By Louise Misiewicz
Are you setting up a property investment business?
What are the basic considerations to be aware of?
I was talking to a new property investor client earlier this week, and the main thrust of the first meeting was to outline some of the basic considerations needed to successfully start and manage a property business in the UK.
There have been a number of significant events in the last 12 months that have impacted the property investment sector – including industry legislation, Brexit, political developments, a General Election, and yet more industry legislative changes coming into place from April of this year.
Property remains one of the best long-term investments on a long-term basis, although it’s critical to be aware of potential pitfalls in coming months that could negatively impact a property portfolio.
Why should you establish a property investment business?
There are many compelling reasons why setting up and running a property investment makes such solid commercial sense. After all, bricks and mortar continue to be amongst the best investment for many of our clients across the UK.
To put it simply, I believe that a well-managed property portfolio remains the best way to accrue sustainable and repeatable wealth over a long period of time. Most property investor clients I work with are in in for the long haul, typically looking to see their investments mature over at least a 20-year period.
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Some considerations to be aware of that can impact the profitability of a property portfolio include:
Timing – it’s not too difficult for even the average investor to make a quick profit from investing in property, but I advise my clients to take a longer-term view to reap the full benefits. The fortunes of property investment business profits tend to follow economic trends.
Capital values can slump, as we saw recently, but as long as rental income covers the costs associated with owning a property or portfolio of properties, it’s a matter of riding out the storm until conditions improve.
The tricky part comes when rental income fails to cover costs.
This is one of the basic mechanics of being a landlord, whether it is for a residential flat or a substantial commercial warehouse. At the time of writing this in June 2017, I remind my property investor clients that it is important to remember that the UK economy is in reasonable shape.
Manage what matters – The two ways your property investment portfolio will deliver a return are capital growth and income – or hopefully both. Property companies with a portfolio of offices might be considered vulnerable now, because of the uncertainties created ahead of the UK’s exit from the EU.
Empty offices or void periods are bad news, and if there is an excess of supply over demand the other money maker – asset appreciation – will come under pressure. Retail landlords could also find it tough.
It’s also important to check how exposed a property company is to unfinished developments. In the good times, building an office block on the assumption that someone will want to rent it is more likely than not to be met with a positive outcome.
But conditions can rapidly change, leaving a property company with a development arm draining money, with little prospect of securing tenants. If a company has a development arm, it’s vital to check if projects are already pre-let or pre-sold, which essentially reduces the investment risk for you.
Property companies usually talk in terms of yield. This relates to the rental income as a percentage of the cost of buying the asset. It’s worth taking independent financial advice on any areas of uncertainty here.
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How can property investors making a profitable living?
I would say the best way to ensure a property portfolio is profitable for an investor is to utilise professional wealth planning and tax management professionals to assist with the management of property assets.
I have written a number of useful articles for property investors making a start in the complex world of property investment. These will provide excellent additional reading on key topics, including:
Next week, I’ll examine further key considerations for property investors to factor into their businesses, including the Dos and Don’ts of buy-to-let.
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