A recent report suggested that the combined capital gain and rental returns on buy to let property over the last 10 years averaged out at just over 8% per annum. A similar report calculates that future returns will be impacted significantly by the recent tax changes. Indeed, the combined annual return could fall to below 4% in the short to medium term. Is there any way to ramp up the risk/reward ratio?
Moving down the development chain
The earlier you invest in the development stage, from acquiring land right the way up to acquiring an established property, the greater the potential risk but the greater the potential rewards. If long-term rewards for the buy to let market were to stagnate at around 3% or 4% then many people could be tempted to move further down the development chain.
The idea of acquiring land without planning permission is perhaps the ultimate in risk/reward ratio for those looking at property investment. There is no certainty you will get planning permission, the value of the land will vary enormously depending on receipt of admission, and therefore the returns will also fluctuate wildly. Initial investment in land could be used to ramp up funding and therefore potential returns as and when planning permission has been received. This would give a significant increase in the value of the land and allow it to be used as collateral against funding for development.
For a variety of different reasons, you will see various property developments up and down the country which have fallen behind schedule or indeed stalled. If the issues are purely and simply associated with the property developer then there is the potential to step in with finance and change the game. The land will already have been acquired, planning permission received and it is “simply” a matter of finishing the project. There is also the issue of finding tenants but this is why the risk/reward ratio is still fairly high in this particular scenario.
Over the years you will come across opportunities to acquire finished property developments below their perceived market value. While this may seem like the deal of the century, and it may well be, from the point of view of the developer there may still be a significant profit. Those involved in the early stages of a new development tend to use asset backed loans with significant gearing and refinancing along the way to maximise their returns. Structured correctly, you can make a significant profit on a new development by using finance alone.
Not the end of buy to let
Over the last year or so there have been concerns that we are nearing the end of the buy to let boom. The government has moved the goalposts with regards to taxes; returns have diminished in recent times but let’s not forget demand, which is still significant. We may see some buy to let investors diversify their portfolios by taking some early-stage developments as well as established buy to let properties. This mix-and-match approach offers a degree of security/protection and potentially enhanced returns on investment.