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Are You Really Saving Money by Being a Landlord?

Are You Really Saving Money by Being a Landlord? | The Property Voice | Scoop.it
People often manage their own properties to save money... but what if I were to tell you that you might simply be wasting your time?
Richard W J Brown's insight:


Oh the lure of a 'Passive Income' eh?  The idea of earning a living without doing anything beyond an initial amount of time/effort/investment - sounds appealing doesn't it?

 

After re-reading my commentary today, I realise that the length might not be digestible for all and so here is the synopsis:

 

[A passive income is independent of our time input; managing a rental property ourselves converts a passive income into an active one; once we get active we effectively chose to earn a lower hourly rate than if we are passive and eventually we will run out of time to maximize the value of our rental portfolio.  This decision actually becomes a lifestyle choice, where the opportunity cost could be time spent in leisure, travelling or with family for example. In order to get to the ‘ideal’ situation of being financially independent living off a passive income we need to make a commitment to saving for investment purposes now and develop a mind-set of a professional property investor rather than that of a professional property manager.]

 

Now back to my commentary if you are still in the mood…

 

First, a quick distinction is required; so here is my definition of passive income - Earnings that are not dependent on any significant amount of time input, with examples being:

 

Interest income

Share dividends

Rental income*

Royalties

License fees

Etc.

 

And here is my definition of active income - Earnings that are to at least to a reasonable extent dependent on our time, with examples being:

 

A job

Being self-employed (no employees)

Trading anything (i.e. buying and selling cars, antiques, eBay, shares, houses, etc.)

Rental income*

Consulting

Any work that is paid by the hour/day or other time-based input

 

The sharp-eyed will have noticed that rental income appears in both lists with an asterisk.  The reason being that as the featured article highlights, having a rental property could be defined as being either active or passive dependent on whether we manage the property ourselves or pass this over to an agent or property manager to undertake instead.  As a side note, this concept can apply equally to other tasks involved in a rental business such as sourcing, refurbishment & maintenance.

 

So, the most important rule that defines whether our income is passive or active is that of time-dependency.  Here, I am referring to the time required to maintain the income stream rather than setting it up in the first place.  The time required to set up the income stream is actually an ‘investment’ (and we could easily quantify it and cost it out to measure our returns).  However, time that is required in order to continue to receive the income is not an investment it is ‘labour’ and time-based labour is what makes this income active rather than passive.

 

With property management we have both a choice and cost associated with managing our property or properties.  When we have a single property or even two, it would probably be difficult to live off the rental income unless we were fortunate enough to have such a sizeable property and / or have it without a mortgage.  In this situation there would be a temptation to avoid paying for someone else to manage the property at c10%-15% plus VAT as a letting agent fee and instead keep this for ourselves.  After all, once we get closer to 3 or 4 properties these letting fees added on top of our net rental income could in fact start to add up to a level where perhaps we could earn a living from the property, couldn't they?

 

I think this is where a number of property investors need to make a conscious decision as to their reasons for investing in the first place.  But there are other factors that need to play a part in this decision and these include lifestyle and opportunity cost as two of the main ones.

 

Starting with opportunity cost - this is the idea that by doing something (or even by not doing something) there will be some sort of price to pay, be it an actual cost or a loss of something else. An opportunity cost in economic terms is by definition a financial measure but for me it could also be non-financial.  To illustrate, in economic terms, if you had £10k in a savings account earning interest of say 3% and you are presented with an opportunity to lend this money to your brother to help him fund his marriage say, he may agree to pay you back along with 5% interest. Applying the concept of opportunity cost would mean that rather than making 5% you would in effect be making 2% as you would need to deduct the 3% you already receive by leaving the money on deposit.  The opportunity cost here of lending to your brother is that of earning interest from the bank or building society.  Other factors play a part such as risk and how long your money is 'locked in' also.  A non-economic example of opportunity cost could be where you had a day job and started a business in your spare time but you also have a family that will see less of you.  The opportunity cost of starting the business would be less time with your family, at least to begin with is what you hope.

 

The other significant factor to consider is lifestyle - this is a wide-ranging concept that covers leisure pursuits, travel interests and community projects for example, along with where and how you live, eat, hang out, etc.  But the simplest definition for me is how do you wish to spend your time and Mars sum this up well with their 'work, rest & play' slogan (you can decide where community projects sits here if that is your passion...).

