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How property investors can prepare for higher interest rates

How property investors can prepare for higher interest rates | realpropertymanagement |
I've had a few emails recently along the lines of: This property lark looks all well and good, but in your examples you always use examples of getting a mortgage with a 5% interest rate. So what happens if interest rates go up?

Via Richard W J Brown
Richard W J Brown's curator insight, December 6, 2013 5:50 AM


Wise words here from Rob the Property Geek - steps to take to protect yourself for the inevitable rises in interest rates looming on the horizon.


Many, if not all, of these steps are essentially defensive measures and that is very sensible and is rightly the place to start but are there also some more ambitious things we can do as investors to offset the increased cost arising from higher interest rates?


I can think of a few but essentially they fall under the 'increase revenue' side of the equation rather than the 'reduce or fix cost' side.  Rent is the main area in which we can look to increase our revenues but it is not the only one.


When looking to increase rents we need to be very careful that we don't accidentally kill the golden goose - for example if we have a good, long-standing tenant that pays their rent and causes very few issues - perhaps keeping them sweet is worth more than potentially risking them serving notice and have them replaced with a 'problem child' instead.  However, as with any business, we should look at potential ways to increase our revenues (rent) and so benchmarking against comparable rental properties to assess the likelihood of us achieving an increased rental income should be an exercise we take on regularly – considering supply as well as price is wise before making a decision though.


There are also a couple of more imaginative ways that we could seek to increase rents also, such as considering multi-lets rather than single lets.  Perhaps more management would be involved but the returns are usually higher.  Having a portfolio with some multi-lets and some single lets could allow greater diversification between long-term capital growth and short-term rental income producing assets and some protection as market cycles naturally unfold. A variation of this idea would be to consider holiday or short-term lets but ensure you do your homework and choose the right property in the right location and market it properly.  Both multi-let and short-term let offer opportunities to increase your gross yield but also come with increased costs and management time.


There are some other ideas you could consider on the income side.  For example, letting out a garage or workshop area under a separate arrangement - works best when the garage / workshop is in a separate block for example.  Or even consider renting a parking space if the property is close to an airport or sports stadium for example - works best with no interference to your tenants obviously. I have rented parking spaces that have been on the road outside a property in a quiet street but close to an airport in the past, so the space need not even be on the drive way. Also consider offering added value services such as gardening or cleaning as this could allow a margin to be made on top of the cost of provision but again with some added management.


So here we have 3 more imaginative ways to consider to maximise the revenue side of the equation - 1) alternative higher yielding rental models; 2) sectioning off elements of the property to let separately and; 3) added value services.


As the slogan goes...every little helps!

Richard W J Brown's comment, April 1, 2014 12:03 PM
Darrell & Realpropertymanagement - thx for the rescoops :)
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How new reduction in CGT relief will affect second home owners

How new reduction in CGT relief will affect second home owners | realpropertymanagement |
In the recent Autumn Statement the Chancellor announced changes to the CGT allowance on a second home which may affect many property owners and landlords in the UK What are the current rules in regard to CGT and property?

Via Richard W J Brown
Richard W J Brown's curator insight, December 10, 2013 11:03 AM

Watch out for this change that seemed to pass me (and apparently many of the news writers) by initially when the autumn statement was announced last week.


With much of the focus on capital gains tax being introduced for non-resident property owners this tightening up of the rules seemed to have been overlooked a little.


The change affects those owning more than one property and using the principal primary residence (PPR) relief to mitigate some of the capital gains.  Previously the final 3 years of ownership of the elected property were exempt from CGT and from April 2014 it will be reduced to 18 months.


The final period election rule was introduced so as not to penalise people who moved house to take up a new job for example.  The idea was to allow sufficient time to sell the former home whilst living in a new one (whether owned or not).  However, in more recent times it has become susceptible to abuse with people seeking PPR elections in order to exempt more speculative investments such as flipping properties allowing an exemption from CGT on the profits.


The new rules don't seem to detract from their original intention and should allow sufficient time to enable a sale to take place.  However, be careful of the shorter time period, particularly in the event of a declining property market, as it could on the one hand force a faster than ideal sale or on the other a potential CGT liability if you wait too long in a rising market.

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How to build a profitable Buy-To-Let portfolio

How to build a profitable Buy-To-Let portfolio | realpropertymanagement |
Buy-to-let lending in the UK has now reached the highest level for nearly five years.

Via Richard W J Brown
Richard W J Brown's curator insight, December 11, 2013 5:00 AM

It is always good to hear how successful property investors have achieved their success and what their golden rules are (or more likely have become over time).


Today, we have an interesting insight into how a buy-to-let investor by the name of Peter Amistead built a portfolio of 80 properties in south Manchester.


I am pleased to say that I have somehow managed to find myself already practising many of the characteristics that Peter outlines, so that has to be a good thing.


Perhaps the one area where I would beg to differ would be that of concentration into a single area.  I do get the reasons for doing that such as making the portfolio easier to manage and also easier to understand the location down to even a street level and so on but I also have a concern about what many general investors call ‘concentration risk’.


