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Property Hawk
Understanding the risks of investing in property

THE RISKS OF PROPERTY INVESTMENT

 

Falling property values

 

The UK property market has witnessed some incredible increases in property values over the last decade and even following the economic crash of 2007 most areas have not seen any real crash in property prices. This has lead many landlords and property investors to hold a niave view that property prices don't ever crash, that bricks and mortar don't fall down, and property can go only one way, and that is up. 

 

Unfortunately, this is not so. Property investors only have to look at the Japanese property market or look at residential property prices from the early 1990’s in the UK to understand that residential property values can fall as well as increase. They are like many investments, somewhat of a gamble.

 

Gearing your property investment

 

The biggest risk for a property investor comes from the fact that most residential investors potentially finance their residential investment purchase by borrowing part of the purchase price with a buy-to-let mortgage

This process of landlords gearing their investment means that small falls in the value of a landlords investment can lead to a disproportionate fall in a landlords capital or equity (the BTL mortgage deposit).  A potential property investor should be aware of this and be prepared to take on this risk during their investment.

  

Performance of the property market

 

One characteristic of the residential market in the UK in recent years has been its varied performance.  After a general rising market in the UK during the 90’s and early part of the millennium.  The market has been characterised by huge variations in the performance of local markets and even types of residential property.  Therefore buying the right property in the right area could dramatically affect an investors returns and risk of making money.

 

Rent levels & rental voids

 

One of the biggest risks to a landlord is an income shortfall because of a failure to receive as much rent as a landlord’s original investment plan had indicated.  This could be for several reasons: firstly, being unable to get a tenant and therefore not receive rent or alternatively receiving less rent than originally anticipated. The way landlords should manage this risk is that when they are calculating their likely annual rental income they should be cautious on their expected rental yields.  Many newbie landlords have been caught out by believing over generous rent projections provided by letting agents on behalf of a developer that sold the landlord their investment property.  Unconnected local letting agents’ projections on rent levels are more likely to be credible and a landlord should always do their own research as well to ensure the accuracy of the projected rent.

 

 

Even worse than not receiving the rents originally anticipated is when the property remains unlet, and leaves the landlord suffering a rental void.  The average rental void period according to the Association of Residential Letting Agents (ARLA) was 24 days in the 4th quarter of 2007.  A landlord should factor a period of rental void into their investment projections.

 

Inflation is a property investor's best friend

 

Many landlords may not appreciate but inflation is actually a property investor’s best friend.  This is because generally a property investors biggest cost and largest liability is the buy-to-let mortgage that was used to finance the investment.  Inflation has the effect of reducing the size of a borrowers loan over time.  How does this work?  For example if inflation is running at 5% per anum then assuming the investment properties real value stays the same by also rising at 5%, whilst the buy-to-let mortgage remains the same.  This means that the real value of the BTL loan is actually shrinking by 5% pa.

 

The risk to a potential buy-to-let investor is that inflation is not as high as projected or worst still is negative as was the case in Japan for many years.  This so called deflation would effectively increase the value of a landlord’s loan.  Deflation is very unlikely in the U.K. but it is always a risk.

 

The risk of further regulation

 

One a landlord has a residential investment property they have certain responsibilities to their tenant and certain legal obligations.  In recent years the government has introduced a number of new bits of legislation aimed at further control of the private letting sector.  These regulations mean

that what a landlord can do is restricted which potentially reduces their financial returns. Some of the legislation such as Houses in Multiple Occupation licensing and the Energy Performance Certificate (EPC) has a cost of complying with them. The risk to a landlord is that the government introduce more restrictive regulations which will either cost a landlord to comply or reduce their investment returns.
 