 

Now, after all of my ramblings we start to get to a common denominator don't we?  Yes, it is time.  Passive income is time independent (largely at least), pursuing our lifestyle interests requires sufficient available time and the non-economic opportunity cost has a time cost aspect to it also.

 

Some investors are not really looking to be 'investors' as such - they are looking for an alternative way to earn a living and in a similar way to buying a franchise chose to buy a rental property and spend their time on managing it in return for retaining most of the available rental income.  This is in itself a lifestyle choice but also one that requires a conscious opportunity cost in where they can spend their time.  

 

Other investors realise that by getting people, money and assets to work for them that they can leverage these drivers to generate even higher levels of income in the longer term.  Nearly all of the Times Rich List are either entrepreneurs or have earning assets such as property working for them.  An entrepreneur leverages the time and knowledge of others to generate profits over and above the cost of paying for them.  We have already seen how a property investor can generate an income from their asset.

 

Perhaps what separates these two categories or passive or active investor is a commitment to carry on investing after a good start – many investors will be limited by time as a result of spending time managing their properties, whilst others will be hampered by the amount of capital they have and so plateau that way.

 

I think the point of the article and that of the big-thinking property investment gurus is that we have to view our time in a completely different way.  What is the true value of an hour of a property millionaire in net equity with a 50% leveraged portfolio?  Well, assuming a rather modest 6% yield it is around £75 per hour gross.  If you were paid £75 an hour would this change how you approached how you would handle finding a tenant, or chasing a late rent payment or dealing with a faulty boiler?  The mental trick is to realise that you are that £75 per hour property investor well before you actually are, so that you can take a decision to outsource some of the more systematic aspects of the business and instead focus on how you can get to owning enough property to attain that £1m net equity portfolio in the first place.  The answer probably lies in investing more into saving for future deposits as possible, so that you can have more properties generating a passive income sooner.  I realise that retaining the letting / management fees can play a part here but only if it is all reinvested and not relied upon to live on.

 

A passing note to those that might think this type of property portfolio as obscene. If you think of a pension fund requirement to replace an income in retirement, we would need a pension pot in the region of £1.67m to replace an average couple’s incomes into retirement at today’s annuity rates. In that sense, my £1m net equity property portfolio actually looks on the light side really doesn’t it? Oh and did we realize that the new pension fund limit of £1.25m means the tax benefits of investing in a pension beyond this limit are totally eliminated with the excess fund size being taxed at 55%!

 

In conclusion, in order to achieve that passive income we need to save hard, invest wisely and realise that our time has a significant value attached to it.  Whilst it is tempting to bag the management fees ourselves it can actually be better in the long run if we spend as much time as possible on the business rather than in it. A difficult concept to grasp and even more difficult to practice at times all the same.

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Bornstein Law & Bay Property Group's curator insight, November 18, 2013 4:14 PM

An interesting perspective on owning property, do you agree?

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Property Workshop Live

Property Workshop Live | The Property Voice | Scoop.it
In addition to the Valued Participant benefits and bonuses above, you will also receive live personalised coaching on your 360° Property Business Plan by Richard & Damien and then join them and the other VIPs for a private mastermind lunch for exclusive additional input and feedback. Plus, you'll also receive a personal check-in with one or both of us after the event to help guide you towards your next steps. Plus 3 month's subscription-free access to the Deal Tips Service and 'The Club'.
Richard W J Brown's insight:
Live property business planning workshops...London & Manchester.

Come and join the fun!

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'Buy-to-let is dead', say landlords, as they start buying shops instead

'Buy-to-let is dead', say landlords, as they start buying shops instead | The Property Voice | Scoop.it
The number of buy-to-let investors moving to commercial property has tripled in the past three years, experts say.
Richard W J Brown's insight:
A natural migration perhaps...but the commercial rental sector is quite different to the residential sector, so tread carefully.

Take shops for example, how many High Street shops remain under the same tenant for any significant period of time? There is quite a difference between WH Smith and the local independent sandwich shop for example.

A potential initial crossover is mixed use, especially retail and residential...shop with a flat above type of arrangement. This could be a halfway house and also avoids the second property stamp duty premium as well.

Definitely useful in terms of diversification or as a hedge against the residential sector BUT just do your full research before diving into the next empty industrial unit you happen to drive past...it might be empty for a very good reason...