Concentration risk is where your investment is held in one area, which could be an asset class (such as property or shares) or is localised in some way (such as a narrow geographic area like south Manchester), or it could even be in a particular niche investment area (such as HMO, single let or holiday let for example).  The idea being that if something happened to that concentrated area it could adversely affect your entire investment portfolio. That said, I think either approach could work as each has its merits i.e. a concentrated approach vs. a more diversified one.  


Personally, I have elected for a little more diversification in my overall investment strategy and so in addition to property I also invest in shares and have a pension.  I have my property investments spread across the UK and also have a small overseas interest that I would like to extend when the time and funding allows.  I realise that I am sacrificing the very detailed local knowledge that Peter advocates but I believe that I am gaining in terms of avoiding some of the potential pitfalls of concentration risk at the same time.


In conclusion, I think that Peter's approach offers a very sensible route map for any investor to follow and should you decide to keep it local or spread your wings a little further afield I am sure that each would have their rewards in the end.

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Buying Rental Property: Don’t Fall in Love with an Investment!

Buying Rental Property: Don’t Fall in Love with an Investment! | realpropertymanagement |
For many investors, buying a rental property is something that happens later in life. Generally speaking, most people don’t start investing in property until they have already secured their own primary residence.

Via Richard W J Brown
Richard W J Brown's curator insight, December 18, 2013 9:52 AM


I was recently asked a question: if I was starting out and had saved enough for a deposit sufficient to buy an average home (say £30k-£40k), what would I do? A very good question indeed...


After some thought I would answer the question like this...

1. First of all define your purpose for investing in the first place - this is our reason why - or in Steven Covey's words 'begin with the end in mind'.


We all need a reason for doing something and investing in property is no different but knowing what YOUR reason is could have a bearing on the direction you then take.  Consider for example the different approaches if you answered with 'I have a big hole in my pension looming in 20 years’ time' versus 'I hate my job but love doing a bit of DIY and want to look at making a living out of property' - each answer would probably lead us down an entirely different path, perhaps a steady, single family buy to let on the one hand or buying run down properties, doing them up and selling them on the other, amongst several other possibilities.


So, start by defining your purpose and here is where emotion IS allowed - you can dream, you can bring the pain of your current situation into the equation - it is all a part of what will make you keep going when times are hard, as they often can be in property investing.  Have a good reason why therefore.

2. Next, are you looking at a short-term or long-term return on your investment?  


This should follow on from your reason why and be consistent with it - there is no point starting out to fix a hole in your pension but then looking to take a gamble of an off-plan property in Belize that you plan to flip before the build is complete - this is not compatible but buying and holding a regular 'bread and butter' family home in a strong rental area is more compatible.  But if you want or desire an income replacement then the latter example will surely disappoint, as you shouldn't even expect to make a cash profit for something like 5 years at least.  In this case perhaps property trading (flipping) would be a better direction to take?

3. Then, are you investing for income (yield) or for capital (house price appreciation)?  


Of course most of us will say both to this won't we?  In actual fact, we may find that our returns are similar over a long time period regardless, although I have previously shown how having an income strategy where excess cash profits are reinvested into more income producing properties can in fact outperform one with low yields but higher capital growth prospects.  I guess this becomes something of an academic argument but knowing if you are looking for income or capital returns would change the direction that you follow.  As a cautionary note here - when starting out as a property investor it is crucial to be able to cashflow your investment in the early years and again 5 years is a guide here.  This not only means paying the mortgage - even if the tenants are not paying their rent - but also the upgrades required to make it habitable, the ongoing maintenance and the odd shock repair bill too!  The first 5 years are the riskiest and so having a cash buffer is highly recommended.  This could be in the form of an actual cash fund, or having enough 'headroom' in your day job earnings to cover up to six months mortgage payments but most realistically through an excess of rental income over our costs to set aside, which pushes towards an income / high yield approach at least to begin with.  Personally, having both types of asset in the portfolio would be a good long-term plan but to begin with at least income beats capital growth for me.

4. Is this a one-time only investment or can you repeat the process in the future?  


By this I mean, could you generate another similar deposit in the future through saving and / or smart investing to buy further properties?  Buying a single buy-to-let investment, holding for the long-term and appointing a letting agent to manage the property is the 'vanilla model' followed by a large number of would-be investors and there is nothing wrong with that.  It will however, probably help to make your future more comfortable than if you didn't do it but it will probably not make you wealthy.  Again, revisiting your purpose is important here - if a little nest egg is all you desire and need then you won't need to look at repeating the exercise and vanilla will be good enough for you.  On the other hand, if like me you need to plug a 12 year hole in your pension then a single buy-to-let might not be enough, so you would need to work on a plan to have number 2, number 3, etc.

5. Understand your personal skills, task preferences & lifestyle choices.  


This is one of the most underrated aspects of being an investor but is actually one of the most important.  What are you good at - is it finding deals, negotiating, scoping out how to add value, doing refurbishment, creative financing solutions, managing people or managing tasks, etc.?  In my case, I come from a financial services and small business background and so the strategy and commercial aspects of investing are both my strengths and preferences - I am not very good with a paint brush!  Equally, I don't have loads of spare time and in fact the time I do have I place quite a high value on it.  So, I prefer to outsource most aspects of property investing outside of formulating my strategy, analysing deals and doing the due diligence and number crunching.  I also like to travel and so being free to do that is very important to me.  If I was self-managing an HMO I would not be able to live my life as I prefer and equally it is not what I am really interested in or good at, so it would go against the grain a bit.

