Investing in Property

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Property investment is not to be undertaken lightly. As with all forms of investment, it has its risks. An investment property is much like a small business in itself, and all such ventures require time and effort, as well as bringing a series of legal and moral obligations regarding the condition of the property and the treatment of the tenant. If you have an investment property, you will need to fill out a self-assessment tax form, so you will most likely need professional financial advice. Such are the complexities that an article like this can barely scratch the surface, and if you take one message from this piece, it should be to find out much more before you go into property investment.

Why Invest in Property?

All investments are about making a return on your money, and property is no different. Property is ‘tangible’ – a real bricks and mortar place you can look around – in a way that other investment products, like shares or bonds, are not. We live in houses, we’ve looked for them, so we have a degree of intrinsic understanding about what makes a desirable home. And, the current climate not withstanding, we generally perceive that homes now are worth more than they were 10 years ago. While these are all good reasons as to why property investment is appealing, the real financial reasons for considering property as an investment are hardly alluded to here. To understand property investment more thoroughly requires the introduction of some technical terms.

Percentage yield

This is the amount of money that an investment generates against the cost of buying that investment, expressed as an annual percentage. For example, if you buy a flat for £100,000, and rent it out for £500 per month, that’s a rental income of £6000 per year, which is 6% of £100,000. This gives a direct point of comparison with other investment options, from government bonds and stocks and shares, to just putting the money in the bank. Property yields are reasonably easy to forecast, because there are always comparable rental properties available to gauge what tenants will ay for your particular kind of property – but it’s important to recognise that if the property is empty, even for only a few weeks, the actual yield will be lower than it seems. Knowing the rental market, and estimating for periods of vacancy, are important considerations. That said, while bonds and bank accounts may guarantee a low percentage yield, other investments like shares can be even more uncertain than property. You can, after all, influence the desirability or reduce the cost of property to make it attractive to tenants. Unless you are on the board of directors, you’re not likely to affect the performance or dividend payments of a stock-market listed company!

Capital Growth

The general perception, that property goes up in value over time, is borne out historically. Britain has had property valuations since the Domesday book, and the general trend is for land to increase in value at around 7% per annum, set against an average inflation rate of between 3% and 4%. In other words, in general property is getting more and more expensive. But there are major caveats to this. In the short term, the property market fluctuates. Falling prices, such as we have seen over the last 18 months, as happened at in the early 1990s, can have a devastating effect on anyone who needs to sell. If you can hold on in a falling market, all the evidence suggests prices will recover…  but not everyone can afford to wait for that. Property prices are also affected by local factors which buck the national long-term trends. If you owned farmland around what is now Milton Keynes, you will have seen your property value multiply many times over. If you own a row of terraced houses in a remote mining village in Wales, those buildings might not now be worth anything at all.

But, these warnings not withstanding, the general trend over time is for property values to rise. This contrasts with many other investment products. Take, for example, money in the bank. That £100,000 in a high interest account might produce a yield of 6%, guaranteed year on year. But the value of that £100,000 capital investment is constantly declining in real terms, as general inflation reduces the value of money. If the interest is re-invested at the rate of inflation (say, 3%), suddenly the actual return is only 3%.

With property, the capital value exists independently, and is linked by default to the housing market and the general economy. Property prices follow the market without necessarily having to re-invest the yield. That £100,000 flat will be worth £105,000 if the market goes up by 5%, even if you haven’t spent any of the yield on it. Indeed, capital growth is generally where property investors make their big returns… but it’s a long term strategy, not a get-rich-quick scheme.

Leverage

This is, perhaps, the most important consideration of all. How much does it cost to buy £100,000 worth of shares? The answer is simple – £100,000 (plus a few fees). Or to put £100,000 in the bank? Same again, but with no fees. But how much actual ‘money down’ does it cost to buy £100,000 of property? Even including expenses, the answer can be as low as £16,000. This is because you can get a mortgage to buy an investment property. And, while no investment ever comes without risks, the fact that banks will lend against the security of a building gives an indication that property is seen as relatively low risk. That intuitive sense, that a building is real, carries a lot of weight with financial institutions. Try borrowing £80,000 to buy shares and see how far you get. But with property, banks will generally lend at least 75%, and sometimes as much as 85% of the purchase price (even in this climate… time was you could borrow even more than that..!)

