in doing so, and in renting the rooms on an individual basis to young professionals the rental yield increased to 8.7%, giving a much safer margin between the mortgage repayments and the rental income.

For many landlords the idea of having more than one tenancy on a property will invoke fear; partly of the unknown and partly of the additional work involved. The argument given against multiple tenancies is often that it is higher risk, but as we’ve explained above, the risk to the landlord is actually lessened significantly. There is of course additional work involved but you can use an agent to help with this and when you consider that any agent should be increasing the rent you receive on your property vs managing the property yourself – it’s a no brainer (unless your agency is charging over the odds). Agents that don’t deal with multiple tenancies are not adopting this strategy to maximise your returns, they’re minimising their own workloads to maximise their profits. If your agent refuses to consider this option with your property, question whether this agent is really acting in your interests.

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Comments

Some One

18:34 PM, 3rd March 2014
About 7 years ago

Yes, you can achieve higher gross income yields by letting a place as an HMO. But there is the extra work involved, even if farmed off to an agent, extra regulations, and extra wear and tear.

Admittedly in Bristol (ie: University land) renting out rooms may be plausible, mine are not within reach of a university, and I would rather stick with the families that stay for years and require very little input, rather than the (gross generalisation) the sort of non-student tenant who only wants a room.

Mark Alexander

23:00 PM, 3rd March 2014
About 7 years ago

Hi Peter

Are you a sales or letting agent?
.

Jeremy Smith

1:08 AM, 4th March 2014
About 7 years ago

It mainly depends if you have an agent you can trust in your area.
I have one in Cambridge, but I only just managed to persuade them to take one of my properties 'out-of-town'.
They def. would not want the extra work-load of renting out 4 rooms for me!

I have done this 'rent-a-room' as a live-in landlord, some years ago in my younger days when trying to keep up with 15% interest rates...
....and the amount of extra work, it's just not worth the hassle....
....tenants coming and going, annoying the neighbours with unsociable hours.
..trying to catch them in when rent is payable weekly, (they are always out when rent is due! ..surprise, surprise !!)
washing up always left in the sink, eating my food, leaving heating and lighting on..etc, etc.
...even using my bl**dy toothpaste !!!! **(see below)

1 x 2 bed house - rent as a whole : £800pcm
3 x rooms rented individually, £400pcm each incl., less £200 for bills: £1000 pcm
..It depends if you want to do the extra work and have the extra hassle for the extra £200.
...to some, this may be a good 'bonus income', on top of what the house returns when rented as one unit.

** solution to lodgers using YOUR toothpaste:
if you get chilli and pepper and squish it into a paste, then suck it back up into the tube by squeezing the sides of the tube together, they don't use your toothpate again! - it works!!
Downside: you need another secret tube of toothpaste.


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