6. No what makes it all hang together - do the numbers!  


This is where there is no room for emotion, not unless you want to compromise or even make some major investing errors.  Being a successful property investor ultimately boils down to the figures - discount, yield, capital growth, interest rates, rental increases, cost management, return on investment, cashflow and so on - all are numbers based and will determine the trajectory of your financial future.  Once you have been through all of the steps outlined above you should have a good idea of what type of property investor would suit you best.  The next step is to understand and work the numbers and stick to them.  Set goals and targets, keep a handle on your progress with regular check-ins and take action based on what you find.  If we do this exercise regularly we can ensure that we are constantly working towards our overall purpose and goals of investing in property.  No room for emotion here and this brings me full circle to what this article reminded me of today...when all is said and done, what will make us successful or otherwise is an unemotional commitment to working the numbers we have set for ourselves - then one day we will look back and see that all of the small, incremental steps we took at the beginning and along the way will lead us closer and closer to realising our purpose as a property investor.


As Vinnie Jones said in Lock,'s been emotional... :)

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House prices set to rise further in 2014

House prices set to rise further in 2014 | realpropertymanagement |
2014 won't be an easy time for first time buyers as forecasters predict price rises of 10 per cent in 2014.

Via Richard W J Brown
Richard W J Brown's curator insight, December 20, 2013 9:07 AM


The only way is up!


‘Tis the season of good will to all property investors and so it is also the season of property predictions too!  I am not big on predictions myself but one thing I do predict is that there will be a lot of predictions at this time of year ;)


I am going to link in to several more later in today's feature, so you can feast your eyes on how many are expecting property prices to up in 2014.  Most are up and the range that I have seen is 4-10% so far.  


However, if you are into ‘contrarian investing’ then is now a good time to buy?  Should we be following the herd and flocking to the market to get our hands on more properties before they get too far out of reach? 


Well, to answer this rather depends upon our investment strategy and attitude.  Those in it for the long-term will be continuing with their 'pound cost averaging approach' and buying through the highs and the lows adopting common principles of buying good, solid yielding assets in decent locations.  Some may even look to halt investing during an up cycle and hold off until the next down cycle to buy closer to the bottom rather than closer to the top.  The speculators will be rushing in...But will they find gold?  How far away are we from another bust...economic indicators suggest a few years yet; so maybe we are good for a while unless we get unemployment down super-fast and see a return to higher interest rates sooner rather than later.  But what about political uncertainty - we will have a general election in a couple of years and Help to Buy is due to end just after then anyway.  What about housing supply - will this pick up sufficiently fast to satisfy demand?


So many questions here I know and so this means there will always be uncertainty and doubt that could get in our way.  So, what is the best solution – I say: stick to sound investment principles, look to the long-term to smooth out the vagaries of the market cycles and all should be well in the end!


Now some of this other links on price predictions I mentioned if you are interested:


RICS 8% rise:


Rightmove 8% rise:


Savills and others talk prices and other predicted trends:


But here is one article that should make us at least a little twitchy - it suggests that rental affordability is being stretched due to wage growth being sluggish:

let us not forget that there is no point in having a rising capital value asset if we have an empty property or non-paying tenant - that always has to be our foundation - getting the rent paid!


And on that bombshell in true Top Gear style – thank you very much for following my ramblings this year, have a great Christmas and see you next year! 

Barbara Lowe Barker's curator insight, December 23, 2013 10:32 AM

It's true, they only rose in 2013 and set to rise more in 2014. No more kicking tires, time to make a decision!  Remember: buy low, sell high. 

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Social housing rent arrears cases up by 13 per cent

Social housing rent arrears cases up by 13 per cent | realpropertymanagement |
Social housing rent arrears cases reported to Citizens Advice from July to September this year increased by 13 per cent since the same period last year.

Via Richard W J Brown
Richard W J Brown's curator insight, December 27, 2013 4:43 PM


Let's face it...we are sitting on someting of a ticking time bomb aren't we?  Insufficient new housing supply is a general housing problem and the squeeze on benefits is affecting the affordability levels of those on low, static incomes and in particular the social / benefits-based sector of the rental market.


Those operating in this sector will no doubt already be aware of this impact and are probably taking measures to protect themselves.  Those considering entering it now may wish to take a step back for a while and rethink plunging in too deep, too fast or to consider other niche sectors, such as multi-lets as alternative entry point but that is definitely not for the faint hearted either.


Proceed with caution I guess is the message in this sector, for now at least.

Rescooped by realpropertymanagement from The Property Voice!

Boom in number of cannabis farms in buy-to-let properties

Boom in number of cannabis farms in buy-to-let properties | realpropertymanagement |

A growing trend of cannabis farms cropping up in rented accommodation has been reported by e.surv chartered surveyors, the national surveying firm.