Borrowing money to multiply the effects of the growth of an investment is called leverage, or ‘gearing’, just as the gears of a car amplify the drive of the pistons into the turn of the wheels. Why does it matter? Because even though you only paid for a fraction of the purchase price, the yields and capital growth are based upon the entire property value. Let’s go back to that £100,000 flat, which we’ve bought with an 80% mortgage. It’s actually cost us £20,000, then. If property values go up 5%, the flat is now worth £105,000. It looks like a 5% capital growth. But..  it we only actually paid out £20,000. So that £5,000 increase is actually a 25% increase on our capital. That’s where the money is!!!

Cashflow

If you borrow money, it comes at a price. The interest rate of your loan shows how much you have to pay each year just for the pleasure of having that money to spend. Bank rates vary with the times, and at any given point there are an array of deals available – hence the importance of talking with an independent financial advisor to find the best and most suitable one. Investment property is treated like a business for tax purposes. The rental income is taxable income, but it can be offset against the interest you pay on the mortgage for that rental property, and it describes the actual cost or return you make from a property.

If the rent pays the interest and nothing else, it is ‘cashflow neutral’. If you have money left over, you have a positive cashflow. The amount of profit you make as a percentage of the actual money you spent is your ‘cash on cash’ return, expressed as an annual percentage. If you need to top up a shortfall, that is ‘negative cashflow’. If you offset those losses against other areas of income to reduce your tax, that’s ‘negative gearing’. And if this hasn’t already convinced you to hire an accountant, then the fact that the tax laws change with every budget really should!

Comparative values of investment

To illustrate why property can be a great investment, consider the table below. To make things as simple as possible, we will ignore any purchase costs, fees, tax, and so on…and let’s assume everything is 5% – the rate of inflation, the growth of the stock market, the share dividends paid, the increase in the property market, the cost of a mortgage. In practice, of course, all of these things are different, so it’s important to stress that the table is purely illustrative, and that financial advice should be sought before making any investment.

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In the right hands, and with proper advice, property can be a fantastic investment. Like all investments, it has its risks, and you should seek professional advice, and become as knowledgeable of the factors which can affect the market, and of the legal and tax implications, before you buy. If you want a more detailed consideration of the pros and cons of property investment, do lots and lots of research. The introductory books listed below will give you a starting point. Talking with estate agents, financial advisors and accountants will also help. Good luck!

Selected Bibliography

“Rich Dad, Poor Dad”, by Robert T Kiyosaki and Sharon Lechter, published by Time Warner, 2002.

“Real Estate Riches: How to become Rich using your banker’s money”, by Dolf de Roos. Rich Dad’s advisors series; published by Little, Brown 2002. Various other editions in existence. Available on Amazon.co.uk second hand for 1p.

“Beating the Property Clock: How to Understand and Exploit the Property Clock for Maximum Gain”, by Ajay Ahuja, published by How To Books, 2004.

“Successful Property Letting – How to Make Money in Buy to Let”, by David Lawrenson, published by Right Way Plus, 2008.

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Going on the market

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So, you’ve chosen you’re estate agent…  what next? This article will help you prepare for the practical stages of getting your home on the market.

Home Information Packs

It is now a legal obligation to have a Home Information Pack (HIP) for every residential home sold in England. The basics of this must be available before a home can be marketed, even if you are selling privately without an estate agent. You will almost certainly need a professional to put the pack together for you – most estate agents and many solicitors can do this, as well as a number of independent companies. The cost of the pack varies, but expect to pay between £200 and £300 for an average home.

One compulsory element of the HIP is the Environmental Performance Certificate (EPC). This involves a qualified inspector looking at such things as your heating system, loft insulation and double glazing, and evaluating both the current condition and potential upgrade of the energy efficiency of your home. Fortunately, the HIP provider will be able to arrange this for you as a part of the deal, but as your home can’t be advertised until it’s done, the sooner you can make the arrangement for the inspection, the better. Getting the HIP is the first thing you have to do, and getting the EPC is the first part of the HIP. 

Creating Property Details

The property details that the agency creates will be the principle source of information for most viewers.  It’s not just those buyers who enquire directly that will be sent a paper copy of the particulars…  almost all automated estate agency systems also send the same information to the internet.   Getting the details right, then, is an important part of marketing your home.

Estate Agents are also under very stringent legal obligations to be accurate in their details, so expect and excuse the amount of time it takes to get things right.

Measuring, Photographing and writing descriptions

The agent will need to measure the property, and to take both internal and external photographs for the marketing brochure.

If you haven’t already, tidy your home for the camera!  You will know at what times of day the front and back of your property gets the sunlight – so make sure you tell the agent.

