Tag: Investment

Learning about property investing from Wolves

It may seem strange to think that we as humans could learn something from animals after all are we not the top predator due to our creative minds. Wolves are always the bad characters in stories, myths and legends, nothing could be further from the truth, as wolves are very sociable, who work as a team and are highly intelligent. If we observe wolves we can obtain some insight on how to use some of their habits when it comes to investing in property. This may seem improbable, but before you dismiss it out of hand keep reading and have an open mind.

Teamwork

For wolves to succeed in nature they have to work as a team, it is the only way to survive. A lone wolf does not last long as they are social animals and need help from the rest of the pack, so they with very few exceptions soon starve, or become victims to other predators.

For an investor to succeed they have to have a team as they cannot do everything themselves. So an investor will have his power team such as Accountant, Solicitor, Broker etc. Without this team, the investor will not last as the investor will be starved from deals and other investors who are organised with teams will become predators who will take the deals away from the lone investor as they can act quickly.

Territory

Wolves know their territory intimately, nothing will happen in their territory without them knowing about it. By knowing their territory in this way the wolves know where their prey is likely to be and they also know how to use the terrain to surprise and attack their prey.

For an investor to succeed they need to know their investment area extremely well. Nothing should happen in the investor’s investment area without them knowing about it. The investor needs to know when there are changes and use their knowledge of the area to take advantage and make a potential gain.

Travel

Wolves are hunters, therefore, they travel long distances to find their prey and they search far and wide. They may travel fifty miles or more each day in search of food they can travel tirelessly for hours on end with no energy wasted.

The investor may have to travel long distances to get to their ideal investment area. Due to either the local property prices, the stock available or strategy the investor may not be able to invest in the area where they live, so it will be necessary to travel to different parts of the country. They must do this without wasting energy thinking that they have to get up early, they may have to drive for hours, etc. travel is part of investing so the investor must learn to accept this.

Hunting

Wolves are incredibly patient animals, they will carefully watch and wait to pick out a suitable prey. They are looking for a weakness that they can exploit, such as a slight lameness. Wolves will keep an eye on their potential prey by constantly checking on them to see if anything has changed that has made them weaker. Wolves may trail a herd of elk, caribou etc. for days before making its move. During this time, they are assessing the herd, looking for an animal that displays any sign of weakness, and this is just the beginning. Wolves also factor in other conditions that will affect the outcome such as weather and terrain that can tip the scales in favour of the wolves or its prey. Once a prey has been picked out the wolves become totally focused on it until they can bring it down.

The investor must also be patient, they must search out the right type of property, put in their best offer and wait and see if it will become accepted. At first, their offer may be rejected, but the investor must stay focused and keep watching and waiting and if they see no movement the investor will remind them of their offer. Once the vendor comes back with a counteroffer that they are prepared to accept then the investor will begin to negotiate and find a weakness until an agreement is reached. The investor must remain totally focused until the deal is done and contracts have been exchanged.

Conclusion

As can be seen, there are similarities between wolves and investors. Investors can learn from wolves because wolves are sociable animals that understand their territory and are fully focused as this is the only way that they can succeed in nature. The investor needs to be a sociable person that understands their investment area has the same focus and commitment if they are to succeed with their property investment journey.

 

Rental Yield

When investing in property you should always look at the Return On Investment (ROI), as you are buying the property to make money. Therefore you need to calculate the rental yield to ensure that the property that you are interested in will make you the most money on your investment. Yield uses the rental income over the initial cost of buying the property and it is expressed as a percentage. There are several ways of calculating yield, but for buy to let (BTL) we will use the most common one known as rental yield. This is calculated by the rent minus the running costs and dividing it by the total amount invested to purchase the property. This will give you a percentage, the higher the percentage the better the deal.

So our formula would look like this:

 

Yield = (((Monthly Rental – Running Costs) *12) / Investment)*100

 

Let us do a simple worked example:

Suppose that you have found a couple of potential properties that you are interested in but now you have to decide which one to choose. Property one costs £175,000 with a potential rental of £650 per month. Property two costs £200,000 with a potential income of £800 per month.

 

Property 1.

Monthly Rental Return = £650

Investment = £175,000

£650*12 = £7,800 (Annual Rent)

£7,800/£175,000 = 0.044

0.044*100 = 4.4% Yield

Property 2.

Monthly Rental Return = £800

Investment = £200,000

£800*12 = £9,600 (Annual Rent)

£9,600/£200,000 = 0.048

0.048*100 = 4.8% Yield

 

Although property two costs more to purchase it gives a higher yield, therefore a better return on investment.

 

The above examples is a simplistic version, as it does not include things like voids which can skew your calculations, so you may want to stress test the calculations by using a figure of 10 months annual rent instead of 12 months. You also have to obtain accurate information which includes the following:

  1. Cost of property
  2. Stamp Duty
  3. Mortgage
  4. Mortgage arrangement fees
  5. Building Insurance
  6. Survey Fees
  7. Legal fees
  8. Tenant acquisition fees
  9. Refurbishment costs
  10. Maintenance Fees
  11. Voids running costs (Council Tax, Utilities etc.)

There may be other items that you need to add to the above list e.g. for HMO you may need to include a licence fee and furniture, so do your due diligence and be as accurate as possible.

 

Be wary of yield figures that are given by agents and developers as they are often based on the basic cost of the property so that it makes the deal look more attractive. So do not be afraid to ask questions and ask how they have come up with their figure and use your list as a checklist to help you. Also, do your own due diligence and do a comparable check of local property prices within a ¼ of a mile of the property that you are interested in and what they sold for and also do a similar local search for the rentals in the area.