Property investing - How do you get started?
I have gone into a lot of detail about the world of property investing. A question needs to be asked. “What is it you want from the property investment?”. Here are some examples of what our clients have said to us as their property accountants in our Nottingham office.
– I want an income to replace my employment income so I can leave my job
– We want a pension fund that is better than the state pension on offer from the government
– I wish to try something new and property gives me a hobby
– We wish to be in control of the investments that I make
– My husband and I wish to leave a legacy for my children
You may be looking for additional income or to replace your employment/business earnings. If you are looking for income then you need to invest in properties that will generate a good Return on Investment (ROI). This means you get more money out for every pound invested.
Investors looking for income typically focus on the gross yield. This is calculated by dividing the yearly rent of the property by the purchase price. You should also look at the monthly anticipated cash flow position of any investment. There is no point having a great % rate of return if the absolute return is just £50 per month.
If you have sufficient employment/business income, you may be seeking capital appreciation. Investors looking for capital growth typically invest in areas where they believe house prices will grow.
For many investors, the choice isn’t clear cut – they may be looking for investments that provide a reasonable income and also have potential for capital growth. Determining the right balance is a matter of thinking about your financial goals over the next 12 months, three and five years. I would suggest you spend some time working out your desired outcomes and goals before you start to invest your hard earned cash.
Is Property investing worth it?
The one thing I personally like about property is that you can generate an income and hope to have capital growth. As you will be able to see from the Office of National Statistics (ONS) website that house prices have significantly increased over the last 14 years. Share prices have also seen growth since 2005. It is only fair that we draw on the conclusion that both asset types have benefitted from capital growth.
It is possible to get an income from savings accounts, gilts and bonds. The amount of income that can be generated by these investment types has been low for the past decade as can be shown from the Bank of Englands website. I fully appreciate that you can earn dividends from shares but these vary from company to company and will not be reviewed in this article.
It is possible to generate a good level of income from buy to let properties. The amount of rent that may be achieved will vary from location to location throughout the UK. As you will see from the below graph that rental income since 2015 has continued to increase. I firmly believe that UK rental prices will increase over the next few years. This is because many landlords will sell their property investments because of the tax changes and the fact that the population in the UK continues to increase. Demand will not be met by supply.
This is why I wish to continue investing in property in the UK.
What are the pros and cons of investing in buy to let properties?
Pros of investing in buy to let properties
– Income generation It is possible to generate an income from a property. So much that the income could eventually replace your employment income over time once you have several buy to let properties in your investment portfolio.
– Capital growth : As you can see from the above that properties increase in value over time. Many property investors see their investments as a pension pot. They may reduce their mortgage over a term of 15 to 20 years and have an unencumbered property. All of the rental income would be theirs if they no longer have a mortgage at the end of the term
– Risk & access: It is a form of investment that helps spread risk. You may have money tied up in pensions, shares, bonds, gilts and wish to spread your risk. You may have a desire to create an income stream that you can access before you retire. This is where property investments can come into their own.
Cons of investing in buy to let properties
It is only fair to write about the downsides of investing in buy to let properties. I wish to provide you with an article that gives you a balanced view. From this information, you can make an informed decision.
– Money tied up: It may take a while to sell a buy to let property investment. You may need to wait a while to access the money invested until the house is sold. This is unlike shares, bonds and gilts that may be sold quickly.
– Time involvement: Noise may be generated from tenants complaining about a maintenance issue in a property. Even if you were to use a letting agent. The letting agent would still need to be in contact with you to discuss the work required and the cost.
– Capital loss: Like any asset types property values may go up as well as down. The issue with property values is that mortgages may call upon the debt to be repaid because their risk has increased.
-Income loss: If a tenant does not pay you or the property remains void you may not have any income. However, mortgage repayments and interest still need to be paid in addition to the ongoing maintenance of the property such as council tax, light and heat.
Can I afford to invest in property?
There will be certain costs that you will need to consider when buying a buy to let property investment
– Stamp Duty Land Tax (SDLT), which we discussed in a more detailed Article. If you have a property in your own name then you are likely to bear the cost of the 3% SDLT surcharge. This additional cost applies to residential dwellings that have a cost of more than £40,000.
– Conveyance costs of purchasing the property (solicitor fees)
– Refurbishment costs of the property to ensure you achieve the very best rental in the local area. We discussed how to refurbish the property whilst being able to offset the costs against your taxable income in our other article.