 

Changes in taxation

 

Tax rates are not static.  The Government has absolute powers to alter them.  Therefore a landlord that makes a residential investment based on assumptions of a certain tax environment could find that their investment returns are severely impacted on as a result of tax changes.  An example of this is the Government’s intention to replace Taper Relief with a flat rate of Capital Gains Tax

 

 

 

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FORMS FOR LETTING PROPERTY

FREE TENANCY AGREEMENT (AST)
FREE SECTION 213 NOTICE
FREE PROPERTY INVENTORY
FREE SECTION 21 NOTICE
FREE SECTION 8 NOTICE
FREE TENANCY GUARANTOR FORMS
SERVING NOTICE

FINANCE AND TAX ON RENTAL PROPERTY

INCOME TAX
CAPITAL GAINS TAX
LANDLORD INSURANCE
PROPERTY INVESTMENTS
OTHER BTL FINANCE
BTL FINANCE - THINGS TO KNOW
BUY TO LET MORTGAGES
BTL MORTGAGE BROKERS
SELLING A BTL PROPERTY

RENTAL PROPERTY REGULATIONS

GENERAL SAFETY
GAS SAFETY
ELECTRICAL SAFETY
FURNITURE AND FURNISHINGS
FIRE SAFETY
TV LICENCES
HMO (HOUSE IN MULTIPLE OCCUPATION)
TENANCY DEPOSIT SCHEME (TDS)
ENERGY PERFORMANCE CERTIFICATES
COMMUNAL HEATING REGULATIONS

INVESTING IN BTL PROPERTY

A GUIDE FOR NEW LANDLORDS
WHICH PERIOD OF PROPERTY
CALCULATING RETURNS
RENTAL YIELDS
FINDING PROPERTY
SELECTION STRATEGY
INVESTMENT CHECKLIST
PROPERTY AUCTIONS
BMV PROPERTY
BUYING OFF PLAN
BUYING APARTMENTS
BUYING HOUSES
BUYING HMO'S
ALTERNATIVE INVESTMENT
KNOWING THE RISKS
PROPERTY INVESTMENT CLUBS
RENTAL TYPES

MANAGING RENTAL PROPERTY

GIVING NOTICE TO LEAVE
NON - PAYMENT OF RENT
TENANT ABANDONMENT
GETTING YOUR MONEY BACK
THE TENANT WONT MOVE OUT
THE TENANT DOES A BUNK
SQUATTERS
RAISING THE RENT
REDUCING THE RENT
REPAYING THE TENANCY DEPOSIT
FAIR WEAR AND TEAR
MOULD AND CONDENSATION
MAINTENANCE OF A RENTAL PROPERTY
APPLIANCES
LANDLORD ASSOCIATIONS

 

LETTING RENTAL PROPERTY

TEN STEPS TO LETTING
PROPERTY MARKETING
WRITING A LETTING ADVERT
FURNISHING A PROPERTY
LETTING AGENT OR DIY
SELECTING A LETTING AGENT
VETTING TENANTS
TENANTS ON BENEFITS
LETTING TO STUDENTS
PREPARING AN INVENTORY
PROPERTY HANDOVER
RENTAL DEPOSIT
TERMS OF A TENANCY
LENGTH OF A TENANCY
RESPONSIBILITY FOR REPAIR AND MAINTENANCE
TENANCIES IN SCOTLAND
ALTERNATIVE TENANCIES
LETTING TO TENANTS WITH PETS

 

LEGISLATION OF LETTING PROPERTY

INTRODUCTION
TENANCY DEPOSIT DISPUTES
ARBITRATION
ALTERNATIVE DISPUTE RESOLUTION
TRIBUNALS
HOUSING ACT APPEAL DISPUTES
THE LANDS TRIBUNAL
RIGHTS OF LIGHT APPLICATION
APPEALS FROM LEASEHOLD VALUATION TRIBUNALS (LVT's)
POSSESSION PROCEEDINGS
POSSESSION - SECTION 8 NOTICE
POSSESSION - SECTION 21 NOTICE
SECTION 21 TIMETABLE AND PROCESS
N5B POSSESSION
POSSESSION ORDERS
GROUNDS FOR POSSESSION
PREPARING FOR A POSSESSION HEARING
LEASEHOLD DISPUTES
HARASSMENT BY LANDLORDS
RENT DISPUTES BETWEEN LANDLORD & TENANT
FAIR RENT (RAC)
MARKET RENT UNDER AST
LEASEHOLD VALUATION TRIBUNALS
MODIFICATION OF RESTRICTIVE COVENANTS