How To Spot An Underperforming Property In Your Portfolio
You’ve invested your time and money into creating a portfolio of properties that will generate income for years to come – of course you’re going to want your investments to perform optimally. But how can you spot underperformance across your property portfolio? There are a number of factors to consider to determine the performance of an investment property:
- Rental yields
- Capital growth
- Property demand and supply
- Equity available to leverage
- Length of ownership
- Location potential
In this piece, we’ll be taking you through the ways you can pinpoint the weak spots in your property portfolio so that you can take the necessary actions to improve the performance of your investments.
Never Neglect A Portfolio Review
You can’t improve what you can’t track, which is why you need to carry out portfolio reviews at regular intervals to spot any outliers in your property roster. Even if you do not suspect that aspects of your property portfolio are underperforming, regular reviews give you the chance to discuss your property goals with an expert and look at the potential to leverage your current assets for further investments. They can be helpful for ensuring that you have optimised your cash flow, are on track for financing your next investment, are charging the appropriate rent, and can also allow you to weigh up your options should you be debating offloading assets in due course.
Understand Market Conditions
It is important to understand the socio-economic aspects of the property market that could be driving underperformance in certain units. For example, single-person flats may underperform in a market where wage growth is weak, as single tenants may decide to move back home or opt for house shares. Similarly, certain areas and neighbourhoods may fluctuate in their appeal based on factors such as nearby investment, local crime rate or even recent school Ofsted reports that could deter families from relocating to a specific catchment area. There will also likely be more of a pull for tenants towards neighbourhoods with greater connectivity – both broadband and transport – and away from regions where tenants are being priced out of the market, such as London.
Certain properties will appeal to a specific demographic of prospective tenants. It is therefore worthwhile doing your due diligence by exploring the population makeup of the locations in which you have purchased or are planning to purchase an investment property to ensure that your units appeal to the tenants searching in that area. For example, you’ll likely find families searching for houses in the suburbs, working professional couples and singles searching for inner-city apartments, and students looking for HMOs near educational hubs. Remember that local audiences also change depending on new projects and redevelopments – new schools will attract families, business development will bring more working professionals, and new or high-performing colleges and universities will bring more students.
At Joseph Mews, we carry out extensive research before bringing a new development to the market to ensure that it will provide investors with strong, sustainable growth. We examine a number of different factors that can be indicators of long-term price growth and high rental demand, including regeneration projects, infrastructure development, employment opportunities and connectivity.
It’s Making A Profit, But Not Enough
Your property investment may be generating income for you – but could it be generating more? If you haven’t raised your rents in line with inflation and rising house prices, you could be significantly underselling your property and not allowing your portfolio to reach its full potential. To assess whether you are marketing your properties at the right price, do your research using the following websites and tools:
- Compare your units to similar ones on property portals such as Rightmove, Zoopla and OnTheMarket
- Explore PropertyData to find out what yields you can expect per postcode
- Home.co.uk is a great option for those looking for local data based on house type and number of bedrooms
For those failing to make a profit on all or part of a portfolio, it is important to understand which assets are contributing to negative cash flow, and why. Here are some of the potential reasons why:
- Are some of your properties experiencing prolonged void periods?
- Are you struggling to keep tenants?
- Are maintenance costs draining your profits?
- Are increasing mortgage costs impacting your ROI?
Negative cash flow is not always an indicator that you should immediately offload an asset or not invest. When looking at cashflow you should consider both rental yields and capital growth. If your mortgage costs have recently risen or are currently higher than the rent you’re achieving on a property, but you are still forecast to see strong capital growth, it’s worth investigating whether the property will still provide you with significant returns in the long-run as opposed to immediately adjusting your strategy.
Weak Market Appeal
Even in strong markets, you may notice that some of your units underperform by attracting less interest than other assets in your portfolio. Some of your units may suffer from a high void rate, meaning that you cannot secure tenants year-round. In such a hot residential property market where rental units are in high demand, with 20 tenants asking for viewings per property on average, a lack of interest should be a huge red flag.
This is why it is so important to diversify your property portfolio to ensure that at least some of your units perform optimally, even if the market doesn’t favour certain property types or locations for a period of time. Diversification is all about owning properties that appeal to different types of tenants, such as a suburban family home, a city-centre apartment, and a HMO. During the pandemic, inner-city apartments became less popular as tenants moved back home to quarantine with family and did not have to be as close to their city-centre offices during lockdown. However, landlords with diversified portfolios would have benefitted from having multiple property formats aside from inner-city flats during this period, as this would ensure that at least some of their units were in demand. Over the past two years, apartment investors have seen huge surges in demand as people return to cities, meaning that those who held their assets through the pandemic are now reaping the rewards. In a changing market having different types of investments can counteract current underperformers if they are likely to perform again in future or are delivering high capital growth.
My Portfolio Is Underperforming… What Now?
Many portfolio investors will be concerned when they discover that one or more of their properties is underperforming. The initial reflex may be to offload these units in the hope of recouping some costs to put towards a more profitable purchase. However, do not rush to offload your units in a changing market, especially if they still hold future potential – you could leverage instead. Leveraging means that you use equity from your portfolio to secure new, mortgaged investments. This strategy can allow you to grow and diversify your portfolio with strong and sustainable investments without outlaying additional capital. A financial advisor or mortgage professional will be able to help you identify any available equity in your portfolio and the team at Joseph Mews is on hand to help you choose suitable properties to improve your portfolio’s performance for the long-term.
Spotting property underperformance is just the first step in your journey to reaping the rewards of a successful investment portfolio. It is important to consult property experts with knowledge of the UK market, economic conditions and property trends so that you can be as proactive as possible in helping your underperforming properties turn a corner. As a leading property investment company, Joseph Mews is able to provide guidance to transform your property portfolio. Our teams can recommend future investments, inform your current investment strategy, and have an abundance of knowledge to support you on your journey to property investment success.
Need some help achieving optimal portfolio performance? Book a portfolio review with Joseph Mews and maximise your return on investment in 2024.