According to new research from Platinum Property Partners, 23% of UK landlords do not measure the return on their buy-to-let investments at all, meaning that £300bn of investment in BTL is left unmonitored, leaving UK landlords unaware of the current or ongoing health of their property portfolio.
Landlords owning Houses in Multiple Occupation (HMOs) for young professionals and key workers are the most likely to measure their portfolio, with 95% tracking the profitability of their property portfolios in some way. But landlords who let out holiday homes are least likely to assess the returns on their investment – with a third (33%) failing to measure the financial performance of their rental properties.
Not only is there a significant failure among UK landlords to measure BTL returns, but there is also a worrying lack of consensus about the most effective way to measure the performance of property portfolios.
Return on Investment is considered the most effective way to measure the performance of all investments, including property. For BTL, it is the only method to take into account gross profit, the cost of the property (including fees and refurbishment) and capital gain. Return on Equity uses a similar calculation so can also be considered an effective measurement.
However, just one in five (21%) BTL investors measure the performance of their investment using these methods. Over half (56%) of property investors use a less effective method to calculate the profitability of their portfolio, which means that £700 billion* of BTL investment is at risk of not being monitored accurately.
Widespread confusion and misunderstanding of financial terms
Not only are landlords using ineffective methods to calculate the performance of their property portfolio, but the vast majority do not fully understand the key financial terms.
As this research revealed, less than a quarter (24%) of landlords understand the term ‘Return on Investment’: when asked to select the correct definition, 56% failed to do so while 20% were not sure. Landlords letting out flats were the least savvy about this type of financial measurement, with only 8% able to define this term correctly.
Only one in four (26%) BTL investors can accurately define ‘Gross Yield’; but landlords of HMOs for working tenants (38%) and holiday homes (42%) are the most clued up about the meaning of this term.
Just 12% of BTL investors know what is meant by ‘Gross Profit’, with nearly three quarters (73%) of landlords incorrectly identifying the definition. Landlords with holiday homes were the most familiar with this measure (25%).
However, even among those investors who correctly understand financial terms, there was no consensus about how best to calculate the different measurements.
For example, the most common method to work out a Gross Yield was rental income as a percentage of the property purchase price, cited by 38% of respondents. However, 28% of investors calculate Gross Yield as rental income as a percentage of the current market value of a property, including any refurbishment costs. A further 18% of landlords would measure Gross Yield as rental income as a percentage of the current market value of a BTL property (without refurbishment costs).
There was a similar lack of agreement in how best to calculate Return on Investment and Gross Profit, suggesting the sector is lacking cohesion when it comes to calculating the investment performance of BTL properties.
Steve Bolton, Founder and Chairman of Platinum Property Partners (PPP) comments: “The BTL market has boomed in recent years as scores of new landlords enter the renting game in a bid to reap the rewards from rising property values and increased tenant demand. But BTL is still largely in its infancy, and professionalism in the sector has yet to catch up: a staggering amount of capital investment is not being managed diligently or being treated like a business.
While bricks and mortar has a more tangible feel than other forms of investment, you wouldn’t leave stocks and shares to their own devices without regularly checking their worth. Landlords need to treat a BTL portfolio in the same way and regularly assess the performance of their properties to check whether they’re on course. Without a clear picture of what they ‘earn’ from their BTL investment, a landlord is more vulnerable to market fluctuation, and less able to predict how a mortgage interest rate rise or falling property prices could eat away at their investment.”