By Simon Misiewicz I have decided to write a blog series that captures my experience of dealing with over 1,000 property investor clients over the past 10 years. My discussions with clients along the way have enriched my knowledge and understanding of what makes a successful property investor. I am going to cover the following subjects with you:
- Part 1 of 9: Why mortgages are the thing of the past
- Part 2 of 9: The end of buying properties in your own name and why Limited Companies are the only way forward
- Part 3 of 9: Lose it all, the risk of holding residential property investments
- Part 4 of 9: You are immortal and do not need to worry about legacy planning. Really?
- Part 5 of 9: The problem with your Joint Venture partners screwing you over
- Part 6 of 9: Why the heck are you doing all this anyway?
- Part 7 of 9: Why you will be poor at retirement
- Part 8 of 9: Why not just buy another poorly-performing asset
- Part 9 of 9: Why commercial properties are the new black
What is risk?
According to Wikipedia, Risk is the potential of gaining or losing something of value. Values (such as physical health, social status, emotional well-being, or financial wealth) can be gained or lost when taking risk resulting from a given action or inaction, foreseen or unforeseen (planned or not planned). Risk can also be defined as the intentional interaction with uncertainty. Uncertainty is a potential, unpredictable, and uncontrollable outcome; risk is a consequence of action taken in spite of uncertainty. There is a saying that is true to all types of investors ‘all your eggs in one box’, what if that box was to fall? All the eggs would be broken.
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The same can apply to you as a property investor in the following ways. For those that have undertook business studies you may have seen the acronym PEST. “Risk comes from not knowing what you’re doing” – Warren Buffett
- Political changes: changes to legislation making it difficult to invest such as new levies and licensing. We can also see direct changes with the introduction of Section 24 mortgage interest relief, 3% SDLT surcharges and introduction of CGT for foreign investors. I am sure there will be even more in the future.
- Economical: Changes to the way that people view the cost of rent versus buying a house. Or indeed, younger people moving back with parents. Economics has more direct impact on the price of your investment especially if there is a recession.
- Social: There are changes in the way that people wish to live and where they live with whom. People will move in and out of city centres in cycles. Certain people will want to live with other people for many reasons, but then social changes may make it better to live in community pods whilst having their own space.
- Technological: We cannot avoid technological changes. It is expected that more people will start to work more and more from home. How might that affect the type of property they buy with the travel costs that they save.
I am sure there are many many other reasons why you think that residential investment may be risky. I am not here to say that residential property investing is dead; far from it.
What I do suggest is that investors diversify their investment to get a balanced portfolio that mitigates risk wherever possible. Successful property investors and business people will identify risks to their investments and put in mitigating actions. Better still many people will look at risk that will significantly affect their competitors. They will identify actions that means they can take advantage of the so-called risk. Let’s take a look at an example. We know that many landlords are not aware of Section 24 (mortgage interest relief). Through our help clients know that their are many ways of mitigating the impact of Section 24. However, there are many other property investors that do not have this knowledge. As such there will be a lot of landlords that will choose to sell their portfolios once their tax bill starts to significantly increase. A successful property investor will therefore identify someone with six or more properties in their own name. If they were to buy those properties then 3% SDLT will not apply, as it will be deemed to be a non-residential linked transaction as I discussed in a previous article here.
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I have now delivered financial and wealth planning sessions to over 100 clients. This is the type of service that does not just look at the tax return for the preceding year; it focuses on the future aspirations of the property investor, and the family structure to meet their lifestyle needs. The greatest concern I see from property investors is that they do not know when enough is enough. Stephen Covey said that “people climb to the top of the ladder, only to find out that it is set against the wrong wall”. How many people do you know are like that – could it be you too? I have also seen that people have purposefully lived other people’s lives. How many property investors say they need £10K per month, even though they earn a 1/4 of that and they will never spend that type of money anyway. I think it is time that property investors understand what they want and need. Once this is established it is about buying the right investments that provide tax-efficient income to meet the desired lifestyle. Learn more about the Finance, Wealth and Tax planning service – Click Here Please use the redeem code “Article 33” to get 33% off your wealth planning call. Face to face in our Nottingham office.
Understanding capital loss
Many property investors buy residential investments for income generation. There are some investors that are not looking for income generation, but focus very much on capital appreciation. However, I would expect that all of these investors will want to know that their capital invested is safe. If all your money is tied up in property and there is a recession or interest rates significantly increase, there could be a direct impact on residential property investment values. So, what would you do if you are highly-geared and property prices slump by 25%?
Does anyone remember 2007/8and how property investors threw their keys on the desks of the bank managers.
If interest rates increased it would be bad news for property investors but good news for those that invested money into savings accounts or angel investments, as the rate of their capital would benefit from these changes. As we have started to see from the many tax changes that residential investments are being penalised compared to commercial properties, which benefit from the below that residential investments do not:
- All mortgage interest is offset against income
- Tenants can sign up to a long lease (some up to 25 years) rather than six month ASTs
- Tenants are responsible for the majority of maintenance costs
- Lower SDLT rates
As you can see, there are many benefits of holding commercial properties. Most property investors have not looked into this sector before because residential investments worked in the past without any hiccups. However, is now a good time for you to review the different ways of investing your money? I am not a financial advisor and there are better people than me to discuss the many types of investments that can be made. All this article is suggesting is that you take a closer look at your investments to see what changes could be made to mitigate – or better still, take advantage of PEST changes that could affect your investment.
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