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How Antarctic bases went from wooden huts to sci-fi chic

How Antarctic bases went from wooden huts to sci-fi chic | The Property Voice | Scoop.it
For decades Antarctica hosted only the simplest huts as human shelters - but architecture in the coldest, driest, windiest continent is getting snazzier.
Richard W J Brown's insight:
I know what you are thinking...what would my home on the polar ice cap look like? Well, here's your answer...just for fun ;) The Property Voice
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The Global Wealth Report 2016

The Global Wealth Report 2016 | The Property Voice | Scoop.it
The 2016 Global Wealth Report has been published by the Credit Suisse Research Institute.
Richard W J Brown's insight:
I'm pretty sure that Credit Suisse are smugly suggesting moving to Switzerland in here, what do you think?

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Buy-to-lose: Is there value left in the UK letting market?

Buy-to-lose: Is there value left in the UK letting market? | The Property Voice | Scoop.it
As we enter 2017, the tide has truly turned against Britain’s buy-to-let landlords.
Richard W J Brown's insight:
BTL is getting tougher now, there are some good tips in here of how to address this.
Better options may also exist with property trading, development, alternative rental models (eg HMO & short-term lets), creative finance strategies and even overseas BTL.

Do a long-term plan to assess how affected you might be resulting from these changes.

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Mapped: Which London neighbourhoods have seen the biggest house price rises since the crash?

Mapped: Which London neighbourhoods have seen the biggest house price rises since the crash? | The Property Voice | Scoop.it
Property prices in south and east London have boomed since the last downturn, growing faster than anywhere else in the capital.
Richard W J Brown's insight:
House prices on a map...got to be of interest hasn't it...but what can we learn from this?

Prime central London property prices are stretched, driving people out of the centre
There is a wave effect that ripples out from the centre
Areas that start from a low-base have greater potential (careful with this one outside the Capital)
There are some genuine reasons why certain areas become popular, transport links, a growing cafe-culture and local attractions among them
Probably many more besides...

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Revealed: the most sought-after suburbs across Britain

Revealed: the most sought-after suburbs across Britain | The Property Voice | Scoop.it
On Sundays, the Three Horseshoes pub in Madingley is elbow-to-elbow with locals enjoying a sophisticated roast dinner.
Richard W J Brown's insight:
Quick on the heels of my last post, this one looks at suburbs with rapid price growth rather than the cities themselves. It's like looking for markets within markets, which of course that's what we have...lots of little niches that collectively make up the entire UK housing market. What makes these hubs so attractive - take a look at the list and look for the common characteristics. The Property Voice
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Ten of the world's most incredible rooftops

Ten of the world's most incredible rooftops | The Property Voice | Scoop.it
A new book celebrates amazing urban spaces in the sky. Fiona Macdonald picks out ten projects that have helped transform cities across the globe.
Richard W J Brown's insight:
Why, hello!

City apartment living with more than a hint of green...feast your eyes on this little collection this Friday pm.

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Inheritance tax, and how the Dukes of Westminster avoid it on their £9bn fortune

Inheritance tax, and how the Dukes of Westminster avoid it on their £9bn fortune | The Property Voice | Scoop.it
Clever use of trust structures enable the Grosvenor family - whose head is the Duke of Westminster - to pass assets down the generations without attracting inheritance tax, accountants say.
Richard W J Brown's insight:
In case you wanted to know...or have a listen to this podcast episode for a more down-to-earth alternative: http://www.thepropertyvoice.net/property-financing-raising-saving-money-tax-efficient-business-structures-s3e15/

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Buy-to-let landlords struggling to pay mortgages hit a two-year high

Buy-to-let landlords struggling to pay mortgages hit a two-year high | The Property Voice | Scoop.it
Rising numbers of landlords are struggling to pay their mortgage, new figures show. For the first time on record, the number of buy-to-let homes in mortgage arrears has increased.
Richard W J Brown's insight:
This is a concern to be honest...landlords falling into arrears and being repossessed BEFORE the Clause 24 tax increase in not great news.

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House price predictions for 2017

House price predictions for 2017 | The Property Voice | Scoop.it
Experts give their predictions for the UK housing market in 2017 and look back at some of the key issues for property buyers and sellers over the last 12 months.
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Garden villages: Locations of first 14 announced

Garden villages: Locations of first 14 announced | The Property Voice | Scoop.it
The locations of England's first garden villages - and three new garden towns - are revealed.
Richard W J Brown's insight:
Think...what does this announcement tell us?

Answer...where the the housing shortage (outside central London) is most pronounced.