The positive news about property is that you can obtain mortgages. You do not need to finance the entire purchase. If you had £50,000 you could only buy shares with the entire value. If you purchased a house with a mortgage then property value could be £200,000. You would benefit from a great capital appreciation if 10% growth on each asset type. This is because the house value would increase by £20,000. The shares would increase by £5,000.
An example of how much money is invested in a buy to let property
We can look at an example of a run down property with a value of say £200,000 in the Nottingham area
£50,000 deposit (being 25% deposit of the property value)
£7,500 Stamp Duty Land Tax on the acquisition of a residential; property with a value of £200,000
£1,000 legal fees including bank fees
£15,000 refurbishment costs
£73,500 total initial investment
As you can see from the above there is a significant amount of investment to be made. This is where we suggest that you save money into other investments until you have about £100,000. That way you can invest money in shares, gilts/binds and property whilst spreading your risk. It is ill-advised to invest all of your money in one asset type. This is because of the risk of capital values falling, wiping out your entire investment.
How can I buy a rental property with no money?
Let’s look at the above example. We suggested that you would need £73,500 to get into the world of property in. However, as one famous billionaire investor was once quoted as saying “control the asset and not own it”. This leads us to one popular property strategy that Samuel Leeds suggests is a great idea. That is rent to rent. This is where you control the asset from another landlord without buying it. You agree on a long term rent with the landlord and you rent it out for a premium to other tenants.
There are other organisations such as Northwoods that provide a guaranteed rent to landlords. You may read this and ask “why would people agree to this?”. Many landlords do not want the hassle of dealing with tenants. Albeit they receive less rent each month this is more than compensated by the peace of mind that they have no rent or tenant issues.
What property investment strategy is best for me?
Before you decide what investment type is best I think it is appropriate to share my thoughts on the type of properties that you can invest into.
Single let property investments
Single lets are the most common type of investment choice for those starting out in property investment.
A single let property is a house or flat let to a single family or person on one tenancy agreement. You can engage a letting agent to manage the property for you and deal with any issues arising during the tenancy. Alternatively, you can self-manage the property. It may be feasible to manage the tenant if you live reasonably close by. If you already have a business or employment that is generating enough money for your lifestyle, then a single let may be the best strategy for you. This is especially the case if your chosen strategy is capital growth.
Houses of Multiple Occupation (HMOs)
HMOs are large properties where rooms are let individually to professionals and/or students. They share common areas such as bathrooms and kitchens. Some do have ensuites. Landlords typically charge tenants a fee that is inclusive of all bills. They will hold tenancy agreements with each tenant. There is good more money to be made in HMOs. Some of my more experienced property investor clients are now generating more than 15% net yield. According to research by Platinum Property Partners last year, the average gross yield of an HMO is 12.4%. This is substantially higher than the 5%-8% from single lets.
HMOs do take up a lot more time. This is because there are more tenants involved. Whilst there are many competent letting agents around to manage single lets, it’s harder to find agents to manage HMOs. You may need to be prepared to do more of the work yourself.
There are a lot more rules and regulations you must comply with when renting out an HMO. Getting something wrong can be very costly. Last year magistrates got the power to impose unlimited fines on HMO owners who fail to comply with regulations. Licenses are also required for properties over a certain size, and in many areas. Local authorities have brought in rules that require planning permission for all HMOs. Financing HMOs can also be tricky if you’re a first-time property investor. There are more options available to those with experience in single lets when buying an HMO
Price and tenant considerations
The one thing I have personally learned over the past decade is that you need to provide quality rooms. I also believe in charging more rent to get a better standard of a tenant. The better the tenant the more they will look after your property investment. I used to charge a double room in Nottingham for £395 per calendar month. I constantly had issues with late payers, arguments between tenants.
If you have the same type of property as everyone else then all you can compete on is the price of a room. This is why I had voids. I was constantly reducing my price because there was greater competition in the area that focused on cheap accommodation. Constantly reducing the price of my rooms was not an option. I knew this would be a sure way to lose money in the long run. I decided to focus on quality.
There is a lot to be said about the price of Apple computers. They are not cheap. However, once you use a mac you never go back. This is why I decided to attend a seminar hosted by Julain Maurice of Icon Living. In this workshop, I was convinced without a doubt that I needed to improve the condition of my rooms to maximise the rent that I could charge. The workshop was only one day but it gave me plenty to think about when it came to making money through property.
I went to work and improved the decor of the rooms, the standards of furnishings and even hung up decent pictures throughout the house. The transformation was incredible. I was able to charge more rent. People paid it because they liked the fact that we demonstrated we cared for our tenants. The void period reduced and so did the number issues with tenants.
