Can landlords maximise yields through property auctions?
Auctions have long been popular with investors and landlords looking to acquire new properties. These events can provide you with the opportunity to pick up properties Below Market Value with potential for development or renovation.
Purchasing the right property at auction could increase your average property yield, making your buy-to-let portfolio even more profitable.
Where are the UK's property auction hotspots?
According to the Essential Information Group (EIG), the North West was the region which offered investors the most residential lots between September and November 2017 (1,257), followed by the South-East Home Counties (1,007), the West Midlands (940) and Yorkshire & Humberside (834).
When it comes to growth in the number of lots offered, the South-East Homes Counties region performed strongly with growth of 24% during the period covering September to November 2017 when compared with the same three months in 2016. Other strong performers included Yorkshire & Humberside (13%) and East Anglia (12%).
London is the region which generated the most money from residential property auctions between September and November 2017 (£200 million), followed by a total of £144 million in the South-East Home Counties and £99 million in the West Midlands.
Do Below Market Properties really exist?
When reading about property auctions, you'll often see the phrase 'Below Market Value', referencing the chance to acquire homes cheaper than you would via traditional means. If you scour the nation's property auctions, there will certainly be opportunities to pick up veritable bargains. But you still have to be cautious.
If you don't do your homework, you could end up with a property which isn't fit for purpose or requires significant investment to get it up and running. If a property is priced ‘Below Market Value’, there's likely to be a reason behind this.
Sometimes you'll be able to purchase a property a little cheaper at auction if the seller needs to offload it quickly, but if there is a significant discount it could be because the property is in disrepair or is pending repossession.
You should be prepared to pay for a survey if you're seriously considering purchasing at auction as this could prevent you from landing yourself with a property which you thought was Below Market Value but actually ends up costing you more than a conventional purchase.
On the day of the auction, you should make sure you have a bidding strategy. If you get carried away, a property that was competitively priced could soon lose its Below Market Value tag if you get drawn into a bidding war.
It's always important to remember that it's a serious investment and you shouldn't let emotions run high and get in the way. Bidding can be fun, but it can also be costly to your investment.
Reminder: how to calculate yields
A rental yield shows the rental value of a property expressed as a percentage of the price it was purchased for. It's calculated by dividing your annual rental income by the purchase price and then multiplying the outcome by 100%. Therefore, a rental property purchased for £250,000 - which generates annual rent of £9,000 (£750 per month) - would have a yield of 3.6%.
This figure is known as a gross yield, but to get a better indication of how profitable your investment is going to be you will need to factor in a range of additional costs to calculate what is known as an 'actual yield'.
Some of the costs you'll need to acknowledge are letting agent fees, landlord insurance, maintenance costs, ground rents and void periods.
Calculating potential rental yields can be a sound starting point when deciding whether a potential investment is a good idea or not. Being honest and detailed about associated costs is crucial as you’ll then have a figure which is a true indication of potential rather than one which seems too good to be true.
We've put together a more detailed piece on how to calculate rental yields as part of our Landlord Tips section.
Renovation could be key to your investment
Many available properties you come across at auction won't be the finished article - it's how you maximise their potential which could determine the future success of your investment.
If you target an area with high tenant demand or a location near a university for example, buying at auction could be one way to enter the market at a lower cost.
One option is converting a property into an HMO. With more bedrooms, you'll be able to generate more rent each month and subsequently increase yields. However, you will have to be mindful of HMO regulations.
Purchasing a property at auction can be a risk, but if you prepare properly and execute any renovation or conversion work efficiently, it provides a great means of maximising yields and increasing profitability of your portfolio in the long term.