What we then do with this information is another story ;)

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UK housing market: what to expect in 2017

UK housing market: what to expect in 2017 | The Property Voice | Scoop.it
Round-up of the state of the property market in 2016 and the outlook for the year ahead
Richard W J Brown's insight:
A useful roundup.

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Why HMOs don’t value up at 10 x income

Why HMOs don’t value up at 10 x income | The Property Voice | Scoop.it
Richard W J Brown's insight:
Kevin is right (sorry about the pun!)...HMOs do not automatically value up at 10 x income. In fact, I would probably suggest that rarely happens at all!

The points made in article tell part of the story. Other factors will also affect the level of the valuation obtained with an HMO such as extent of conversion from a single home to more of a commercial building (eg ensuite bathrooms in all rooms), yields in the local area, HMO licensing and planning approval among others.

A full 10 x income valuation is far more likely for a large HMO that requires both planning approval and an HMO license and has been converted substantially away from being a normal residential dwelling. Anything less than this will most likely reduce in sliding down the income multiple scale.

Personally, I do my rough calculations at 8 x income (less in certain locations). So, even if you do follow Kevin's advice and instruct your own lender panel valuation, make sure the end-product is likely to tick as many 'commercial valuation' boxes as possible as well.

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The radical model fighting the housing crisis: property prices based on income

The radical model fighting the housing crisis: property prices based on income | The Property Voice | Scoop.it
Community land trusts battle gentrification by linking house prices to local wages rather than the market rate. But can this growing movement for ‘permanently affordable’ homes really ease Britain’s housing crisis?
Richard W J Brown's insight:
An interesting idea for sure.

My questions are these, however:

1. What incentive is there for people to ever leave one of these 'permanently affordable homes? They will be priced out of other areas, so will either want to or be forced to stay. That leaves little room for new people to come in after they have been occupied.
2. How will demand be met when each site has so small numbers of homes? The reality is that there is a risk in building a home or homes and private developers do need to make a profit too, so the incentive to do this on a large scale is probably limited...unless we are talking about council housing again that is.

I do see the merit in small niches, such as expensive Cornish towns, or in selective city-centre boroughs.

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Sharp rise in first-time buyers taking mortgages lasting at least 30 years

Sharp rise in first-time buyers taking mortgages lasting at least 30 years | The Property Voice | Scoop.it
Halifax figures may herald death of 25-year mortgage, revealing that 28% of first-timers chose 30- or 35-year mortgage terms in 2016, up from 11% in 2006
Richard W J Brown's insight:
Whether it is right or wrong, financial institutions will come up with more products that make buying a home more affordable.

Help to Buy (Gov supported deposit scheme), coupled with historically low interest rates and a longer mortgage term all aim to help FTBs afford to borrow and buy a more expensive home.

However, will the chicken come home to roost, should interest rates and / or house prices stagnate or fall?

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What are the top 13 house selling superstitions?

What are the top 13 house selling superstitions? | The Property Voice | Scoop.it
Bury a statue of St Joseph in the garden
Richard W J Brown's insight:
Psst! Want to maximise the sale value on your next flip project? You do...then try this or one of the other superstitions listed here:

Bury a statue of St Joseph in the garden!

Adding to standard flip checklist ;)

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Janet Howcroft's curator insight, January 12, 10:57 PM

Bury a statue of St Joseph in the garden

 - Today
Janet Howcroft's curator insight, January 18, 8:33 AM

Bury a statue of St Joseph in the garden

 - January 12
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Total of 31 illegal immigrants removed from UK as a result of Right to Rent

Total of 31 illegal immigrants removed from UK as a result of Right to Rent | The Property Voice | Scoop.it
Little information available on remaining 600-plus tenants identified as illegal
Richard W J Brown's insight:
31 illegals removed
75 landlords fined
thousands of right-to-rent checks undertaken at a cost to landlords and agents

Love the comment about the cost of data collection being too high, so they won't bother anymore...what about the cost of us as border agent substitutes?

What a butchers muddle this is!

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BTL market sees the largest fall in products in 8 years

BTL market sees the largest fall in products in 8 years | The Property Voice | Scoop.it
Richard W J Brown's insight:
1,400 is still plenty to choose from, in terms of BTL mortgage products BUT it is indicative of a tougher lending landscape that's for sure.

