Your risk profile and the tale of two property markets

Yield is a representation of risk. The higher the yield, the higher the risk. The lower the yield, the lower the risk  Choose your yield wisely based on your ACTUAL risk appetite.  If you are happy doing developments or changing tenants around to go for the big win, knowing that if it doesn’t pan out, you’ll be leaving a lot of money in the deal then go for those double digit yields. But make sure to do your sensitivity analysis. See what will happen if you are £10k out on your predictions or even £5k, how does that impact your yields. Could you live with that? Compare this to the yield of a building where you would just buy it and sit and hold, collecting the rent and maybe organising the annual building insurance… maybe the yield is 9%, but how far off is that from your higher yielding property not working? The risk is yours, don’t be swayed by what someone else tells you. This needs to be constantly evaluated in your investment strategy. Interestingly enough I’m starting to see the tale of two property markets form within the commercial sector. Sub £500,000 purchases are seeing yields lowering as there is more cash available at this end of the market. Now a medium risk property will be sold at around 7% whereas traditionally we’d see 8%, 9% or maybe even 10%. Interest rates on mortgages aren’t budging much lower than 8.5%. Whereas in that £800,000 plus arena, yields are higher. Low risk properties are being sold at 8% or 9% yields AND interest rates for properties at this level are tumbling below 7%. Why? There are less market player at this level and the banks see the bigger properties as less risky, so you get more bang for your buck! My suggestion… work with other investors who are looking to buy and find a portfolio of properties and split the properties between investors so you are all buying separate titles. You’ll get the perks of the higher priced properties without needing that sum of money. Now, those portfolios don’t come round every day, but its worth keeping an eye out to jump on them when they do!