MIH TEAM
19/04/25
Fresh Thinking
020 3637 7968
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The lifecycle of a rental property investment
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CONSIDERING A BUY-TO-LET?
If you’re considering buy-to-let investments in London, then there is a vast array of advice available on the internet from trusted sources such as Savills and Frank Knight. Where to buy, when to buy, setting expectations, potential rental yield, legislation and compliance know-how, plus maximising ROI are all covered in detail.
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The skill comes in working out how to maximise your rent through maintaining and updating property, without it having a negative impact on your investment returns.”
In a nutshell, the rental yield tells you what percentage of your property’s value you’re earning in rental income each year. A good rental yield in London, where property prices are higher than anywhere else in the UK, might be anything from 4 – 6% depending on the initial value of the property. But beyond this you will need to consider the wider picture, and you’ll need to be aware of the theoretical lifecycle of a rental property investment.
STRATEGIC INVESTMENT
There is evidence that property markets follow a predictable pattern, as advocated by eminent economist Fred Harrison, a recognised authority on the long-term impact of investment in land and property. The 18-year property cycle as it is known is of course a theory and not absolute, nevertheless, it can help to illustrate cycles of behaviour and what you might expect on your property ownership journey.
- Recovery Phase
Let’s start with the recovery phase as experienced after the last recessionary phase also ominously known as the ‘crash’ of 2008. Following a recession of this nature, property prices typically rise slowly and cautiously, buyers and investors are tentative, and banks are more stringent in lending. Here, the buyer can potentially find property at lower prices before the market picks up speed again. This phase is approximately 7 years long and may be followed by a mid-cycle dip of a year or two. - Explosive or Boom Phase
This sounds exciting and is the period where confidence is restored and there are more rapid increases in property values. Banks are looking to lend money and there is more flexibility financially. At this point rental properties will be in demand as rising prices may exclude some from purchasing. You can capitalise on your rental returns or sell to realise appreciation in value. Property booms last for between 7 – 14 years with 7 being the average. - Recession Phase
In this phase of the cycle, the market has peaked, the economy is faltering and there is a slowing down in price increases as the marketplace becomes more cautious again. Once more this may be the time to snap up a good deal. Or you may wish to pause large investments until the market warms up again.
FOREWARNED IS FOREARMED
Having this knowledge is useful for understanding that there is a continual cycling process in operation. What this means is that there are times to sit tight and times to act and the trick is to get a sense of where the market is at, at any given time.
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Understanding these cycles is vital for investors as it aids in predicting market trends and making informed decisions.”
Presently, other affecting factors have had an impact on this cycle for example, the pandemic, where there was a notable movement of people from town centres to out of town residences, giving rise to a mini boom. But overall if the market is considered over a longer period, the 18-year cycle bears out. What does this mean for current investors? Well if the pattern is to be applied then we are approaching the nadir of the recession phase in approximately 2026. This would mean that recovery would follow thereafter.
Remember: because the property market is cyclical, prices surging and falling back are to be expected. Bearing this in mind is the key to riding the waves to your advantage.
