Despite claims to the contrary by the then Chancellor Gordon Brown, the boom and bust cycle will never disappear. It is ingrained in human nature to be overoptimistic and over pessimistic at various times of the economic cycle. However, when you bear in mind the 2008 worldwide economic collapse and the various ups and downs in the UK property market, why do investors continue to chase capital appreciation with less emphasis on rental income?
Short-term profits
Each and every property investor in the UK is looking to acquire their chosen property at the lowest price. In theory they may be able to flip a property for a short-term profit but why are so many focus on a short-term profit as opposed to long-term rental income?
Short-term investment timescales are the bane of the investment markets causing volatility and uncertainty – although they do help with liquidity. If we look at the London property market, we know it is probably the worst performing in the UK at the moment and well off its recent high. There are concerns about Brexit, the UK economy and financial companies moving their offices elsewhere but still investors look to “bottom fish” with the idea of banking a short-term profit. Buying at the bottom of any investment market cycle is like “catching a falling knife” i.e. near impossible.
Double-digit rental yields
In any economic environment double-digit rental yields must surely be the Holy Grail for buy to let investors? When taking into account mortgage capital and interest payments it is not out of the question to earn enough rental income to fully pay off your mortgage within 10 years. Whether the property has increased in value over the period will be irrelevant for many people because they will fully own an asset without ever dipping into their own resources. This then offers the opportunity to use equity in a fully paid-up property to fund other acquisitions and the snowball effect begins.
If you take a step back and look at this situation from a distance, yes, there is nothing wrong in a short-term profit but surely, looking longer term, double-digit rental yields and relatively low capital appreciation are not such a bad mix?
Market fluctuations
We know from anecdotal evidence that many buy to let investors are currently sitting on the sidelines counting their investment warchests. While there is no suggestion that short-term capital gains in property investment have gone forever, they could be more difficult to come by in the current uncertain environment. So, could we see more investors looking towards long term double-digit rental yields, at least in the short term?
Income streams are vitally important to anybody looking at investing in property, or any other investment vehicle, because cash is king. You can have an array of potentially valuable assets but if you are unable to realise their true value as and when funds are required (often at short notice) then their potential value could be significantly reduced.
Conclusion
For many people it is human nature to chase a short-term profit, increase their investment pot and look for the next asset acquisition. However, when you bear in mind there are double-digit rental yields available in many areas of the UK, UK base rates are at historic lows and demand for rental properties remains relatively strong, why do so many people discount the rental market?
Over the next couple of years we will see positive and negative announcements regarding Brexit which will quite likely have a significant impact upon UK house prices. There will be many savvy buy to let investors looking for these dips to buy undervalued properties and put them up for rent on attractive yields. Never underestimate long-term income streams, never underestimate cash in the bank and while many property prices will fluctuate in line with investor confidence, a strong rental yield will offer an extremely valuable degree of support.