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Ten hotspots with the biggest 10-year price growth outside Londonh

Ten hotspots with the biggest 10-year price growth outside Londonh | The Property Voice | Scoop.it
From ancient university cities, to seaside towns and riverside enclaves – the commuter hotspots to record the biggest house price growth in the last decade are revealed today. The league table of locations beyond London – many within an hour’s commute of the capital – is led by Cambridge, where average asking prices have soared by 75 per cent to an average of £463,093, although its grandest houses change hands for millions.
Richard W J Brown's insight:
Still a few gems in here but also some insights in how to spot these locations going forward. The biggest one is fast train links to London and of course other elements of what integer to as the STAR criteria. These Schools, Transport, Amenities & Revenue i.e. Jobs and onward investment. A bit of charm and character wouldn't go amiss either. Where will the next big risers be then? The Property Voice
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Mother 'posed as London property owner to share £1.2m fraud profits with model daughter in Dubai'

Mother 'posed as London property owner to share £1.2m fraud profits with model daughter in Dubai' | The Property Voice | Scoop.it
A mother from Blackpool posed as the owner of a £3 million London property to help pull off an "audacious" fraud so she could share the cash with her model daughter in Dubai, a court heard.
Richard W J Brown's insight:
Wow...how simple was this sting to execute?! The solicitor clearly didn't bother to check the photo against the individual either!

What can we learn from this? Well, if we don't live at a property we own, then have several alternate contact details (address and email) listed at Land Registry for a start. This will at least alert you to a title transfer. Better still is to have regular check ups on the property as well.

Take care out there people.

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Analysis: will there really be a property crash in 2017? These six charts may give the answer

Analysis: will there really be a property crash in 2017? These six charts may give the answer | The Property Voice | Scoop.it
Britain is among a handful of wealthy countries where house prices are "dangerously high" and liable to crash, according to analysis from the Organisation for Economic Cooperation and Development.
Richard W J Brown's insight:
Tough for London property, but OK for the rest of the UK in conclusion. Modest overall growth rather than a dramatic crash BUT London may see a tricky year.

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Airbnb is about to lose £325m in London bookings

Airbnb is about to lose £325m in London bookings | The Property Voice | Scoop.it
Airbnb is set to miss out on more than £325m in London bookings this year as it begins to enforce UK rules limiting rentals to 90 nights per year. Almost half of Airbnb nights booked in London would be threatened by the 90-day cap, according to data from accommodation search engine AllTheRooms. Its analysis says some bookings would simply move to different properties on the platform but many would look elsewhere. It is estimated that the end result will be a drop in London bookings of one third.
Richard W J Brown's insight:
Anyone with an interest in short-term rentals in London should read this. It represents a threat or an opportunity depending on whether you can overcome one essential barrier to entry...planning permission.

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Is this the world's most glamorous halls of residence?

Is this the world's most glamorous halls of residence? | The Property Voice | Scoop.it
Residents in the 550-room 11-storey tower (Melissa Panero, 21, pictured in her bedroom) in Willesden, share a 'twodio' - a 100sq ft private room and bathroom with a kitchen split between two people.
Richard W J Brown's insight:
Mega-HMO! It will never catch on...really? For the right market in the right location, I think it has and will continue to do so.

A model to watch for sure...add in some co-working space and boom!

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Fears of a 'massive' global property price fall amid 'dangerous' conditions and market slow-down

Fears of a 'massive' global property price fall amid 'dangerous' conditions and market slow-down | The Property Voice | Scoop.it
Property prices have climbed to dangerous levels in several advanced economies, raising the risk of massive price falls if markets overheat, according to the Organisation for Economic Co-operation and Development (OECD).
Richard W J Brown's insight:
Interesting, if a little scary piece to start off the year!

If you are a believer in the 18-Year Property Cycle, then we are certainly due to experience a 'mid-cycle slowdown' in the next year or so, but not a full-blown crash.

The real panic would arise once we start seeing all those new record tall buildings and very easy access to credit...which is far from the current reality.

Slower price growth, especially in London, but not a crash would be my expectation. Note that slower growth is still growth!

Oh...if you have strategies that take speculative short-term house price rises out of the equation, then no need for panic. Focus on higher cashflow / net yield and / or adding value to help smooth out the bumps in the housing market. Hold assets for the long-term to take short-term market fluctuations out of the equation. Finally, if you have a decent-sized portfolio, then some additional regional / international hedging can also help ride out some of the inevitable region / nation-specific bumps and bruises.

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