Do you wonder if property investment is still worth it?
Have you often thought about buying property as an investment only to be dissuaded by people who’ve told you that ‘it was a good investment, years ago – but that times have changed and you need to be very careful now’?
Have you found yourself becoming even more uncertain after doing research online? Some people say it’s a good idea but their approach seems really complicated, others tell you that the property game is dead. Do you feel like you’re struggling to get to the ‘truth’ of the matter – especially with all the conflicting opinions!
Let me make this very clear: Property is still an excellent investment if you put your emotions aside
Invest in any other capacity and you’ll be another property victim, struggling to receive the returns you thought you might and burdened by the amount of time it takes to look after your ‘asset’.
In fact, now is a great time to buy property in the UK. Property prices are at a record low – you can get a Buy-to-Let mortgage on a five-year, fixed-term rate of only 2.5%. And you’re making money off the bank’s money when you’re achieving yields of at least 5-6% (or as I do, 9-10% on short-term rentals). The stock-market doesn’t afford you such opportunities.
People who suggest property ‘isn’t worth it’ are often what I describe as ‘accidental landlords’, when they bought their investment property, it wasn’t as an investment. Many accidental landlords bought property to live in themselves, then their circumstances changed – they got married, divorced, decided to move to a different area etc. and instead of selling their property, they rented it out.
Although the property may have made a lovely home, it wasn’t necessarily fit for purpose as a rental. Typically people are willing to spend a lot more on a home than they would a rental property; consequently, when circumstances change they have a large mortgage on a house with a rental return that doesn’t stack up well against alternatives that would deliver them far better yields. See my post on yield to understand more about this crucial part of property investing
However, the vast majority of jaded investors I hear bemoaning their situations weren’t thrust into the position of becoming ‘accidental landlords’ but instead, aren’t receiving the returns they’d like because they made investment decisions based on emotions.
The most common scenarios I see play out go a little something like this…
…Prospective property investor thinks they should ‘bite the bullet’ and get into ‘this property game before it’s too late’. Since they know the neighbourhood they live in (and like it!), they think it’s probably a good bet for property investment – besides, this way they can always ‘keep an eye on it’. They visit local real estate agents and ask to be shown around properties locally, within their budget. They view the property, knuckle-knock on the doorframe (men, I’m talking to you!), determine that the figures more or less add up and decide to take the plunge.
They also participate in thinking like “Maybe if I buy close by, my kids can move in there one day”, or “I like the look of it, maybe we’ll live in it one day”.
You will never live in it. Your kids are highly unlikely to live in it.
Both of these ideas, while nice and endearing are akin to crystal ball gazing. By the time ‘one day’ rolls around, the likelihood is that both your wants and needs (and those of your children) would have changed.
Trust me, I understand this mentality well, because I’ve been there! I’m a parent, too. I have a young daughter and when I was first getting into the property market I had these ideas about my future – and hers! Nothing made me feel more comfortable than the notion of her living just down the road where I could keep (a very keen) eye on my little princess.
Making decisions based on familiarity with a neighbourhood, proximity to where one lives or whether you’d live in it is not the way to make money in property! This is how otherwise smart people come unstuck and later complain that ‘property is not worth it anymore!’
These days I tend to buy Buy-to-Let properties for the purpose of exclusively letting them out as holiday rentals (more about this later. Also read my post on short vs. long term rentals). But, I don’t buy properties that I personally “might be able to use it as a holiday home ‘one day’” – another common sentiment I hear amongst prospective investors. Sure, you could use it, ‘one day’ but do you really want to go to Scotland on holiday, most holidays? Being realistic, aren’t holidays often about seeing new destinations? And besides, the likelihood is that when you want to use it, so too will your holidaymakers!
There’s a big difference between buying a holiday home in a location you truly adore and love to visit frequently (and maybe occasionally renting it out when you’re not there) – versus buying an ‘investment property’ somewhere you quite like with the delusion that it can function as both a ‘proper investment’ but also serve you as a holiday home when and if you feel like it. You have to decide what the purpose of your purchase is, if you’re looking for investment properties, you need to forgo the romance, Romeo (or Juliet!).
I want to stress here, I’m not immune to the pull of emotions. I know these feelings because I’ve made these exact mistakes myself – and they’re costly!
Put simply: To make money in property you need to evaluate the figures and trends and make decisions based on facts. It’s really that straightforward.
I’m sure you’ve read that with Brexit looming now is an especially bad time to buy – actually, it’s a great time to buy! As mentioned, interest rates are at an all time low and the economy is doing extremely well, with the lowest unemployment rate since 1974! And while it’s true that property prices are falling in London, this is not true across the rest of the country.
So what do successful property investors do differently?
When you’re looking to buy an investment property these are just some of the considerations you need to review, clinically:
- Value – is the property like to go up in value? Does the area have an overall upward trajectory over time? At what rate have values risen? Are some parts of the area rising faster than others?
- Planned developments – related to value, are there any developments planned for the area specifically and generally that could impact on the property’s value? i.e. Crossrail or other transport links etc.
- Rental potential – does it make sense purely as a rental property? Is it on a commuter belt? Is it located next to big corporates/industry headquarters that are likely to have staff coming in from other cities/countries? Is there a lack of supply of quality rentals in the market or is the market already saturated with properties and are occupancy rates therefore low? Is it located near to tourist attractions or areas where a lot of domestic and/or international travellers would visit? Is the local economy buoyant? You want to make sure that you can attract high quality tenants.
- Yield – How much are you looking to pay for the property? What rental income can you expect? From here, determine the yield. Expect to see a yield of at least +5% before you proceed.
When it comes to my strategy for investment, I now almost exclusively buy for the Buy-to-Let holiday market. I look for property in areas where property is affordable and there’s a lot of demand for short-term accommodation, either from business travellers or holidaymakers.
Although Buy-to-Let holiday properties do result in far more hassle and work – the returns are also far greater. As I do this en masse as a business, I have the right systems and people in place and have streamlined the processes over time, making it much more cost-effective. However, if I were an everyday property investor I wouldn’t want the hassle!
Outsourcing the management of your investment to someone like myself of course comes with fees (20% for short term lets, 10% for long term rentals, in case you wondered!). Again, I often overhear conversations in both the tangible and digital realms about how using Property Managers results in an investment exercise that’s just not worth it. In the vast majority of cases I would ‘sort-of’ agree – if you’re buying a property in places like London where affordability and yields are low, it’s not a good idea as it eats into your already slim margins. If you’re buying a property with the intention of doing standard, long-term lets, it’s often easier to simply do it yourself depending on your circumstances. And, depending on whom you use, sometimes they’re not really taking care of your investment and their fees are exorbitant.
So to recap, property is still worth it – if you can put your emotions to one side and critically analyse the opportunities before you. It doesn’t matter if it’s fluorescent green if it delivers a great yield and is likely to have a high occupancy rate. Money is money. I for one, boast an occupancy rate of around 90% – and that’s because I evaluate each purchase purely on its financial merits while ignoring the rest! And, Don’t buy an investment property in London – the stamp duty alone will cripple you!
Do your research. Thoroughly. And if you don’t have the time or inclination, get in touch – no pressure, no obligations.