Property investors can generally fall into two categories i.e. a specialist or a generalist.
Specialist investors focus on one particular locality – and most have a preference for either houses or flats, for example. In fact, the most successful investors I know buy the exact same type of property over and over again – because that way it’s easiest to get the numbers right and be sure about the demand.
A generalist, when it comes to property, will buy anything…anywhere – and they developed a pretty comprehensive research process to compensate for the lack of specialist knowledge of a specific locality. They are generally looking for good deals everywhere.
In order for the investors to be interested, the deal needs to fit into one of four “buckets”. No opportunity is ever perfect in every way, so instead investor look for a particular set of criteria that’s sufficient to get them interested.
Here are the four types of property deal to look for…
- “Solid performer”
If a property isn’t completely up and running, most would want some kind of reward for going to the effort of doing a light refurbishment, getting tenants in, and so on.
But that reward doesn’t have to be huge: sometimes, “good enough” is good enough. The general criteria for a “solid” investment are:
- Anything with BMV of 15% or more in a given locality which may vary in terms of supply, demand etc
- A good yield maybe above 6%
We could argue all day about whether “BMV” makes logical sense given that the transaction by definition sets the market value, but there’s no doubt that circumstances sometimes allow you to buy a property for less than you’d normally expect it to be worth. Anyway there’s nothing wrong with building in a little extra equity at the start then sitting back and collecting a good income every month.
This is the lazy option: a property that’s already in good condition, tenanted, and generating income from day one. Sign a few bits of paper, and it’s yours.
A lot of people don’t like buying tenanted property, but I really do – for two reasons:
- It eliminates any void period at the start, and saves the inevitable hassle and maintenance that’s always reported when tenants first move in.
- It removes any risk of being wrong about the level of rent the property could achieve. It’s possible that it could achievemore, but in my personal experience it’s rare (although not impossible) for tenants to be in occupation paying an above-market rent.
When you’re inheriting tenants, there are extra things you’ll need your solicitor to take care of. There’s nothing wrong with being lazy for laziness’ sake: time is a finite resource, and there are plenty of things the investor would rather be doing than overseeing refurbishments or finding tenants.
But on top of mere convenience, the other reasons other than just laziness to buy a turn-on property:
- Capital growth potential: the price isn’t “below market value”, but there’s potential for the value to increase over and above what the overall market is expected to do.
- High yield. No work to do, and sit back to collect good rental yields forever?
- “Flippable” or “Recycle”
The game here is to combine a discounted purchase and the potential to add value, allowing you to:
- Re-sell the property quickly (“flip”) at a good profit.
- Refinancing to pull out (“recycle”) as much of your cash as possible.
The criteria are similar: ideally, I’m looking for purchase price + costs to be less than 80% of the end (refurbished) value. This would allow for most of the cash to be released on refinancing, or for the property to be sold at a good profit.
Having similar criteria for both options is useful, because it gives a built-in contingency plan: you might buy with the intention of selling the property (so be targeting an area with a strong re-sale market), but also check that you’ll be able to rent it out if you can’t find a buyer.
- “Something special”
These are the opportunities with the potential for big profits – like getting planning permission to convert old houses facing busy roads into commercial properties, turning a pub into a block of apartments, or anything more than your standard “buy it, tart it up a bit, let it out” kind of deal.
Because these are the most profitable opportunities, they’re the ones that everyone is looking for and the owner doesn’t realise quite what they’ve got. They’re also the deals with the most risk: building costs spiralling out of control, planning being knocked back, and so on.
And that’s why they’re so profitable: they’re hard to find, they’re more work to execute, and they’re more risky.
These deals are rarely suitable for newbie investor.