You won’t know the answers until you ask the right questions
Recently I met a client who has dabbled in property a little but now sees the need to start getting serious about building a portfolio. He appreciated his main business, as with all businesses, could go through trying times; therefore having properties in the background will serve to dampen any future dips in his business. The other reason for wanting to build a portfolio is that no one can run their business forever, property will serve to act as his pension post retirement when his business is no longer supplying his income.
Often many are surprised to learn that by investing in the right way they can compensate their whole annual income; the rate properties can rise is often far more than many can save per annum.
He has previously invested in a couple of properties with his partners; they are all in the pharmaceutical business and draw healthy incomes of over £200,000 each.
The properties they had decided to invest in were HMO’s (House in Multiple Occupation); I asked him why they went for these types of properties, as generally such properties have a high yield but the grow this not so great.
There are only two ways to make money from properties, one is income and the other is capital growth.
He answered he didn’t know, they just thought this was a good deal. The trouble is that at the level they are all earning from their businesses, going for high income producing properties doesn’t make much sense, as the government gains almost half of everything they earn; and I assume they did not do this for patriotic reasons.
It seems there was no thought behind this decision, had they gone for capital gain they may have been able to make use of their £10,000 per annum capital gains allowance as well as paying a lower rate of tax.
These were clearly astute business people, yet they failed to define the type of property investment which will suit their circumstances before purchasing an investment.
When most clients actually come to see us all they want is a property deal, they have no idea what will suit them. Part of our role is to help them define what it is they require. The shape of the return is also important, high rental returns may not be required by the investor in which case they can go for projects which are more lumpy, therefore we can be more adventurous with the investment, as the return period can be months or years, as long as the funds are working hard in the interim.
Some people have the notion of buying a property both as an investment and as a future place to ‘possibly’ live in; a two in one. Following this idea means you probably will not achieve either one well, as to live in a place depends upon one’s own taste where as the criteria for an investment is to maximise the returns on the funds you invest in the shortest possible time.
It’s more a question of what the market wants, not you. It’s important to keep your personal whims out of the investment property you’re buying.
Another common criterion we get is for freehold flats or houses; the Indian psyche does not like the idea of leasehold. There are two reasons for this, the primary one is they wish to keep the property in their family for the next 21 generations, and the other is they do not like to pay service charges. However much of Central London property doesn’t fit this criterion.
One of the questions they should be asking is where will my money be working the hardest for me? This after all is the main objective of investment. There are many questions which need to be addressed in order to ensure the property purchased will be the right investment for you.
Last week, a client came to see me wanting to invest, I talked to him about his current circumstances and I asked him a few questions. This conversation made me aware of his parents’ family home which is worth over £1m in Wimbledon. It would be absurd if we started investing and ignored the fact he will be paying an IHT bill soon, this will neutralise any gains from the investment. It is not that we are able to advise on tax aspects; it is simply that we can point them out and in the right direction.
At times we meet people who have been looking for over six months and still are not able to close a deal simply because they are attached to purchasing in their locality and trying to purchase themselves. For example we had a client who was looking for months in Harrow, every time he would see something worth buying we would find out that the property had only just been sold to someone else.
In the end him and his brother in law decided to purchase through us, we sourced them a property in Hampstead for £1.110m; the property consists of 1400 Sq Ft and we anticipate a resell of £1.4m when developed, with £100,000 spent on it.
A good analysis is to ask Why, When, Where, How and What questions: Why is it you wish to invest in property? The obvious reasons are to make money, but there are other asset classes so why is it you wish to invest in an immovable and fixed asset?
Then consider when you would like to invest, tomorrow? Or are you waiting for something to mature. Generally money is sitting somewhere, for example in a policy here or abroad.
The next question is where do you wish to invest? Here the mantra Location, Location, Location should be the driving factor, this is what will keep your investment growing into the future.
Many invest in their locality, however this should not be the driving factor for your investment.
How will this investment be done? Do you have cash or will you require funding? Even if you have cash should you use funding? And if so, from where? It may be prudent from a tax point of view to remortgage your own home rather than getting a mortgage on the new BTL property. It will probably be cheaper too.
What kind of income do you require? A steady cash flow or lumps of money? Perhaps a combination of these would serve you better. For example you may require a certain amount to be coming in as your steady income and after you have achieved this goal you may want to go for more lumpier gains. Lumpier gains are not as predictable but tend to be more lucrative and may not come in when you expect, but at least you will have a steady stream coming in, therefore you’re not dependent on the lumpier income to meet your day to day needs. I guess this is a little like receiving a salary and getting bonuses on top, you can’t live on your bonuses as they may not come in on time to pay the bills.
These are just some of the questions you should be considering before you embark on your property investment and we have not even considered the tax implications of these decisions. There is no point in going one step forward and two steps back when investing in property, so it’s important to address these questions prior to even commencing looking for a property.
- Auctioneer – Auction House London
- Date – 17th April 2013
- Lot Number – 24
- Property Address – Flat 70, Hillsborough Court, Mortimer Crescent, Kilburn, London NW6 5NR
- Two bedroom flat on a well maintained block moments from stationl
- Long lease of more than 170 years
- Guide Price: £235,000 plus
Sow & Reap
A Property Investment Company
!Tips of the Week
Decide whether to be an investor or a landlord, depending on how much time you can spare on your investment. Many first-time investors are surprised by the amount of work involved with directly managing a buy-to-let, so delegating day-to-day tasks is well worthwhile for most people.
Know the local rental market – Investors should always investigate how well similar properties have let over in their chosen location. It isn’t just rental income that is important but overall volume of demand, as this can reduce voids between tenants.