I started working with investors buying property in the early 1990’s as a branch manager and later area manager for one of the large chains of estate agencies, and was very quickly fascinated by the property investment culture that seemed to take hold in the late 90’s.
We had just gone through a terrible recession of the early 90’s with high unemployment and eye watering interest rates as high as 15%, and massive repossessions nationwide, so trust me properties were hard to sell in those days. But from the late 90’s we had people in their masses wanting to jump in and buy properties to put on the private rental market, looking for a good deal.
This continued and is still growing in popularity today; I too now work exclusively with property investors helping them to buy properties for investment. So with so many people now looking to the property investment market to secure their families future, I wanted to look at the top 10 reasons I have been given over the years as to why individuals want to “Get into Property”.
Property Investment became possible for the average person, with the introduction of the buy to let mortgage in 1997. This revolutionised the way rental property was bought, no longer having to be bought utilising a commercial mortgage with business plans and projected incomes presented to a bank. In the early days, only the brave jumped in, those that were of a business background, with money behind them, but in a short space of time, soon all types of people started to get involved in property and in many cases, this became their new “career”, the Investor Landlord was born.
Now Buy to Let is available to anyone with a bit of cash and a good credit rating, but what REALLY is the reason so many of the population are turning to property to secure their future? Here I have listed
The Top 10 Reasons for investing in Residential Rented Property
1) Cash Flow
Many dream of replacing their rat race job with that of a perceived easier life as an investor landlord, so therefore they are looking to replace their income with rental income.
Some just want to increase their income enough to cover maternity leave, kids in university or to make life that little more secure and fun.
The average cash flow return of a leveraged property in the UK is currently around 15.66%, (ARLA Review index) but this can be beaten with certain investment strategies, for the switched on investor.
High Cash flow properties tend to be cheaper units or bigger units converted into flats or rooms, which require higher effort in the marketing and management of them, but create much larger returns. Some HMO’s can return as much as 25% on capital invested if planned well.
But what if you built up a property portfolio of some substance, this is where your life can really change and for many it does. But be warned, don’t go too far… Too many properties with not enough cash flow built in, too high a leverage and the dream will crumble.
The key is to get balance. Good quality properties, with good cash flow, with as minimum gearing as possible to allow a comfort zone for “what ifs”.
With the lowest interest rates in history, caution must be taken on working out your cash flow based on today’s figures, the interest rates are only going to go in one direction and you need to be ready.
2) Capital Growth
Some investors are not looking to create a cash flow return now. They do not need extra money to live on; they merely want to know that they are using their money to make more money.
This is very similar to putting money in the bank and watching it grow over the years. On average property in the UK has grown 5.66% per year for the last 20 years. That’s quite a growth, especially if you are making a cash flow return as well.
High capital growth properties tend to be larger properties in better areas, which tend to not return such high monthly returns, but do much better on the capital appreciation stakes.
For the really savvy, larger properties in nicer areas, rented to professionals as rooms, can sometimes generate the high capital appreciation yields and great monthly cash flow returns too.
3) Better return than money in the bank
If you are to calculate the average cash flow return of 15.66% and add to that the average yearly capital appreciation return of a property of 5.66%, you are looking at an average overall return for a geared investment of around 21.55%. (ARLA review Index) Interest Rates at the time of writing are not even a quarter of that and therefore cannot attempt to match the returns of property.
There is an element of caution that needs to be aired here, property is a real living thing and just like investments can go down so can property, but it can also leak, crack and flood. So careful consideration should be made as to the type of property you buy, age, condition and ensure that all maintenance is jumped on immediately to prevent further damage and of course allowances have to be made for these in the figures too.
The older the property-the bigger the maintenance bills
4) Leveraged Investment means more money invested, than you have!
This is the really unique and cool thing about property… Leveraging. What other investment can you borrow money to buy?
If you have £100,000 and you get 5% per year in the bank, which is £5000 per year interest. If you were take that £100,000 and split it into 4 and buy four properties with a £25,000 deposit on each one you could in fact buy 4 houses totalling £400,000.
Assuming that those properties give a return of 21.55% per annum as the average shows, you would be looking at a return of £21,500 per annum
5) Opportunity to maximise returns by converting to a HMO
With property we have a choice, we own it, we can do something to it to make it more profitable if we choose too, and by comparison what could you do to stocks and shares to make it return better?
One great way to maximise returns on a property is to convert it into smaller units as in rooms or flats. That way you are getting more units for the same price (allowing for cost of conversion)
As an example a typical 3 bedroom midlands semi, that sells for £160,000 that would normally rent for £650pcm could fetch as much as £2050 as a HMO, that’s a 15% return.
