Ajay Ahuja, a millionaire with a successful buy-to-let portfolio worth £13.6 million and author of Lawpack's Buy to Let Bible, tells you how to find the perfect buy-to-let property investment.
Once you've got your finance in place, you need to find the right buy-to-let property. This is the most important decision in the whole process as it's the property you choose that dictates your success in property investment. There are many buy-to-let properties on the market, but less than one per cent are worth buying.
During the whole property investment process there is only one figure you can ever be in control of: the purchase price. If the price is too high, you need to walk away.
You must only become involved in a purchase when the price is right. But what is the right price?
There's a rule of thumb you should always apply when you're looking for a buy-to-let property to invest in - it's called 'the rule of 12'. It's very simple to remember when you're looking at properties.
Let's assume that the purchase price is £45,000. Knock off the two zeros at the end (in effect, divide the purchase price by 100) and you arrive at £450. This then determines the monthly rental figure that needs to be charged to obtain a 12 per cent gross yield.
Gross yield is defined as:
(Annual rental income × 100), divided by purchase price
If you can achieve a 12 per cent yield, then go for it! Speak to letting agents or look in the local press for typical rental values for the area that you're looking at. This yield is also stated as a payback period - the length of time it would take to own the property if you reinvested all the income earned to replenish your savings.
12 per cent is a like-for-like comparison to a bank or building society rate. So if your bank is offering four per cent, you know that you can earn three times as much from investing in buy-to-let property. But this assumes that you have funded the whole property purchase out of your own funds. Usually this isn't the case. When you borrow to finance the purchase, the returns are significantly higher.
When you become familiar with an area and its rental values, then you know when a property is a bargain. If typical rental values for a one-bedroom flat are £500 per month, then you instantly know if you walk past an agent's window and there's a flat advertised for £46,000, that you are going to get in excess of 12 per cent so it's worth an enquiry.
If, however, flats in the area are rarely priced under £70,000, then forget the area! You're not going to make any money there.
It's the price that will dictate the area. Forget location, location, location; it's PRICE, PRICE, PRICE! Always remember that you're looking for a property to invest in, and not to live in.
More expert tips on how to get the right buy-to-let deals and achieve a profitable buy-to-let yield, even in a market that's in a possible slump, can be found in Ajay’s two buy-to-let books, Buy-to-Let Bible and The Seven Pillars of Buy-to-Let Wisdom . In these bestselling buy-to-let guides, he outlines his secrets to buy-to-let success and shows how you, too, can turn a deposit of £500 into a buy-to-let property investment portfolio worth over £13 million.
More tips from Ajay:
Why You Can Still Make Money From Buy-to-Let in a Recession
Buy-to-Let Landlords: How to Make a Profit from the Credit Crunch
Calculate the net profit from your buy-to-let investments with our Rental Income and Landlord Expenses Manager
January 2008
