When you buy a property below market value you might not be getting what you hoped for. If a BMV deal does not have a good rental yield then you won’t turn a profit. Worse still you might end up losing money month by month. A good rental return is essential to success in property.
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Today we are going to look at what a BMV deal is and why it’s better for investors to focus on finding properties that have good rental yields instead.
What Is A BMV Deal?
A BMV deal is where a property is purchased at below market value. In other words, it is where a property is purchased at a discount to its assumed market worth.
The reasons why a property might be sold at a discount are various but often it is because the property owner has run into financial difficulty and has had to sell quickly.
Although BMV properties can still make great investments there are a lot of less than scrupulous operators in the below market value property industry. For more information see Property Hawk’s article: The BMV Myth Exploded.
BMV Property Companies
There are a lot of companies that specialise in sourcing and selling below market value property. Whilst there are some great BMV deals to be had from these companies you need to be wary and to look at the bigger picture before you invest.
Because a lot of companies will focus on the discount in the deal to the exclusion of all else. As an investor, you, on the other hand, need to be taking much more than the discount into account.
How Is A BMV Property Valued?
For a property to be considered below market value, its true market value must first be fully known. This is calculated by making market comparisons between the property in question and other similar houses that have recently sold in the same area.
As with all things, a property is only worth what people will pay for it. As such, the value of a property is always a perceived value; more a general consensus around value at a specific point in time.
So, once the ‘correct’ market value of a property has been calculated, for it to be on market for anything below that figure puts the property in the BMV deal category.
The Problem With BMV Deals
The problem with BMV deals is that investors too often focus on the discount and don’t pay enough attention to other aspects of the deal.
This problem can be exacerbated by the types of company that specialises in selling BMV property, as they will take the discount and focus entirely on that in their sales pitch.
In short there are a number of things you need to consider before buying a property marketed as below market value.
Your Return On Investment (ROI)
With any property deal, you also need to look very carefully at the potential of the property to generate an income. You need to calculate cash flow. You need to know what you return on investment is going to be.
In the long term a good rental yield is much more important than securing a property at below market value.
It is by having a good rental return on a property that the long-term success of the investment is assured. Or, to put it another way, it is rental income that dictates how a property performs over a period of time.
What Is A Good Rental Yield?
Rental yield is the return a property investor is likely to achieve on a property through rent. It is calculated by the yearly rent achieved divided by the total money invested in the property.
In our experience, it is prudent to aim for 7%+ gross rental yield on buy to let properties. This will ensure enough cash-flow to cover running costs such as mortgages or any unforeseen incidental.
How To Work Out Rental Yield For A Buy To Let Investment
For more information, you should have a look at our other article on how you should be looking at rental yield.
In that article we cover:
What Is Rental Yield?
Why Rental Yield Matters
Capital Growth and BMV Deals
How To Work Out Rental Yield
An Example Calculation
What Is A Good Rental Yield?
Costs Your Rental Income Needs To Cover
What Makes A Good Buy To Let Investment?
Price, Yield and Growth. Finding the Right BalanceLearn More
Property Investment and Cash Flow
If you can buy a property below market value then that’s great. But, if the cash flow is negative, or your monthly income and expenditure are so close as to be almost neutral, then you are not going to make any money, and even worse, you might end up getting poorer.
You will have mortgage costs, utility costs, maintenance costs; most likely you’ll be paying management fees.
If you don’t have a good rental return then the chances are that your income will only just cover these things.
Even if the property was a great BMV deal when you bought it, if you can’t cover your costs and still make a profit then the property is not going to stand as a good investment.
You could turn it around, of course. If a property doesn’t have a good rental return but can be bought at a fantastic discount then there are ways to increase that yield to improve the situation.
But, this is very difficult to do. To take a property that has a negative cash flow and turn that negative into a positive will require no small amount of effort and success at this will be harder still to guarantee.
Achieve A Good Rental Return From Day 1
You need to focus on your rental income from day one. You need to have calculated the rental yield. You need to set yourself targets and make sure that your returns (your ROI) are high enough to cover your outgoings and still generate a profit.
And, that is why a good rental yield is so much more important than the original discount you achieved through a BMV deal.
Our Property Investment Checklist
For the deals that we source, put together or purchase, we look at seven different criteria.
Rental yield is one, the discount is another but it’s much less important.
We also look at the tenant profile. We put together an exit strategy. We look at the location in depth. We ask ourselves how we can add value to the property.
By thinking through the seven areas on our property investment checklist we are able to achieve a very rounded view of where the opportunities are, in any given property deal. But more importantly, this process will give us an understanding of what that deal really means to us.
You can see our property investment checklist here. How to take action on all of these seven criteria for assessing a property deal is covered in depth in our free property training which you can sign up to by email.
Our Property Deals
All If you would like to see what property deals we currently have available all you have to do is sign up to our Property Insider’s Club.
Join Our FREE Training
Thank you for reading this article. If you liked this content then why not join our free online property training course?
In there we cover a range of different property strategies to help you get started on building a long-term property portfolio or creating a cash flowing property business.
We also look at ways to increase your return on investment with any of the properties you may be considering and we also have a couple of cheat sheets and downloadable documents.
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