UK real estate investing

The UK rental sector is largely refereed to by the phrase Buy To Let (buying a property to let/rent it to a tenant). BTL is the label. BTL as a sector is 11 years old. Prior to 11 years ago private individuals could not obtain a conventional mortgage for an investment property. They needed to use a company structure and commercial financing.

Here are two quick quotes from an industry association survey (ARLA – Long Term Investors Continue to Dominate Buy to Let).

Buy to Let investors borrow an average of 73% of the purchase price for their property investments, while a sizable minority, one in eight, borrow less than half. Over 40% of these investors buy properties that are over 50 years old and less than a fifth buy new build. On average, investors expect to keep their properties for nearly 17 years.

The above might seem normal in the US but it is rather surprising for to some UK investors who are not active in the property marketplace. They assume that property investors are speculators rather than long term investors.

The ARLA Index shows that the annual rates of return for a cash purchase of residential rental property average 11.18%. For geared investments the average is 21.68%. These returns include both rental income and capital appreciation.

“Geared” means to use leverage. To finance property with a loan rather than just paying 100% in cash.

From the ARLA website home page…

ARLA, the [UK] Association of Residential Letting Agents,is the only professional self-regulating body to be solely concerned with lettings.


One Response to “UK real estate investing”

  1. invest tool Says:

    invest tool asked: how does to know a property really worth ?

    John Corey replied: The concept is cash will find its way to the best deal. Hence you would not pay more for one property than another if they are really the same. You also would not buy commercial property as an investment if there are other investments out there which provide the same risk/reward trade-off.

    How to decide what something is worth is to compare it to the alternatives. For residential this means looking up comparable sales. 3-4 houses that are the same in almost all the major factors and which have recently sold. The market will effectively pay the same for houses that are the same.

    For commercial you look at the income after expenses. You compare that income stream to other streams of income (other commercial properties, bonds, etc). You then adjust if the risks are different but otherwise one stream of income is worth the same as another.

    Compare, compare, compare. Cash is King while RE is somehow less valuable.

    There are two other concepts that are at work.

    When doing a deal, a real deal with upside…

    What is the motivation of the seller? They could have reasons for selling that is forcing their hand. Motivated sellers are the key to a good deal.

    Second, is the idea of improvements or higher and best use. Many times there could be ways to force the value of a property up through changes. Improve the structure, change the cash flow by reducing the expenses and raising the income. Hence you are buying an opportunity where active management will make for a better situation. Hence the price paid does not reflect the future value. Note that you should never pay tomorrow’s price today. If the seller wants to realize the gain that would be possible from improvements let them make the improvements before they sell. Otherwise they get no more than the as-is value based on today’s situation.

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