Via Richard W J Brown
Imre Janoshazi's curator insight, January 11, 2014 8:52 AM

are you THAT type of tenant? :)

Richard W J Brown's comment, April 1, 2014 12:04 PM
Imre - thx for the resccops & shares :)
Imre Janoshazi's comment, April 2, 2014 12:44 PM
you are welcome :)
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State pension age rises: how to retire at 55, not 70

State pension age rises: how to retire at 55, not 70 | realpropertymanagement |
The Government has decreed younger generations will work longer before claiming a pension. Luke O'Mahony, 26, will have to work until he is 70 - unless he follows our plan.

Via Richard W J Brown
Richard W J Brown's curator insight, December 9, 2013 11:22 AM


There is uproar amongst many about the prospect of working until we are 70 in order to claim the state pension.  I understand this and of course the obvious question of what jobs will be available for the sixty-somethings to do also needs to be answered sometime in the next 30 years of so too!


That however is not my point here today.  My point today is all about taking personal responsibility for our financial destiny wherever possible.  That includes retirement provision also and that is where my link to residential property investing comes in.  Of course another obvious issue with pensions is: can we or rather would we be able to live off the state pension in any case?  It will a whopping £144 a week per person when the flat rate pension kicks in during 2016...assuming you have worked and paid full NI for 35 years that is!  I like the comment in today's article about seeing this more as a bonus rather than a dependable part of our retirement financial planning as a lot can happen in terms of Government finances and priorities over several decades.


So the plan suggested in the feature starts as always with an early commitment to saving and  on the basis that starting a business is not for everyone in very broad terms that would leave ISAs, pensions and finally buy-to-let as the top 3 areas of retirement investment suggested.  I agree that it probably is this mix of savings methods but for me the emphasis would be different and might look something like as follows.


Commit to live off 90% of your income regardless and take the 10% difference off the top straight away before spending on anything else, even if this means a smaller place to live or no Sky TV or missing one weekend in two down the pub.


Of the 10% saved, take advantage of the maximum 'matched contribution' from your employer into a pension as this has two forms of the very important leverage principle i.e. using someone else to pay for your investment - namely the employer through their contribution and also the tax man through his tax contribution.  This should leave somewhere between 5% and 7% to be invested separately and if your employer has a more generous matching pension scheme (I once had one where my employer paid in 10% of my salary to match my contributions up to this level) then I would take the maximum and on top of this save an additional will be so worth it later!


So, with the remaining 5% (or more) that we are left with we can shove it into a stocks and shares ISA probably a tracker fund of some description but hey I am not an IFA and so the choice is yours!  We should aim to achieve a return of around 6% a year, which is more or less the long run stock market average.  If we also happen to receive dividends then reinvest these too for some added compound growth.


After 10 years, we can apply the principle of leverage to increase the value of our starting investment but this time with a repayment mortgage and so we will hopefully have enough for a deposit on a decent starter home costing £150k with a 10% deposit if not in central London or a buy to let costing around £89k outside of London.  I would buy one or the other now (remaining in rental accommodation if I can't afford to buy in a higher priced area).


Repeat this exercise every 10 years but buying a new buy-to-let property with the deposits saved.


If we start this plan when we are 25 and earn the average salary for the UK of £26,000 with 5% matched pension contributions and 5% invested into an ISA then into BTL then by age 55 we would have the following assets, for now ignoring house price growth:


A pension fund of around £245,000

Your own home worth £150k and 2 buy to let properties worth £180k (if not in central London) or 3 buy to let properties worth £270k if you live in central London


In income terms this could be worth something like this:


A private pension of c£7,350 a year

Buy to let income of c£10,800 a year and no mortgage to pay on your own home with the 2 BTL route or £16,200 buy to let income a year but with rent to pay with the 3 BTL alternative

That's around £18,000 to £23,500 in income or 69% to 90% of the average salary we started with (ignoring inflation)

This also ignores our state pension of £7,500 a year!


That is a retirement plan for stopping work aged 55 if we wanted to.  Yes we need to factor inflation into all of this but that should work favourably on the house values and rental income also, which I have ignored for now. I appreciate that saving is a discipline and is hard particularly when on lower incomes but it can be done with a bit of commitment and delayed gratification.


The above plan is actually quite conservative, aside from the sacrifice of saving today for a better lifestyle tomorrow but we can also consider the following ways to boost these numbers even further:


Starting sooner will get us there faster

Ending later will increase the retirement returns

A couple following this plan could double the rate of progress

Saving more than shown either due to a higher % saved or earning more and saving the same % will increase the returns

Better returns will get us there faster also or leave us with more when we get there

If surplus cash is generated through our BTL then we can save that into the fund also - it will accelerate the results

If we use interest only mortgages for the BTLs then we should be able to generate more cash along the way to reinvest resulting in more properties being owned

If house prices increase to sufficient level to release equity for further investment then we can consider this to grow the BTL portfolio with a mortgage to increase the retirement fund also


You will notice that the biggest single aspect of this plan that will enable us to achieve the results set out and also to beat the potentially destructive effects of inflation is...LEVERAGE.  In this plan the Government, your employer and even the banks all help to make the overall size of our investment higher than they would otherwise have been.  Even though a pension has many tax advantages there are limits and due to being able to leverage or multiply our own invested funds to a greater extent with BTL, it is this that will give us the better results in the end all things being equal. 


