Professional property investor Silas J Lees offers some advice and food for thought if you are thinking of investing in housing
2015 has seen the property market start to show signs of recovery with interest rates remaining historically low, so it is the perfect time to look again at investing in property. But how do you know if it is the best place for you to put your money?
Property has always proven to be a great investment if held for a long time, but there are some key steps you can take when deciding to invest in bricks and mortar.
Education is one of the most important words you will hear in property investment. Most people are told to buy property for the capital gain it will achieve over the length of ownership. This advice is frequently given out to new investors, however, it is not the full story.
Capital growth is fine so long as the market is going up. However, if you treat property investment from a professional business standpoint, you will note that this is a speculative approach and not an investment approach.
It is best to acquire a property portfolio that provides you with an excess monthly income over and above the costs to run the property on a monthly basis and to make sure each property stands on its own two feet. Otherwise you may end up subsidising your tenants’ living conditions, rather than being a true investor.
In order to build a buy-to-let property portfolio to supplement your income or retirement fund, you need to be educated in property investment. Unfortunately, many people do not know that you can choose to get educated in investment, both for the property market and stock market and instead blindly go into something they know little about and then wonder why they lose money.
Ongoing costs
Owning an investment property and dealing with the lives of other people is wholly different from owning your own home and you need to take into account the running costs of owning the property.
For example, there is not only the monthly mortgage cost to consider; there will be the costs of employing a good managing agent to look after the property and respond to tenants’ needs. There is also the need to budget for repairs and maintenance that inevitably crop up from time to time, especially as we enter the winter period and central heating systems are asked to cope with the change in weather conditions.
Once you have taken these monthly expenses into account, the rental income you receive will need to be in excess of these in order to pay yourself an income. The interest part of any mortgage payment is deductible against the rental income currently (although this will change in the future), however any capital repayment part of the mortgage is not. When acquiring a property initially, the investor has to ask himself or herself if they will be holding it for the long term, as this may impact the financing they take on it.
Repayment mortgages
For additional security, landlords may wish to have repayment mortgages on their properties in order to pay down their borrowings over time.
Taken over the term of a 25-year mortgage, this would mean that anyone investing in property now will be in a strong position at the end of the term, as they will own the property outright.
This could be an excellent position to be in if someone owns a couple of investment properties at the point of retirement. Not only would it give strong equity, which could be passed onto future generations with the right tax planning, the landlord would be enjoying rents that could be two to four times greater than when they first bought the property due to the effects of inflation. Therefore a £500 a month rent now, might be £1,000 to £2,000 per month.
Will there be enough to retire on?
The majority of people thinking about getting into property investment are in their 40s and 50s and will be concerned about their ability to get mortgages as well as the possibility of paying off their borrowings by the time they retire. This is a valid concern, however, the benefits of buy-to-let property ownership more than outweigh this.
Imagine a situation where someone is 50 years old looking to acquire their first property with a view to retiring at the age of 65. This gives a 15-year window within which to pay down their debt, however, they would be unwise to take a 15-year repayment mortgage as the mortgage payment would erode any potential profits they might make.
Instead, they should consider acquiring a portfolio of properties which would allow them to sell up to 50% of them at the point of retirement to pay down the borrowings taken.
Whilst there are potentially some taxable implications in this situation, it could mean that the investor has put themselves in the strong position of owning properties outright with the benefits of the rent covering their pension; rather than relying on a traditional pension, which may not be able to provide the necessary level of income a pensioner requires at the point of retirement.
Not only that, if the properties are owned in joint names with their children, for example, the mortgage term may well be 25 years, meaning they do not need to sell any properties at retirement and enjoy the rental income instead.
Of course, this means buying more than one property to facilitate retirement. This is where educating yourself on how to do this properly and learning how to leverage your money to acquire more assets becomes so incredibly important. As an aside, when you consider that most banks and mortgage companies will lend 60-80% of a property’s value, this suggests that they believe property is a strong and stable investment.
Regional considerations
When working out the return on an investment, it will become quite clear that buying properties in the South East of England will not provide the necessary income to cover the costs of acquisition without putting in a large deposit.
However, if potential investors explore the possibility of buying in the Midlands and North of the country, they will understand that the numbers work much better and the returns are greater.
Inevitably, this leads to some concerns about buying property further away from where you live and worrying about your investment, but if you can get over those concerns, you will find lucrative parts of the country where you can acquire multiple properties. This will bring in an investment income on a monthly basis and provide much better value for money than buying in the South. Any potential savings you have for investment will stretch much further in a value for money area rather than London.
One of the key principles of building a portfolio is to acquire properties in a run-down condition and renovate them to increase their value before refinancing them to pull out as many of their costs as possible, before taking this money onto the next project and so on. If this principle is applied consistently over a five-year period, it puts investors in a very strong position and will no doubt create a monthly investment income for them.
Silas J Lees is a chartered surveyor turned professional investor who has built his property portfolio during the recession of the last seven years. He is a published author of the book ‘As Safe As Houses’ and regularly trains other investors in the art of property investment. www.silasjlees.com
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