These quality unit’s are now very much in demand, they attract young professional tenants who want all the ‘Mod con’s’ and want to live with other like minded people, refurbished to a high standard these unites provide great and alternative starter accommodation.
6) Second opportunity to maximise return with LHA
There are many strategies to optimise your returns from property and renting to Housing benefit tenants is one of them.
There is a rapidly growing need for housing for many communities and the government is increasingly looking to the Private Rented Sector to meet that need. This is giving us a great supply of tenants, where the rent is paid by the government.
There are many schemes available, LHA (local Housing Allowance) as well as various care in the community schemes, sheltered housing etc. dependant on your property and area, an assessment would see which schemes are available to you in your area, but can give great alternatives to the standard rental market.
A word of caution, many investors are attracted to the LHA market due the potential returns and then find themselves wrapped up in legal jargon, red tape and nonsensical rules that don’t seem to make sense. If this is a potential market for you, advice and assistance is necessary from a “specialist” LHA letting agent as many will say they “do LHA” but unless they specialise in it, then it is unlikely that they will “do LHA” properly.
7) A Good addition to your pension plan
Pensions are a great way to secure your future into your retirement, but what if you have not got enough invested and you feel that you will need extra, or maybe you see this as a good addition to your pension.
If you set yourself up with the right “type” of property portfolio, one that does not need too much work in the management of it, then this could be a great idea. As you near retirement, ensure that you have a good management company working for you, managing your properties, to ensure that your money keeps coming in throughout your retirement.
You could always of course start to sell your properties as you near retirement and beyond, creating cash lump sums to either invest in annuities or cash investments or to do all those things that you always wanted to do but never got around to doing.
8) To benefit the family in the future, to get them on the property ladder or help pay for university fees
I have worked with an amazing amount of parents that buy properties for their children starting university for them to live in (and rent out the additional rooms) or just to create revenue to fund the fees and living costs of that child.
Some parents like to help their children get onto the ladder and actually gift a deposit to their offspring. This is becoming a huge part of the market now.
The average age of the first time buyer now is 35 years old… just 10 years ago it was 25 years old. If you factor in who has paid the deposit, then the average age of the first time buyer that has funded their own deposit is a staggering 38! That’s nearly 40 years of age, and if the age has gone up 10 years in 10 years, then there is nothing to assume that that won’t continue to increase.
But this idea is not for you and you still want to build a property portfolio, then leaving a nest egg, of a substantial property portfolio, could be a great way to secure their futures after you have gone. If you have mortgages on your properties, remember to review your life insurance is sufficient to cover these and any other expenses that your portfolio would incur like inheritance tax. You will need to seek advice from an IFA with regards to this.
9) A great time to buy
When is the best time to buy property? When it is at its cheapest, well of course that would be 20 years ago unfortunately we cannot turn the clock back but traditionally property goes up over an elongated period, so it just generally a matter of time and waiting to the right time to sell.
So if property is always generally going up (with the occasional dip) then the best time to buy property has got to be now, as it will only ever get more expensive on average in the future.
There are also lots of repossessions on the market at the moment, with some great opportunities to get a bargain, mixed with the Private Rented Sector set to more than treble it is an investment vehicle that just cannot be ignored.
The PRS is currently at 17% of the total housing stock, and is predicted to grow to 21% by 2019 and 50% by 2050. That will make the PRS a very important player in the UK economy and in housing the nation. If these figures seem unbelievable, compare them to the European markets. France and Germany’s private rented sectors are in the 30-40% levels already; therefore we are just coming in line with Europe.
10) Capital Release opportunities
Property gives you options and an access to cash when you need it. When you own a portfolio of properties, you have an opportunity should you need to, to raise cash for life’s special occasions.
With a property portfolio, I always believe that it is good to have a good spread portfolio, some good cash flow properties, some high capital appreciation units, and also a few “trader” units. These are small units, flats, small houses etc, that if you need to release cash quick you can sell, flip, and remortgage etc to do so.
If all your money is on one massive unit with 50 rooms in it you are at risk. If it floods, subsides or they build a road or factory next to it, then your entire portfolio is wrecked, or if you need to release cash, you only have one unit and con only either sell your entire portfolio or remortgage it, whereas if you have a few units, can sell a few, keep a few and keep your portfolio fresh and modern.
The Rental Market has changed hugely over the years too, so frequently changing your portfolio, will ensure that you always have the right units to meet the current tenant demand and yielding the maximum returns for you.