Myself and Matthew Gibson, one of my portfolio development managers, have sat down with around 100 investors over the last 6 weeks, and a common theme throughout has been investors not being sure what returns on their investment they are achieving – and therefore their ideas on what properties are performing best are often not accurate.
By looking at many varied portfolios it is amazing to see all the different strategies and performances of different portfolios.
What return would I be looking for across the board? I would be looking for a minimum of 30% returns per annum on investment i.e. my equity to increase by a minimum of 30% per annum.
So if you have a portfolio worth £1 million with £300,000 in equity – you would be looking for your equity to have risen to £390,000 – i.e. your portfolio to be worth a minimum of £1.09 million – assuming a neutral cashflow – this is crucial, as if you have had negative cashflow you will require a higher return on capital growth, vice versa if you have had a positive cashflow – you may not require quite as high capital growth.
i.e.: a 9% capital growth across your portfolio above will give a 30% return on investment – pretty powerful? And if this compounds up over 5 years you will get a fantastic return.
Now if we look at the same portfolio value i.e. £1 mil, and you have just £150,000 equity this time i.e. 15% equity – and the portfolio still increases in value by 9% – what return on investment would this give you overall, again assuming a neutral cashflow?
Well it is going to be double – as you have half as much money invested but have had the same returns.
Therefore you will have seen a huge 60% return on your investment.
This shows that capital growth is so crucial when investing and therefore choosing markets that are undervalued compared to nearby markets or have economic reasons for growing over the next 5 years i.e. mortgage markets opening up, strong economic growth…
The 2 big mistakes investors can make in not seeing as strong returns as this are:
1) Buying in a market that is not going to give them capital growth
2) Putting too much money into each deal
If a property has risen in value, but it is hard to release the equity as the rents do not stack up – it is worth considering selling this property and re-investing in a faster growing market.
This whole idea of never selling a property does not make good business sense – you need to be aware of your market and the opportunity costs such as what gains you could get by selling and re-investing and at times it will make sense to sell and re-invest elsewhere.
For example, I bought and sold new build properties within the space of 6 months of owning them a few years ago. I did this because I felt that would give me a quick return; I did not feel holding onto them for longer term would give me as strong a return as investing that money in a market that was at the early stages of its growth cycle.
It is worth looking at your portfolio, this should highlight the importance of good leverage, and buying in undervalued markets as capital growth is crucial to achieve a minimum of 30% returns on your investments.
Ryan Neagle (Director).