Now all I want is one of those DeLorean Back to the Future cars to go back to when I was 25 years old, to give myself a big kick up the backside and tell myself to start doing this then instead of about 15 years later!!

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The most overlooked factor of property investing: Supply

The most overlooked factor of property investing: Supply | realpropertymanagement |
Supply is the factor most over-looked by property investors.

Via Richard W J Brown
Richard W J Brown's curator insight, December 12, 2013 7:58 AM


I have to admit that when I first saw this headline I thought, 'good that's not me', as I do look at aspects on the supply side of the equation when evaluating a new investment.  But after mulling it over for a little while, I realised that there are some gaps in my analysis...


I do tend to look at some data on the supply side as it relates to both sales and lettings.  I tend to use Rightmove for this and once selecting my chosen area I switch between include already sold / let properties to excluding them to get a sense of the ratio of available property to the total including those available and also those in the process of completing - this gives me a snapshot of the current market buoyancy levels in respect of both lettings and sales and is very useful.  High ratios of available to the total including completed properties suggest a supply glut whilst the opposite would also be true with low ratios.


What I don't tend to look at is data relating to new home building and planning consents, in fact I am not even sure I know where to find this info at a localised level (I do look at generic national data to get a feel for overall supply levels periodically).  So, I guess one take away for me from this article is to research where I can find this data – any tips?


In terms of vacancy rates - I believe my Rightmove search mentioned above would probably do the trick as would a general search of the market to see what else is currently available that competes with my own property.  However, again I don’t know where to find local rental vacancy rates aside from doing a trawl around the letting agents – again any tips?


In general terms, it is vital to look at the demand side when considering an investment but equally it is important to consider the supply side also, so that a more balanced perspective is achieved.

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Rent arrears are the UK's fastest growing debt problem

Rent arrears are the UK's fastest growing debt problem | realpropertymanagement |
National debt advice charity the Money Advice Trust says that its latest figures indicate the UK is in danger of falling into a rent debt crisis.

Via Richard W J Brown
Richard W J Brown's curator insight, December 16, 2013 5:00 AM

This has to be a worrying trend for both tenants and landlords - increasing rent arrears or rent debt.


There is much political debate about the so-called 'cost of living crisis' as we have all no doubt seen and the fact of the matter is that over the past 5 years or so we have seen household bills increase at a much larger rate than incomes.  This inevitably means that many householders, including tenants, are feeling the pinch and many are falling into arrears as this article highlights.


Rent arrears is a business risk for the buy-to-let landlord and as with any business risk we need to both be aware of it but also take steps to mitigate it.  Mitigation could be in the form of property and tenant profiling (e.g. targeting professional tenants vs. low income workers), taking out rent guarantee policies, reducing our own debt levels, adequate referencing to weed out those with an arrears history and having a cash buffer to absorb the shocks of a few missed payments.  In addition, having a diversified portfolio of several properties, potentially in different locations and / or with different tenants profiles and / or with decent cash positive returns can be  effective alternative strategies to 'de-risk' ourselves.


At some stage I would expect wages to start growing again and so hopefully it is the lag effect that we are seeing as the economy turns around and begins its full recovery.  It will still take time of course and so in the meantime we need to plan to cross some choppy waters before we can sail away into the sunset - it is a part of the cycle of being a long-term property investor though unfortunately to handle times of rental arrears.  We just need to be aware and be prepared as best we can.

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When is the right time to sell your investment property?

When is the right time to sell your investment property? | realpropertymanagement |
IT IS often said by real estate advisers and among property investors that you should never sell an investment property, rather, you should just keep adding to your property portfolio.

Via Richard W J Brown
Richard W J Brown's curator insight, December 17, 2013 9:20 AM

To sell or not to sell…that is the question?  This in an interesting point - when to sell an investment property.


If we break down our property investment business, we typically have three key phases:






So, the most obvious time to consider selling a single property or even the entire portfolio would naturally be the exit phase under normal circumstances.


Why would someone seek an exit to their investment business anyway?  Well, approaching retirement or inheritance planning are the most likely triggers to consider such an approach.  In retirement, we may wish to wind down a little and so managing and maintaining properties may not be our top priority or may not even be within our wherewithal anyway (e.g. health issues).  Similarly, we may believe that leaving our vast property empire (we wish) to our kids is exactly what they are looking for but it may not be their bag so to speak.  So some kind of sale at this stage of life does make sense.  Personally, my aim is to have a portfolio that is sufficiently lowly leveraged that it can be refinanced very easily and combined with an outsourced management approach would be minimal hassle for my wife or kids to handle.  This should also enable them to have a decent income and a capital base after I have departed this world.  


I had this conversation with my accountant recently and he has around 40-50 properties himself but does not plan on leaving this many in his estate and I am working on a similar basis also...the reason being another consideration of when to consider, which I will come on to.


