Many investors have been asking me this question since the referendum results in 2016. Agreed, the market is in flux: The mass of legislative changes that have come into place over the last two years would seem to put anyone off starting or growing their rental portfolio.
However, it always brings to mind the wise words of Jonathan Sacks “The wisest rule in investment is: when others are selling, buy. When others are buying, sell. Usually, of course, we do the opposite. When everyone else is buying, we assume they know something we don’t, so we buy. Then people start selling, panic sets in, and we sell too. “ Or how about the wise words of Warren Buffet, “Don’t be a follower . . . Be fearful when others are greedy. Be greedy when others are fearful”.
So how could this pan out for investors? I see three distinct groups:
- Should I start?
- Should I expand?
- Should I sell?
Should I start an investment portfolio?
The market is not as good as it was, but it is still good! You can still achieve 5-6% returns if you buy well. The industry senses the June 2019 legislation to prevent extra costs being charged to tenants has one effect, to increase rents. This is usually good news for investors.
There continues to be a strong demand for good quality rental property. The operative words here are “good quality”. There is still a lot of property on the market bought by landlords in the 90s who have not kept pace with the needs of the market. Kitchens and bathrooms are very much as they were 20 years ago. That is not going to work in this quality-focused market. Your tenants, or should I say your customers, are more discerning. We have seen tenants move because they see there are better facilities elsewhere, which they are often happy to pay for. That means some of your competition is missing a trick, from which you can benefit. But it’s not just about immediate returns. You invest for the future so you are looking for capital growth of your asset.
For this to work to have to look over a long period – 10 to 15 years, and not surprisingly the better you buy the better your capital growth will be. House prices are cyclical so the ideal is to buy when the graph is dipping. Which brings me back to buy when others are selling.
Brexit has added a real nuance to the market. Which means that people have been holding off from making decisions. The sales market is slow. I always look at the sale price of cluster homes (2-bed houses without a garden or garage) as a good gauge of the market. Eight months’ ago you would expect to pay £170,000 – £180,000 for a 2-bed cluster with a decent kitchen and bathroom, which would give you a return of 4.8%. The most recent one to enter the local market is up for £160,000. Which indicates to me that the seller definitely wants to get shot of the property and they have recognised that the market is busy. That also says we are in a bit of a downturn.
How long will this last? For that, you need a crystal ball! Certainly, what is happening with Brexit will have an impact, as peoples’ confidence in the status quo has been knocked and they make hasty decisions – they panic. So should you start a rental portfolio? When the market is in a dip you have more opportunity of buying at a reduced price, as you have a stronger negotiating position. As soon as the market recovers you have either missed or benefitted from that opportunity. But before you do anything, get advice from specialists: your accountant; an independent mortgage broker. And listen to what they have to say. If they challenge your perception, that is good. And before you buy anything make sure that you talk to a competent letting agent: they should know what is in demand and can advise if your choice is a good one.
Should I increase my portfolio?
The same applies: The market is not as good as it was, but it is still good! However, the first question to ask yourself are what do you have now? You will probably have equity in your present portfolio which you could use to buy another property. There is an obvious risk of increased interest rates. But it is easy to do a calculation on the worst-case scenario (some of us remember 1989 rates!) to see how your rental business would cope.
The other question is are you better off improving what you already have? As mentioned before your customers are happy to pay for quality, which is a win-win. And if you are to expand, choose your time to buy well. We bought one of our properties at the top of the market – it took 8 years to recover and this property generates the worst return of our portfolio – albeit, we still get a return!
Again you need to talk to an independent mortgage adviser who can show you the way to get the best from your portfolio.
Should I sell?
We hear this from some customers who are nervous about an uncertain future and the constant changes – we say the same – The market is not as good as it was, but it is still good! However, deciding whether or not to get rid of your portfolio will depend on your circumstances. If you are thinking of selling because you feel the Government is against Landlords, I would think again. The returns may not be are not as good as they were, but they are still good compared with many other investment opportunities, and often much easier to understand!
The more landlords that sell to owner-occupiers then the higher the demand for good quality rental property – the result of this should be increased rents. Sadly I can see that this might see some tenants being unable to afford the better homes and being pushed into lower-quality homes, but that’s another discussion. We are seeing that sale prices are reducing, so if planning to exit then be aware you may not be getting the figure was advised the property would sell for. On top of that remember you will have a potential Capital Gains Tax liability, which will reduce the amount you realise from the sale. Trust me, I speak from experience – we sold a property because we ‘felt’ it was a pain. Bad decision – in retrospect we should have used data and a longer-term assessment to make a better decision. Our expensive mistake, from which you can learn!
To help landlord assess these issues, and look at returns over the longer term, we have a simple keep or sell calculator we can go through with you.
So can this piece be unbiased? It is my opinion which you can agree or disagree with as you like. All I would say is it is based on experience, good and bad. Being a landlord (30 years) and running a business specialising in rentals (15 years) I have seen many changes and listened to many landlords over the years. I have seen some brilliant strategies and witnessed some car crashes. To round up the market is definitely in flux. There will doubtless be more legislation, but if you employ a specialist these changes are manageable. There continues to be a strong demand for rental property, and all forecasts show this is expected to continue. The sale market is in a bit of the doldrums, but that could change quite quickly once Brexit is sorted. Remember, the market is not as good as it was, but it is still good!
Maxine has been a landlord for 30 years and started a specialist rental business in 2005 which now employs 17 people looking after customers within a 15 radius of St Ives. Her team have won many awards based on the high levels of expertise and customer service her company provides its customers.