Absolute Beginners – Issue 1
Every body knows if they have kids it’s back to school or university, now buy-to-let students it’s your turn. First of all well done, you’ve successfully made it to the first class. I hope you are sitting comfortably – we shall begin.
This course is aimed at buy-to-let novices. People who it is assumed have no experience of property development or investment but are keen to know. It’s aim is to over the next few months to build into a guide to the essentials on buy-to-let investment. What not to do, tips of the trade, things to look out for. Some of the information has come from my book to be published next year; others bits of information are just things I have picked up from almost 20 years of being a landlord, investment and working in the property industry.
First of all why buy to let?
The most obvious answer is the returns. The returns from investing in residential property have been phenomenal over the last 10 years, even over the last five the price of the average UK house has almost doubled. But you knew that. We’re all aware that some investments go up at phenomenal rates. Gold has risen by 100% since September 2001. However, closer inspection of the statistics show that if you had bought gold at its peak on 21st January 1980 for £371 per ounce you would have had to wait over 26 years to May 2006 to get your money back. Even then if you had held on to the investment, it would have come down to £308 by September 2006 – a fall of 17%. It’s therefore not just about gains it’s also about stability, a characteristic that can definitely be attributed to property. In fact, residential prices have fallen only twice in real terms since records began and these falls were rapidly reversed by subsequent rises. This particular characteristic is very important if you are investing for your pension or for the future. Shares have performed well over the long-term but their values can be subject to dramatic and sustained falls. This means that if you are just about to cash in you holdings; to fund a purchase or your retirement, you may find that because of a sudden fall you could be suddenly short of your investment goal.
The other attractive aspect about ‘buy-to-let’ is that returns can be derived from two sources: capital increases as property prices rise over the long-term and income from rent. One of the attractions to many investors is that they can ‘gear up’ their investment by raising a mortgage. This can be significant; as much as 90% in some cases. There are ways of borrowing 100% of purchase costs and I will go into detail about this in the next article.
Be clear about your objectives
If you are thinking about ‘buy – to –let’ its important that you are clear about your objectives. What do I mean by that? If your aim is to buy for your pension than you should be thinking long-term. Generally, property should be viewed as a medium (5-10 years) to long –term (15+ years) investment. Why is this? This is because transaction costs are relatively high. Purchase and selling costs can amount to between 2.5% and 6% of the value of the property, so you are looking at it going up that much just to cover your costs.
Equally, if you are purchasing something just for your kids to live in during their education. Buy somewhere that is conveniently located for the university, but also consider it attractiveness to purchasers upon resale.
If you are buying as an income stream then it is important that you look to the type of investment that will give you the highest rent in relation to your costs. This relationship between income and capital cost is generally known as the yield. A £100k apartment generating £6k in rent would have a gross yield of 6%. The current UK average for yield according to the Association of Residential Letting Agents was 5.24% (2nd qtr 2006). Have a look at LINK mystery of the yield for more information about this.
It’s a business not an investment
Where most new landlords come unstuck is in their initial approach. That is they equate being a landlord as being a property investor. It is not. You are a small businessman, a small businessman with an investment business. If you approach the whole undertaking with the ‘light hearted’ view that it is just a case of handing over the cash and then 20 years later collecting the profits; you will have an unpleasant shock and will also potentially fail. But I thought property investing is easy? It isn’t difficult, but to be a successful landlord you need to approach the whole undertaking in an organised business like manner to secure the maximum benefit. This means being prepared to put in time and effort to get your investment off the ground and then further effort to effectively manage it effectively. It’s no good thinking that a property investment is like have money in the building society. There are things that you will need to do to ensue once bought that your investment keeps on track. If you accept this you will probably be surprised at how little effort is involved one you are organised. But start with the right approach and you are half way to securing your investment goals.
How much time do I want to spend?
The time involved once you have bought your property will depend to a large degree on whether you employ an agent to manage your investment or not. In my book Landlords Bible, I actually go into some depth on the time you can expect to spend on this and compare the different approaches.
One of the tables is included below examining the time implications of managing the initial letting.
DIY MANAGEMENT – TIME IMPLICATIONS
|1||Drawing up a marketing plan||0.5|
|2||Placing your add & payment||0.5|
|3||Setting up viewings||0.75|
|5||Selecting preferred tenant||0.5|
|6||References, credit checks||0.5|
|8||Property hand over||1|
|* possibility of reducing it to zero|
My personal view is that unless you buy a property in another part of the country making ‘day to day’ management unfeasible; then I would always advice an ‘absolute beginner’ to manage their first property themselves for at least the first 6-12 months. Why? So that you can get to grips with what it’s all about. You will learn quickly about: getting tenants in, tenancy agreements, what management is all about and what happens when sometimes things go wrong. This all means that you are in a better position should you subsequently decide to employ an agent; to know what to expect and whether they are doing their job properly. It should also give you the experience and the confidence to take matters back into your control to rectify the situation. If you don’t get this experience early on; the danger is that you remain in the dark about how the business operates making your more vulnerable of being exploited by unscrupulous agents and other ‘shadowy’ figures in the business. You are more vulnerable to coming a serious ‘cropper’ if things do start to go wrong.
Are you still convinced you want to be a landlord?
I hope my introduction has not done too much to put you off. This was not my intention. I do think it is very important that potential investors are aware and prepared before taking their first steps down this road. Here at Property Hawk we are on your side and if being a landlord is not for you, it’s better for you to realise this early on before spending hundred if not thousands of pounds on what could come as a very costly mistake. If hopefully your enthusiasm has not been dented too much then please read on and tune in to the forthcoming issues of Absolute Beginners.
NEXT issue is on financing your investment – including all the latest schemes and techniques to make your investment happen.