Death of the old school landlord
Christmas is a time for reflection and after over 20 years in the landlord game I’ve seen a fair few changes. In the early days of BTL in the late 80’s, and pre buy-to-let there was little to no purpose built accommodation for young tenants in the private rented sector. This means that there was a burgeoning market for the young professional tenant market of renters who for various reasons were not ready to buy. This was where I came in. My refurbishment of run-down properties in the right area was greeted by yelps of delight from any tenant that viewed and an advert in the local paper would generate a raft of interested tenants. I could simply pick and choose the best tenant.
Buy-to-let lending revolution
The buy-to-let revolution of 1995 unleashed a wave of new lending onto the market and made it easier than ever before to borrow money to finance a property investment. All was good. In the ‘noughties’ a property boom financed a raft of new apartment building in our towns and cities and for the first time investors could buy specialist off the peg property investments.
Developers fell over themselves to build new blocks to sell to investors and there were plenty willing takers with easy credit being the name of the game. Then, the crash & the credit crunch hit us.
Luckily, the scale of the bust forced the government to slash interest rates to save a nation of homeowners from losing the house. This tightening of credit left the next wave of first time buyers unable to buy beaching them indefinately in the private rented sector. This sequence of events saved many landlords from crashing on the rocks, and though many, particularly in the north, suffered from paper capital losses as property values dipped at least they could console themseleves with low mortgage payments and high rents handing them a rental profit.
The rental market is changing
One thing is for sure – nothing stays the same, and the rental market is changing. I was chatting last week with my accountant. He is looking at buying another buy-to-let property, but this time he is going for city centre apartment. It’s brand new, shiny, alluring and at £90,000 not that expensive. He anticipates around £650 per week and a 7% net yield. He is going for a 50% leveraged strategy, which means a return of 12% on his capital. Optimistic? Maybe, but 12% compared to the 2% you might get on your money in a building society sound pretty good. He is after all an accountant, so he should understand the figures. I listened to his argument as if having some kind of landlord epiphany.
Death of the old-school landlord
For years I have believed that my way of buying to refurbish an old tired property gave me the best long term return on my investment. However, the fact is that the young professional tenants who were once my target market now want the new apartment in the purpose built block.
If I were in my 20s (god wish) I would want something new and bespoke, with a new kitchen and lovely Hansgrohe bathroom. I wouldn’t care that I was paying for a gym that I probably would never use, or a swimming pool that was far too small to swim in.
My market of tenants clearly had many more options than the re-furbished victorian properties I had focused on. Much of my target market had moved on. So the question is – do I?
Property investing strategies
I was struck at a recent Property Hawk training event by the complete variety of landlords all with very different investment strategies. Some were refurbishing properties to rent on, some were buying new builds, others were letting properties at the cheaper end of the market, to tenants on benefits. As the letting market has matured, it has also differentiated, and become more defined.
If I were starting out again what would be my investment strategy be?
What is the best property investment strategy for capital growth?
For capital growth there is no question the best option is to buy the biggest family house in the best area with the best schools a landlord can afford. This is probably going to be called a landlords home and as such you will pay no tax on disposal and there will be no rent and income tax. If you were to rent the property out the rental yield would be rubbish, but this is historically the best place to put your money for capital growth.
What are the best properties for overall investment?
For investment, I would seriously consider new build, but watch out for service charges and the flip side, particularly for city centre apartments is that when it comes to realising the value of your investment there are a lot of ubiquitous looking rabbit hut apartments out there that you will be. There will not be many that appeal to owner-occupiers that are willing to pay the asking price. Instead, you face selling if you are not careful to a hard-nosed property investor who will look at rental yields and try always to drive a hard bargain. So in the short-term new build great for securing reasonable rents and tenants, not so great when it comes to re-sale. You can safeguard against this if you try and source an apartment that has something a little bit different. Perhaps it’s in a small exclusive block or is in a stunning listed building or has a fantastic mezzanine bedroom or views. This way you may avoid your apartment being the one that no one wants when it comes to selling and realising your capital investment. Remember tenants tend to be more tolerant than hard-nosed buyers and investors.
Be aware of the service charge trap
Always, check out the service charge. Service charges are likely to be high and seem to grow at a disproportionate rate. Make sure that you understand what the service charge covers (will there be a big bill coming down the line for the repair of a roof on a listed building for instance). Also have a look at how the service charge has grown and factor that in to your long-term net rental yield calculations.
As I said above this type of investing is a numbers game (which probably explains why my accountant likes it). It is about securing a high yield investment and getting your gearing right. He is going for a relatively conservative loan to value of 50% and that will help secure himself against any capital falls but also mean that the loan will get paid off quicker and that the investment will generate higher rental profits than if you go for the maximum loan available. This approach and type of investment is most suited to those with money and the equity to invest in the first place and don’t need to rely on rapid capital appreciation. As I said, it’s a long-term numbers game and for landlords that don’t want to be pre-occupied with leaky roofs and guttering, etc. This should in theory be taken care by the management company and paid for through the service charge.
Would I change my property investment strategy now?
This brings me back neatly to the fact that would I change my investment strategy now. Well probably yes. However, the reality is now I can afford to buy city centre apartments with low gearings and using a repayment mortgage to pay down the loan. Twenty year ago I couldn’t. This is why I started by refurbishing rundown property and using my development gains to refinance and be able to draw out the valuable equity to buy my next investment property.
So, the reality is for any landlord new or old, the investment game changes and what strategy is right for you and me can also change depending where you might be in your financial and property investment life.
Other things to read