If there are any special details or characteristics of your home, do tell the agent.  The estate agent may not know that your bath-taps are engraved from sterling silver, or that the kitchen worktop was hand-carved from Dartmoor granite.  If you have guarantees or certificates to show the date and quality of renovations or extensions, have them ready, so that they can be mentioned in the particulars.

All buyers welcome any reassurance of quality.  If a prospective buyer sees two identical Victorian terraces in the same area for the same price, but one has a 10-year guarantee against woodworm and a 20 year guarantee on a recent re-roofing, then guess which one will sell first??!  Guess which one is less likely to make the full asking price?!  So, any information you have about the construction or interior of your home should be giuven to the agent before they write their descriptions.

Make sure you mention, too, all the local facilities and amenities nearby.  The agent will know about some of it…  the general area, the nearest shops, and so on… but it’s possible that there will be some local details that only residents are really aware of.  If there is a neighbourhood watch scheme, or a hidden alleyway for the rubbish bins, or a residents’ only parking bay, or a weekly visit from the mobile library…  any and all of these details and more might persuade the perfect buyer to arrange a viewing.

What should you include with the sale?

This is an often-asked question, and the final answer will vary from house to house.  As a general rule of thumb, if it is built-in, include it from the outset and say so in the details.  Integrated ovens and hobs, or inbuilt bedroom wardrobes, are good examples of things which should be left and should be mentioned.  Carpets should almost always be included – apart from anything else, they won’t necessarily fit a new home, and unless they are extremely expensive will be damaged by removing anyway!

You may consider mentioning other items, too..  but remember that if it’s written into the particulars, then it is legally considered part of the sale.  The likes of blinds and curtains are usually cut or fitted to the dimensions of the windows they serve, but their inclusion in the details makes a commitment to leave them with the house.  Equally, bulky items like freestanding white goods – especially dishwashers and washing machines – don’t always take well to being moved, and it may not be worth having older items moved…  but again, having them listed in the details is a commitment.

It’s generally better, with these kinds of item, to leave them out of the written details, but also to have decided in broad terms what you might leave behind.  This can be very important in negotiation, because of the very strong psychology that affects people in a bargaining situation.

People are very reluctant to give ground unless they feel they are getting something in return.  If you receive an offer for your home which is lower than you are prepared to accept, an outright ‘no’ can sometimes close the door on further talks, especially if the buyer has put forward what they consider to be a genuinely fair amount.

But if you are in a position to add more ‘value’ to the sale – by offering to include all the curtains and blinds, or even the white goods – then it is much easier for the bidder to justify an increased amount of money.  You may only be adding in things you’d have given away anyway, and the increase in bid might be far more than the value of those goods, but in negotiating terms both parties feel that the other side has made a compromise, and that both sides are working towards an agreement.

So, in general terms – if it’s fitted, include it; if it’s not, don’t mention it but be willing to consider using it to make a deal.

The one exception to this would be if you are selling a rental property, or if your home is in an area where investors are the most likely buyers.  Then, if you can leave furniture, consider including it in the details.  Investors are often very happy to buy a home that can be let out straight away.  Even in this situation, though, if you are unsure, leave it out of the written details, but let the agent know that you would consider leaving furnishings for the right buyer, and at the right price.

Do the details make you want to see the house?

The property details are important.  The description of your home should paint a picture and create an emotional response, giving a person who has never seen the inside of your home a real sense that it is a place they might enjoy living…  or at least, that it is somewhere they’d like to find more about.

Agents who overlook this, and who write nothing more than ‘window to front aspect, radiator, tv point’, and really letting their clients down.

Signing off – don’t delay!

Once the agent has created their details, they will send a copy to you for approval.  Read them carefully and check that you are happy with them.  If there are factual errors, correct them.  If there are descriptive points that you feel under-state or miss out the best aspects of your home, then let the agent know, and do so as soon as you can.  The agent will want to be marketing your home as quickly as possible, and may already have begun sending information out, so the earlier you get in touch, the better it will be for you!

Viewing arrangements

This is another important aspect of the marketing that you should discuss with your agent at the outset.

When can viewers come around?  In general terms, the more time that you can make your home available for viewing, the better.  Your perfect buyer might work nights, or have young children, or live a long way from Exeter.  It’s possible they will only be able to visit at times that most people would find inconvenient, or most agents would be reluctant to work.

Who will conduct the viewings?  Any agent that doesn’t offer to accompany every viewing should be ruled out from the start, even if you don’t feel you need accompanied viewings, because it suggests that the agency isn’t willing to work hard enough for you.  Some agents may refuse ‘out of hours’ viewings on principle: this again throws real doubts on their ability to provide a commitment to service in all other areas, too.