Charge more rent, get better tenants, improve the bottom line.
Single let property investment strategy compared to HMOs
I have taken the liberty to show you a direct financial comparison between single let properties and HMOs. Please note that these examples have been taken from my very own property investments here in Nottingham. The values represented in the below charts may not be achieved in your local area. This is where your own due diligence needs to come into play. You may be able to achieve better financial results than what is being shown below. In fact, I would argue this is true with a number of Optimise Accountants’ very own clients up and down the UK.
Investment in an HMO compared to a single let property
The amount of money that you will need to invest in an HMO for refurbishment works will be higher than that of a single let property. This is because you will furnish the property and provide lockable doors to give each tenant privacy. You are also likely to invest more in a shared kitchen as it needs to be spacious and workable.
You can pay more for a house for it to be converted into a 5-6 bedroom HMO. However, there are ways of making the very best returns from what they call “mini-HMOs”. These Mini-HMOs are typically 4 to 5 bedrooms. This is why I made a direct comparison between a good sized family home as a single let with an HMO.
Investing in property is not cheap. I would always stress that you get other people to support you on the first property investment that you make. It is better to be educated and learn from others than it is to be isolated and make costly mistakes.
Income comparison between a single let property and an HMO
I wanted to show you the key difference with the income and costs of a single let property and an HMO. You will be able to generate more income from an HMO as you will have more tenants.
Please bear in mind that many HMOs are bills included. You may charge a tenant for the rent and their share of the gas, electricity and water. Many savvy landlords also include more luxury items such as broadband and TV subscriptions. You may decide that tenants pay their own council tax. landlords that have students will not have any issues here. This is because students do not pay council tax.
You will notice that the “other costs” in the below graph are higher for the HMO than the single let property. This takes into account what I said above about utility bills being paid by the landlord.
More profits may be made from HMOs
I am hopeful that you can see that the HMO will generate £1,000 profit per month. This is typical of many of the Optimise Accountant’s clients. You may only need 2-3 HMOs to replace the income that you generate form your job. This will hopefully show you that there is a way out of employment if you do not like what you do in your job. Personally, I love investing in property. I also love solving tax issues. You could say that I have the very best of both worlds.
Return On Investment (ROI) on single let properties and HMOs
Finally, we can now talk about Return On Investment or ROI as many people refer to it. I firmly believe that there are two ways of looking at the returns you get from a property investment. You need to take the annual profit that you make from your buy to let investment and divide it by the amount you initially invested.
1 – Income generated in absolute terms (£ per month)
2 – ROI
Many people are far too focused on ROI. I say this because they are impressed by how they have a property with an ROI of 10%. If a property is only providing a monthly income of say £200 it can be easily be wiped out if there is a maintenance issue. I would suggest that you look at the absolute monthly income and the ROI of a property.
Equally, I would suggest that you do not look at just the absolute profit without considering ROI. If you want to sweat your asset then the ROI calculation is a very good mechanism to help you work out which property to invest into over another.
Holiday lets & serviced accommodation
Investing in holiday lets has been attracting a lot of interest lately. Holiday lets are properties that would otherwise be standard residential accommodation. However, they come with the tax advantages of commercial property. Section 24 mortgage interest relief cap does not come into play. 100% of the mortgage interest cost can be offset against holiday let income.
Investing in a holiday let could allow you to enjoy the same opportunity for growth as a standard buy-to-let. Holiday lets are a lot more time-consuming to manage than single lets, but there are many good holiday letting agencies that can take care of management for you.
We have written a separate article on the tax benefits of owning a holiday let over a standard buy to let property investment.
Commercial property investment
We have written a more detailed article on the benefits of investing in commercial properties over standard residential property investments. We have also written an article to discuss the various tax benefits of investing in commercial properties.
Investing in commercial property has not been the first port of call for property investors. However, commercial property investment is now drawing more attention since the announcement of Section 24. This is a change that affects residential buy to let property investments. It basically means that mortgage interest costs may not be offset 100% against rental income.
Commercial property is taxed differently to residential property. Stamp Duty Land Tax Surcharge of 3% as highlighted above does not apply to commercial property. These are just two of the many tax benefits of owning a commercial property over a residential buy to let.
You can invest in commercial property via a self-invested personal pension (SIPP), which attracts tax relief at the highest tax bracket. Do not forget that you get tax relief on the money you invest into your pension. This immediately boosts your ROI considerably. Any income and capital growth earned in a SIPP is tax-free.
Commercial property can include properties such as shops, offices and restaurants, as well as holiday lets.