In this guest piece, Stuart Williams, director of property investment firm Thirlmere Deacon, outlines the golden rules for armchair investing.
Over the past 10 years, investors who purchased a buy-to-let property in southern cities such as London and Oxford have reaped the rewards of considerable house price growth during that period.
Those who got in early to the BTL market have reaped the returns. A report written in 2015 by economist Rob Thomas showed that buy-to-let returns over the previous 18 years had beaten those from every other major asset class available. Since buy-to-let mortgages were introduced in 1996, Thomas calculated that net annual returns have averaged at 16.2%, compared to a lower average return of 6.2% on UK equities.
Most of the experts point to longer-term trends that underpin the future performance of residential property investment. The UK’s population is growing and quite simply there are too few homes for the existing population and that’s a situation that’s likely to endure for the medium to longer term.
The number of people renting continues to increase, with a third of UK’s millennials who will rent into retirement. The UK has the fifth-highest number of tenant occupiers out of all 28 EU nations. VeriSmart forecasts renters will account for 55% of the housing market by 2045.
Despite the pandemic, investing in buy-to-let is still delivering impressive capital growth and income rental in parts of the UK. Recent research from Aldermore’s new Buy to Let City Tracker, which assesses buy-to-let performance in 50 UK cities, has ranked Manchester as top with Cambridge (2nd) and London (3rd).
So, if you are thinking of investing in property for the first time, should you manage your investment – or is it wise to leave it to the experts?
Investors might not always recognise the importance of finding good tenants. It is important to secure the right tenants to ensure your property is cared for; the rent is paid on time; and you prevent void periods.
Deciding where to advertise your property, screening tenants, sorting the tenancy agreement and organising the inventory can be time-consuming. The longer it takes to find tenants, the less revenue you will have.
Agents’ fees for a yearly management charge will probably equate to two months’ rent. A good agent will have a waiting list of potential tenants ready to move in as soon as the property is vacant, almost paying for their service immediately.
Agents will charge between 10%-15% to manage your property portfolio. But in the case of student lets, it is usually only 1%-1.5% of the total yield, still leaving a very healthy 9-10% return on investment each year.
If you have a managing agent looking after your property, all you have to do is check your bank account to make sure your investment yield has been paid. You won’t have to worry about obtaining the correct licenses and keeping them up to date; paying utilities; organising repairs; resolving tenant complaints; chasing rent arrears; and providing the annual gas, electricity and PAT certificates.
Another important consideration is that if you want to purchase the right investment property, regardless of its location in relation to where you are based, you can do this as an armchair investor.
The secret to a successful armchair investment is to work with the right partners. It is important to buy from a developer with a proven track record; use a letting agent that specialises in the rental sector you are looking to be in - e.g. residential, commercial or retail. Each of these is a specialist field and, if not undertaken by an experienced agent, can lead to the failure of a potentially good investment.
If the property investment is to provide an extra income or a pension, it is best to use an agent. But if you want to be a full-time investor, and have the time to do so, go it alone. Whatever you do, make sure you carry out thorough research, before making any decisions on how you will manage your investment.
As well as having a top managing agent in place, Thirlmere Deacon has outlined some hints and tips for armchair investors:
Know your market: You need to understand what tenants want, target their needs accordingly and be able to provide what they want, at a price they can afford. This takes a lot of research and knowledge of the local market. As a general rule, aim to appeal to the broadest possible market, without alienating your target market.
Diversify your portfolio: Increasingly investors are diversifying their property portfolios to spread their risk, not wanting to be reliant on the success of one strategy, region or development. Many are investing in off-plan as it offers great benefits, allowing investors to put capital to good use, from the comfort of their armchair. It is seen as a way to purchase a property at a discounted price ahead of a price rise on completion, essentially giving investors instant equity in the property once completed. One of the big advantages is that investors are securing the property at today’s market value (possibly less), giving time for a significant increase in the value by the time the development is completed. It is not uncommon for some investors to have made up to 100% growth on the value of their unit between exchange of contracts and completion.
Contingency fund: Many investors do not factor in the costs of owning a buy-to-let property with contingency funds. Investors who do not have a contingency fund in place to cover unforeseen circumstances could fall into financial difficulty and potentially lose their property. Buy-to-let lenders typically want rent to cover 125% of the mortgage repayments and many are now demanding 25% deposits, or even larger, for rates considerably above residential mortgage deals. The best rate buy-to-let mortgages also come with large arrangement fees. Ensure you know how much the mortgage repayments will be and if it is a tracker, allow for the rates to fluctuate in your calculations.
Design: Good design is absolutely key to appeal to tenants; this can be your secret weapon. People are willing to pay a premium to live in a nice, attractive property. There are many areas here which you can focus on to give yourself an edge over the competition. The finishes should be especially good as that is often what appeals most to potential tenants. Light, neutral colours help increase a sense of space. Keep things light and bright. For walls, stick to one colour throughout, preferably a neutral colour like off white or magnolia.
*Stuart Williams is director of Thirlmere Deacon