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Back to buy to let section
Is
the future rosy
for buy to let
In March 2004, like every other month for the last 20 years
or so, some have been predicting property prices will fall, but so far they
never have to any large degree, if you look at what price property was at 2 years
before rather than looking at monthly ups and downs, then you will see that
property has never fallen in real terms.
In this weeks Estates Gazette are reports of auctions that
show the same properties sold last November and flipped and sold again recently
have all reached higher figures, therefore indicating a like for like rise in
prices is continuing, and one of the building societies recently reported that
the rise in prices in January was the highest for several years.
However lets be pessimistic for a bit, what would happen
if property prices were to start to fall. Well the limiting factor on sales and
prices is how much people can borrow and this is why so many first time buyers
cannot get involved, unless they use one of the clubs services or find another
way to buy at a discount. So if prices started to fall all that would happen is
that people who previously could not raise the purchase price would be able to,
and more sales would result stopping the fall. Experienced buy to let people
would probably also see the opportunity to buy at a discount knowing that
historically prices always recover.
Ok lets be unreasonably pessimistic, you know like
the people who want to sell you an insurance or share deal based pension scheme,
they often refer to themselves as independent financial advisors but well lets
just say that if they were not pushing the products they got such high commission
on we might believe the title independent a little more. Of course that is being
unfair, as the independent label means that they can just sell products for a number of companies and picking on them could well be like picking on a free
house because you still have to pay for the booze there.
So lets assume for a minute or two that things do not
go on as they have historically, and take a pessimistic viewpoint.
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This is a fictional account written as at a future
point when prices had fallen
In the past making money from buy to let, or property development,
has been easy, in fact so easy that you could make a great many mistakes and
still walk away with a theoretical profit.
Now in some areas with more people involved, more letting
agents vying for fast lets, and in some cases an oversupply of some types of property,
the returns have fallen to near uneconomic levels. Added to this some have bought
at too high a price or have the gearing set up with very expensive mortgages,
that are difficult to now support. Voids (unlet periods) have also increased in
some places. Those who have been involved for some time will survive, and some
of the ones who have made mistakes we can expect to see dropping out, selling up
and even possibly making considerable losses.
In the future we might also see many more people running
into problems, particularly those with low priced property in areas where prices
are not doing well, and where the type of property was developed for a market
that has moved away from the area, possibly due to employment changes. At this
point with people still entering the problem areas, everyone who wishes to still
has the opportunity to fine tune their portfolio to avoid joining the future
casualty list.
Similarly in many areas we might expect to see a shaking out of
letting agents, very many have set up in the last few years, many with little
knowledge or expertise and without the ability to properly service the landlords
and tenants. When these failures occur, some will result in the loss of tenants
deposits, creating tension between landlords and tenants, as well as pressure on
the government to regulate how deposits are treated and possibly licensing or control
who can be letting agents. We also expect to see the continuing pattern of
agents pressing to let at a rate that gives the landlords smaller margins in
order to get more properties let and rents/commissions rolling in. It has to be remembered
that although agents get a percentage of income they don't carry a parentage of
the mortgage costs and we are seeing in some areas agents recommending rents
that just cover mortgage payments and their fees with nothing left for the
landlord. When you take into account maintenance and similar, landlords are
being expected to subsidize these rents. Also a hard up agent is far more likely
to be less critical of tenant references, or even conspiring with them in
getting false ones, and accept a lower standard of tenant, giving you more
problems in the future. The gap between good and poor agents is widening.
Property appreciates in value due to the shortage of
supply, and rents are similarly geared. If we all rush in and buy up properties
in a single town to rent out we create an oversupply and the rental rates drop.
In a similar way when too many people looked to supply properties for city whiz's,
they initially did well as the financial industries were in rapid growth, but as
the companies in the financial services industry started to thin out their
staff, the oversupply became a problem and voids became longer. In many cases
the obvious over charging in these areas in terms of rent meant that many saw it
was no longer sensible to rent and to buy instead, so that not only has the
employee base thinned but a higher proportion are buying now. The lesson here is
that we need to identify a need that is going to be long term, not a temporary
situation brought about by a change in employment patterns. It does usually not
make economic sense to buy houses on a long term mortgage to meet a short term
need.