If you are in any doubt, get the agent to do all the viewings.  Estate Agents are usually confident and competent at showing strangers around a house.  An agent will be more objective than the owner, and viewers understand this: while the owner might exaggerate features or downplay problems, a good agent will give their best, honest assessment when showing someone around.

This is just good business sense, because if the agent says something that turns out to be misleading or wrong, not only are they stepping close to breaking the law, but they also undermine a future sale should they be ‘found out’…  and, of course, the new buyer is moving into their area, so the agent knows their future reputation is in the hands of the new owners just as mach as the old ones.

If the agent is conducting viewings for you, it’s probably better to be ‘out’.  The viewers will be less inhibited, and might ask more open questions, and stay for longer.  Plus, of course, the more people in the house, the more crowded it will feel.

For second viewings, though, it is a good idea to be available, if the agent thinks it would be of assistance.  By the second viewing, the house-hunter is already showing serious consideration of a property, and they are more likely to have direct questions about living in the house…  utility bills, local taxes, the immediate neighbours, and so on.

Some sellers are occasionally reluctant to give the agent a key.  Don’t be.  Agencies all have systems to ensure that the keys are not obviously related to any given property, and all agencies have insurances in place.  Nothing bad is likely to happen while an agent has your house-key, but even so you should be reassured that the agency’s own policies will add some further protections above and beyond your own insurance policies.

One thing you should clarify, though, is the arrangements by which viewings are confirmed, and especially what the agent should do if they cannot reach you.  Viewings should be confirmed 24 hours in advance or more.  Let the agent know what to do, though, if they try and can’t reach you.  Is a message sufficient?  Should an unconfirmed viewing be cancelled, or should it go ahead??  Address these issues before they arise.  If you can, give the agent permission to go ahead if ever there’s doubt.  Also, it is not unusual for people to call in and ask to view that day.  Be clear, once more, what the agent should do in this situation.

When waiting for viewings to take place, please understand that not everyone is on time… and occasionally, it might be the viewing before your home that is late.  If the agent can let you know that they are running behind, they should, but it’s not always possible if one is showing clients around non-stop.  Alternatively, the people coming to your home might be seeing several different properties, and could linger in any of them (or alternatively reject them from the front doorstep!)  So, consider all viewing times as contingent, because (as with any appointment-based system), a single interruption to the schedule might move everything around a little without notice.

Finally, if a viewing is booked with you, but the person doesn’t show up, please don’t be too hard on the agent!  Sometimes, sort kind of person that doesn’t keep an appointment, is not the kind of person to give the agent advance warning.  Chances are that the agent has waited some time to see if they are coming, and has called to ask if they are still on their way.  This can have a disruptive effect on other viewings later in the day, so it might be that the agent doesn’t have the chance to tell you that the viewing didn’t happen until much later.  It can be frustrating, especially if you’ve cleared up or gone out especially, but it’s not something that the agent should be blamed for: they will be as fed up by ‘no-shows’ as you are!

Viewing feedback

Having people look around your home is one thing: finding out what they think is another altogether.

An estate agency business must regard this as a key part of its role.  It does two things – it identifies issues about the home in question, so that the agent can let the seller know what, if anything, needs changing.  It also updates the agent as to what their buyers are looking for, so bringing them closer to their own market.  Any agency that doesn’t chase feedback after it’s viewings is letting down buyers and sellers alike…  so ask your agent how their company ensures that viewings are followed up!

Most sellers are keen to know what people thought of their homes after each viewing.  The one difficulty that agents have, though, is actually getting the chance to find out.  Following up viewings is vital, but do bear in mind two things: first, that not everyone can be reached at once, and messages often have to be left; and second, that very few viewers that didn’t like a house ever actually return calls to the agent to tell them so.

In theory, events should happen as follows:

  1. Viewing takes place
  2. agent gets feedback from viewer
  3. agent tells seller

In practice, what very often happens is this:

  1. Viewing takes place
  2. agent leaves message with viewer
  3. agent leaves second and third message
  4. no response is effectively a ‘no’ but there’s nothing to tell the seller
  5. seller feels the agent doesn’t keep them informed

Sellers get frustrated, sometimes, if they feel and agent isn’t passing on feedback…  but in practice, it is frequently the case that there is no feedback to pass on, which itself is an indication that the viewer wasn’t interested.  Neither agent nor seller wants a succession of calls saying ‘still nothing to tell you’.

Establish that your agent has a good system in place for taking feedback and passing it on.  But, if you’re sure this is the case, give some leeway to the agent to call you only if and when there is a need to.