Returning to my three phases, the first one is obviously the growth phase - here we are looking to grow our portfolio and the income and equity base.  So, if growth is our objective then why should we consider selling any property at all here?  In the article it suggested upgrading the family home as one possible reason for selling an investment property.  Personally, I would tend not to consider doing this during my growth phase at least as this is counter-productive to the aim at this time.  However, we could consider releasing some equity from our portfolio instead to achieve the same end result.  Providing we don't remortgage over and beyond the original purchase price then there are no tax implications in refinancing to release equity and in fact the refinancing of our investment property is tax deductible also, so sensible refinancing to fund our own home improvements can be more tax effective than selling an asset to leave equity locked away into a non-earning asset (i.e. our home).


Another reason mentioned that could also arise during the growth phase (and also the consolidation or exit phases for that matter) is with an underperforming asset.  Whilst, I agree that we should set ourselves targets for individual properties and the portfolio as a whole we should be careful not to be too hasty when it comes to ditching assets.  The article suggests looking at recent capital growth as a trigger but I would be less worried about this, as over a long time period most properties should achieve some capital growth.  I would and do look at the income and cashflow of the properties in my portfolio but again I believe we need to take a longer term view and so one bad year does not necessarily mean we should sell up and move on.  I have spoken previously of how I sold my very first investment property in the 90s when I had some large repair bills and tenant issues but if I still had that property today I would be smiling I can tell you. I also have an overseas investment property that is not exactly setting the world on fire but would I be able to access the funding in a different country again if I needed to?  For now having that funding in place on reasonable terms is enabling me to pay down the debt on the asset that will appreciate over time and as I take more of a portfolio view I know and understand that within that there will be some 'stars' and some 'dogs' too.  So, I am happy to hold onto this for now at least.  There are also costs involved in both buying and selling that we need to factor in.


As an aside, I had a bit of a brainwave the other day and this article reminded me of it.  This article is directed at the Australian market really and so there is one aspect within in that applies to Australia but not the UK - the offset of tax bit to be precise, so if you are in the UK you should ignore that bit.  However, what I believe is possible in the UK is a neat tax saving strategy by offsetting capital gains tax by investing it into a pension and getting income tax relief instead. This is an appropriate time to state clearly that I am not an IFA and so do not treat this or any of my suggestions as advice and instead speak to your IFA and accountant before considering this.  Anyway, the digression is to highlight another possible reason for looking to sell an investment property – tax planning.


During the consolidation phase is clearly in between growth and exit and so we may still take on the odd new investment, we may start to ready ourselves for the exit phase by looking at certain properties that would be better off sold and we may also decide that selling some properties suits other goals that we may have such as lifestyle.  If we are fortunate enough to be prolific investors then there comes a stage when we will have enough properties for our long term goals (e.g. retirement and inheritance planning) and so we may decide to realise some of the inbuilt equity to enjoy the fruits of our labour as it were.  One such approach would be to look to sell an investment property regularly utilising the annual CGT limits to keep the tax bill under control and use the proceeds to fund lifestyle choices such as travel or an updated car say, or to help with some of life's larger expenses, such as helping our kids with their education, weddings or first homes. However, it would be a disaster if we ended up selling off all the family silver and be left with nothing to get us through our golden years wouldn’t it?


So, in conclusion the decision of whether to sell investment property does need some careful thought and planning.  It needs to be reflective of the stage of investing we are in and should also align to our wider medium to long term investment goals and not just our short term whims and wishes.  Whilst asset performance and lifestyle factors can have an influence also, we should not rush into selling for these reasons unless we are certain that we can offset the downsides, such as by efficient tax planning and leaving our own and our loved ones interests in a healthy place.


To sell or not to sell...maybe…it depends!

Rescooped by realpropertymanagement from The Property Voice!

3 Finance Rules for Property Investors

3 Finance Rules for Property Investors | realpropertymanagement |
Property investing is as much about finding great properties as it is about ensuring that the financial aspects, such as cash flow, are achievable.

Via Richard W J Brown
Richard W J Brown's curator insight, December 19, 2013 5:03 AM


There is a principle often used in wealth creation teaching - using Other People's Money (OPM) to maximise our returns.


This very short article reminded me about this principle and is the subject of my musings for today.  How property investing enables us to apply OPM to help to build our wealth.


This feature mentions 3 potential sources of OPM - other investors, banks (and other institutional lenders) and indirectly at least: tenants.  All 3 of these (and in the main the latter 2) are sources of OPM that enables us to maximise the returns on our investments.


Borrowing money from banks took off on a larger scale in the 90s as buy-to-let mortgages were introduced.  Prior to that commercial lenders still lent money on property assets for commercial entities but the advent of the buy-to-let mortgage made access to this funding far more mainstream and today this accounts for around 10% or so of all mortgage lending.  With some of our own money, typically 25% of the property value, we can ‘leverage’ our investment by borrowing the remaining 75%.  What this means is that instead of getting a return on our 25% investment, we actually get a return on the full 100% instead.  Even when we deduct our cost of financing (assuming we get a higher yield than our interest rate) then we are left with a surplus that essentially boosts the return on our original investment.  A similar principle applies to the capital growth, as to the rental return and is one of the main reasons why property investing has such appeal now.


The other main source of funding is of course the rents we receive from our tenants - another source of OPM. The rent allows us to pay the mortgage and other costs associated with the property and by allowing the passage of time to do its work, other principles such as inflation, leverage (mentioned above) and compound growth should work for us rather than against us.