As it has been so easy in recent years there has been an acceptance
of under performing, people feel they have done well even if they made only a
fraction of what they could have. Particularly with upgrading property the lack
of financial control and time overruns have often meant that they have made no
real profit, and could have done as well or better had they just bought and held
good property without the hard work involved. In many of these cases they sell
it, creating a paper profit on which they pay capital gains tax, and then buy a similar
property at the current higher price to repeat the operation. If they do this a
number of times they are less well off by the volume of tax they have paid than
had they just bought one good property and let it out, plus they would have had
the rental income throughout.
Similarly with some landlords the rents often do not match
what they could have got, had they realized where the market for property was
and how to make the property produce the greatest returns. Often penny pinching,
cause considerable extra costs or the reduction of rent that can be achieved.
Poor maintenance in particular is likely to make the tenant look at moving, and
in some areas a lower rent then got from the incoming tenant, plus often a void.
Happy tenants that stay for long periods with slowly increasing rents are worth
far more. So being a good landlord, and if using an agent making sure that they
are providing a quality service is essential.
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Switching from pessimism to realism
Making money from property will of course continue to be
expertly done by many, and many will continue, whatever the overall conditions, to
do very well. In many ways it is a product of a business plan that covers different
eventualities, so is only in part about seeing the future, and more about being
able to do well in all conditions, and restructure or react to them as they approach.
Property is for many a long term investment, and many will not switch, but stick
with the property they have, and in the long term providing they are able to do
this it will work out in many areas.
Should property prices fall for a period, it has no impact
on the owner of the property as long as they can keep paying the mortgage as
over time it will recover unless they were really silly about the price they
paid for it.
The largest single fault of those involved in buy to let
is paying too much for the property, often they become emotionally involved in
the purchase as if they were buying a home for themselves. Particularly in a
rising market they may be easily persuaded that they have to buy at the
asking price or even more in order to get any quality property at all, but
still many report that they are held in chains as some properties take a
considerable time to sell.
Similarly there may be too much attention taken of
the media, we constantly see prices are about to crash or double and neither occur,
however things will happen similar to they did yesterday, the day before
and last year is not news. If property prices fall, good we can get more at a bargain
price, if they rise, good so will our equity, if they stay still then we can
plan with more confidence. What at no point we need to do is to pay over the
odds for the chance to become involved, if we cannot get what we need in one
place we look somewhere else or create a situation to give us what we need.
So why don't the Property Pension Club push the concept of
audits to show people where they could be doing even better, after all services
exist within the handholding and other services to allow people to get this
benefit.
The problem for the club is to decide if we should make these
happy people unhappy by showing them the error of their ways, or allow them to
continue producing what for them is a satisfactory return. In many ways pointing
out to people how much better they could have done is counter productive as it
may make them less confident and stop to grow further and we all know that the
largest risk is just not doing anything. Just about any property investment will
turn out over time to be far more profitable than anything else you could do
with the same funds. Given that in reality it often cost the investor nothing at
all as a tenant ends up paying all the costs and returning a profit it is difficult
to see how anyone can loose, unless they do something really silly. The fact
that with a little help they could have done it faster, grown the capital at
twice the rate and turned projects round faster so have reached several times
their current wealth is not all that important as long as they have actually
done something and are happy with the return they have.
Can we learn anything from the exercise of taking the pessimistic
viewpoint
I would suggest we can, in that if we can see that there
is scope for reducing risk, even if not necessary, and in increasing the speed
and margin available to us. We can also by understanding what any outcome would likely
to be move forward with more confidence.
Should we be looking to UK or overseas buy to let or some
other property investment to produce the largest return, well that needs another
article.
Back to buy to let section
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