There is also considerable landlord confusion about the most accurate way of assessing their buy to let finances, according to new research from specialist firm Platinum Property Partners.
It found that 23% of UK landlords do not measure the return on their buy to let investments at all and this means that £300 billion of investment in the sector 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 33% failing to measure the financial performance of their rental properties.
Not only is there a significant failure among UK landlords to measure buy to let returns, but there is also a worrying lack of consensus about the most effective way to measure the performance of property portfolios, the firm says.
Return on Investment is considered the most effective way to measure the performance of all investments, including property. For buy to let 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, according to the firm.
However, just 21% of buy to let investors measure the performance of their investment using these methods and 56% of property investors use a less effective method to calculate the profitability of their portfolio, which means that £700 billion of buy to let investment is at risk of not being monitored accurately.
The research suggests that 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.
Just 24% of landlords understood 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.
Overall some 26% could accurately define ‘Gross Yield’ and the research found that landlords of HMOs for working tenants and holiday homes are the most clued up about the meaning of this term at 38% and 42% respectively.
The research also found that just 12% knew what is meant by ‘Gross Profit’, with 73% of landlords incorrectly identifying the definition. Landlords with holiday homes were the most familiar with this measure with 25% understanding the term.
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 buy to let 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 buy to let properties.
‘The buy to let 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 buy to let 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,’ said Steve Bolton, chairman of Platinum Property Partners.