There are of course some risks involved that we should be careful to avoid or at least mitigate these as follows:


Interest rates - as I alluded to already, we rely on the rental income to exceed our cost of financing (interest rate) in order to ensure that we end up with a profit.  In fact we also need this margin to be greater still to allow us to cover our other expenses such as letting fees, maintenance, voids, etc. I therefore adopt a measure in my property assessments criteria of return on debt and check this against my interest rate.  I also seek a minimum return between my gross yield and my mortgage interest rate that allows me to both cover my existing costs and also to allow for a rise in interest rates.


Over borrowing - using OPM can be a good principle to accelerate the returns on our investment but equally over-extending ourselves could spell financial ruin.  The last property crash is evidence of this where property prices fell in the region of 25% to 30% within a short time period.  Of course we only realise that loss if we sell but beware as some lenders have a clause in their terms stating a minimum loan-to-VALUE needs to be maintained at all times.  This could mean we are asked to pay down debt to keep within this limit and so if we do not have such funds available then we may be faced with a forced sale of our property at a loss.


Threat to rental income - this could mean buying in low demand areas, or too many empty periods or tenant arrears or even tenant damage as an indirect contributor to a shortfall in rental payments.  We rely on our properties being tenanted at a level sufficient to service our borrowings and so choosing the right property location and tenants is vital here.


The concept of OPM is not restricted to the property market - the stock market also has similar principles.  Obviously many companies borrow money so that parallel is clear but equally companies use OPM in the way of shareholders putting in capital into a business.  Governments also use Government bonds and gilts to raise money and of course they collect taxes from people that work and buy stuff.  It is one giant money-go-round where everyone is applying the principle of OPM to grow their financial buying power...and we can do the same too…

Rescooped by realpropertymanagement from The Property Voice!

Private Landlord 'Blacklisting' of Housing Benefit Tenants Highlights UK Human Rights Failures

Private Landlord 'Blacklisting' of Housing Benefit Tenants Highlights UK Human Rights Failures | realpropertymanagement |
So what can be done? There is no international human rights court that can force the UK to comply with its human rights obligations.

Via Richard W J Brown
Richard W J Brown's curator insight, January 7, 2014 9:15 PM

This story really is starting to gain some momentum isn't it - now a cry out for Human Rights protection is being called for...?


Having read a few more articles on the subject I now fully understand that the Wilsons: the Landlord couple in Kent that caused this storm with their no more benefit claimants stance, have of course issued eviction notices to all existing tenants that claim LHA benefit regardless of whether they are in arrears or not in addition to adopting a policy of not letting to benefit claimants for new lets.  It is this blanket approach of eviction of existing tenants, many of whom it would seem are not in arrears, that is possibly the most controversial aspect of their actions.  I get the 'economic argument' claim that has been presented by the Wilsons.  But equally I also understand that their rental model includes insuring their tenancies for loss of rent and that benefit claimants are no longer acceptable to the insurers (by the way many lenders also prefer to avoid benefit claimants as well as general landlord insurers) - so this is not a cut and dry issue is it?


The biggest outcry that I have seen is against those being evicted that have good payment records and I have a great deal of sympathy for these people - what have they done wrong?  Nothing it would seem aside from no longer being an acceptable insurance risk - but therein lies the rub...if they subsequently fall into arrears then there will be no insurance protection for the Wilsons to rely on and that goes against their particular model it would seem.  I would say though that some of the quotations apparently being attributed to the Wilsons don’t really seem to be helping their argument, with the ‘lack of sympathy’ point being made being especially cruel and unnecessary – stick to the economic argument and avoid making moral judgements would be my advice for what worth.


I have to point out here the National Landlord Association's statement of the subject, which makes a lot of sense in stating that each tenant should be treated on its merits (agree), that the problem is really one of a shortage of home building and high tenant demand (agree) but also that many landlords specialise in the social sector (true) - see here for their statement:


So will this lead to an avalanche of similar actions from other landlords?  Perhaps to some extent yes it will, especially where the landlord's model relies on rent guarantee insurance and/or the level of arrears highlighted by the Wilsons is experienced more widely.


But what of the human rights issue - I can see the debate here quite clearly but how can you claim a human right for housing for an individual at the expense of a private landlord's right to rent or vacant possession in its absence?  I tend to think that once again we have the 'law of unintended consequences' here – as apparently the Government informed Shelter that they expected the recent cap on LHA benefit to drive down rents, when in fact it seems to be leading to more of a threat to homelessness for some of the poorest in society - that was not the intention I would imagine.


But just as with any marketplace, where some fear to tread, others will surely roam and so I would expect that there will be a niche in the private rental sector for experienced social landlords to operate and provide for benefit claimants...but the numbers do need to stack up, as previously stated otherwise there will be many losers along the way and that will include tenants and landlords alike if we are not careful.


I expect this one to rumble along for a while yet as the implications unfold over the coming weeks and months and I wouldn't be surprised to see it crop up in PMQs either...

Rescooped by realpropertymanagement from The Property Voice!

Stress testing your buy to let portfolio

Stress testing your buy to let portfolio | realpropertymanagement |
Every landlord, whether they own a couple of properties or a couple of hundred, is running a business. Like any business, it’s a numbers game – and the numbers can often be unpredictable ...

Via Richard W J Brown
Richard W J Brown's curator insight, January 9, 2014 2:42 PM


To avoid too much stress in our property investing undertakings we need to undertake some stress testing of our portfolio.  The idea of stress testing is to assess the likely impact on our property performance given an adverse change to certain key cost levers.  The most common ones would be interest costs, void periods (empty property) and maintenance / repair bills with a standard buy-to-let.  This article looks specifically at interest costs but the concept can equally be applied to the other assumptions also.


In the current environment, we might expect to obtain a 75% loan to value (LTV) buy-to-let mortgage at a rate of around 4.5%.


So, we are a novice investor and have saved furiously or released some equity from our home to allow us to buy a £120,000 property with a £40,000 or 25% deposit – mortgaging the difference using an interest-only mortgage.  We have already mentioned that the interest rate will probably be around the 4.5% mark, so surely as long as we can rent it out and achieve an annual yield (rental income based on total property cost) of at least 4.5% then we should be in profit right? Err wrong actually…


Let’s take a closer look at the numbers, as in addition to our mortgage payments, we should also factor in some letting fees if using an agent, some allowance for a void period and some maintenance / repair costs too even with a new or newly refurbished property this can be the case.  So, perhaps our annual costs might look as follows typically:


Rental income £7,440 (assuming the average 6.2% gross yield on £120k)

Then deduct:

Mortgage interest £3,600 (£80k x 4.5%)

Letting fees £893 (7,440 x 10% plus VAT)

Voids £429 (assuming 3 weeks pa)

Repairs & maintenance allowance £2,000 (allowing for a boiler replacement and redecoration etc.)

Total deductions £6,922

Annual profit before tax £518


Wow – this should get loads of people rushing into the property business shouldn’t it???


Well for starters, many people would have simply ignored the void and repair / maintenance provision I allowed for above – that would save £2,429 a year and add in the possibility of self-managing (probably not recommended for new investors) to save an additional £893 then we would be left with a much healthier looking profit before tax of £3,840 per year.  Whilst a false assumption, a common one for new investors I have found!


Now the stress testing of interest rates.  We started with a 4.5% interest rate on our £80k loan you will recall and this resulted in an annual payment of £3,600.  Here is the same loan with increments up to the 7% recommended in this article:


4.5% £3,600 pa

5.5% £4,400 pa – total additional cost £800 pa

6.5% £5,200 pa – total additional cost £1,600 pa

7.0% £5,600 pa – total additional cost £2,000 pa


We can see clearly that this property would fall under water i.e. having higher costs than income even with a 0.5% hike in interest rates based on my cost and rental assumptions.  Even the more adventurous investor that self-manages and ignores voids, repairs, etc. would be close to going under water at the 7% suggested stress test interest rate (£3,600 profit before tax less £2,000 incremental costs).


I may have laboured my point a little in undertaking the calculations but hopefully it is clear that this property as it stands would struggle to pay for itself in reality based on the starting position at least.


But there is some good news amongst all this, so hang in there for a little while longer…


I have already stated that we may not need to set aside the level of repair and maintenance fund that I have shown above for each and every year (although trust me you will need some money for this each and every year!) – so, that’s a plus for subsequent years.  But the most helpful factor going in our favour here is actually inflation – specifically rental inflation.  If rent increases can keep pace with inflation only at around 2.5% per year – note that it probably won’t happen in a straight line most likely but on average this is a reasonable assumption – then this increased rent will start to top up our revenues to enable us to be able to cope with higher interest rates and other costs.  Consider the following pattern of rent increases at 2.5% pa on average over the following 5 years:


Starting rent £7,440 pa

After 1 year £7,626 pa

After 2 years £7,817 pa

After 3 years £8,012 pa

After 4 years £8,212 pa

After 5 years £8,418 pa


By the end of 5 years we would be receiving an additional £978 each year in rental income, which along with our original £518 profit gets pretty close to our increased interest rate cost at the stress tested 7% mark, save an extra £504 from the repairs and maintenance budget et voila!  I wish it were this simple in reality ;)


In conclusion, whilst illustrating the very sensible idea of stress testing our investment for cost increases - what this exercise has really shown most likely is that we probably won’t really be making any profit in real terms on our property for the first 3-5 years all things considered.  There are ways to change this – cost containment is one, fixing our interest rate is another, higher rental increases if possible is another, as is a higher yielding property assets such as an HMO (house of multiple occupation).  For me, I always seek investments with a minimum yield of 7% and / or that generate a return on debt at or above 3% more than my mortgage rate (return on debt is the total gross rent divided by the mortgage advance) – these are my own personal stress tests to cover potential cost increases in the early years.


After the first 5 years are over then we should be in a healthier place to cover our position such as allowing rental increases to be set aside to cover maintenance and repairs or to pay down the mortgage debt or potentially remortgage at a lower LTV. Until this point with the standard buy to let it might just be a little too stressful if we are not able to sit out the almost inevitable rise in interest rates that will occur in 2015/16 or possibly even sooner…don’t be stressed, just do the test :)