Why Property? Part VII; What if…
Although property is by far the most secure investment vehicle, offering the highest returns, many people still have their misgivings. Nothing in life can be guaranteed but I still genuinely believe that investing in property is best option open to an individual investor. It is good to have concerns and questions about an investment, and being careful leads to the development of a more successful investment strategy. With a more considered strategy for investing you are less likely to fall foul of those rocks on which many investments perish.
Concerns often raises by clients include:
- Is this the right time to invest?
- How can I be sure that I am buying the right type of property?
- I’m not comfortable being in a lot of debt.
- I don’t like the idea of chasing after money from tenants.
- I don’t have time to organise the day to day running of my properties and their maintenance.
Is this the right time to invest?
Although over the long term the value of residential property has increased dramatically, and will continue to increase dramatically, there will of course be times when house prices fall for a short period of time, as happened with the recent Credit Crunch. Locally house prices fluctuate for all kinds of reasons. However, as your investment will be over the long term any temporary dip in the market will not affect that long term value of your investment. In a dip in the market the only people who are hit by the fall are those individuals who have to sell at that particular moment. So unless you are in the property market for a quick turnaround, which I advise against in the strongest possible terms, then a short term fluctuation is not an issue at all — any time is the right time to invest. I will explore this further later in the guide.
How can I be sure that I am buying the right type of property?
Knowing the kind of property to buy is a much more important question. I will look at this point in much greater detail in later sections, but for now it is enough to say that this is the one point in your overall plan that you must devote the greatest amount of your time to. You would be well advised to seek the assistance and advice of experts in the location where you plan to invest, such as estate agents, financial advisers, or a property management company. There are bargains out there but in a lot of cases there will be a very good reason why the price of a particular property is lower than the market in that area would suggest, and it is the experts who will help you to sort the good investments from the bad investments. You will be entering into a relationship with the property that you invest in and if a property is underperforming now then it is likely to underperform over the long term. Help is available and it is essential that you avail of that help even if you intend to run your portfolio yourself.
I’m not comfortable being in a lot of debt.
Being in debt is of great concern to many potential investors. The amounts associated with many mortgages can be jaw dropping when viewed in the context of your annual salary, for example. It will certainly be your biggest financial commitment. It is important to distinguish between different kinds of debt, especially at a time when the debt of the nation and the debt of the individual is facing such close scrutiny. Financial experts and the media like to talk about bad debt and good debt. The money that you borrow to pay for your property investment falls into the good debt category. What is the difference between good debt and bad debt, and how on earth could any kind of debt ever be classified as good?
Bad debt: Imagine going on a spending spree with your credit card, you by a new plasma screen television, new furniture, a new washing machine, and so on. In the end you run up £5000 worth of debt on your card. You are responsible for that debt and the interest that it incurs. If you decide to sell the goods that you have just bought to pay off the credit card you will be disappointed — your television and so on are now second hand and they will be worth a lot less than what you paid for them — a situation that will only worsen with time. With all of your new goods sold you get £3000, leaving you with £2000 still to pay off on your card (plus interest). This is why the experts classify this kind of consumer debt as bad.
Good debt: If you borrow £100,000 to buy a rental property the situation is significantly different. In the first instance you do not need to worry about the interest that has to be paid back on the loan as this will be covered by the rent paid by the tenant living in the property. You will have to pay back the loan if you sell the house, but this is the only cut from the sale of the property that the bank, or other lender, is entitled to. So, if you decide to sell your house after ten years, based on historical trends the house should be roughly worth £200,000. After paying back the money that you owe to the bank you will be left with £100,000, less legal fees and other fees imposed by the lender. The main point here is that the debt has gone, and not only has it gone, but you have made a healthy profit into the bargain. This is why we call this kind of debt, good debt.
I don’t like the idea of chasing after money from tenants, and I don’t have time to organise the day to day running of my properties.
I will look at both of these points together as the solution to both is the same. In the majority of instances you will not have any problem getting rent from tenants. There is high demand for rented accommodation and most tenants appreciate that they are lucky when they find a house that they like in a desirable location — they will not want to rock the boat and risk eviction by not paying their rent. And if a tenant is problematic their reputation soon spreads and it becomes increasingly difficult for them to find a property to live in — experts with local knowledge are very helpful in this regard. However when things do go wrong it is nice to have a way of dealing with the problem from a distance. That is when having a letting agent becomes invaluable. The letting agent with be well versed in the rights and responsibilities of being a landlord and they will know exactly how to deal with problem tenants.
The letting agent will also deal with issues such as burst water pipes and faulty boilers — the kind of everyday, time consuming issues that many people with jobs simply wouldn’t have time to deal with. This workload will increase as the number of properties in your portfolio increases and it will reach a stage that you will be faced with the choice of managing the properties on a fulltime basis, or paying a competent letting agent to manage them on your behalf. Some investors like the idea of working fulltime for themselves, managing their properties, dealing with problems as they arise, but unless the income from those properties after mortgage repayments is really good, then this simply won’t be an option for many.
In conclusion: there are many valid reasons why someone should be slightly apprehensive about investing their money in property, but on balance most of these fears are apparent rather than real, and with the right approach and sound investment plan, the problems quickly melt away. I am not suggesting for one minute that over the lifetime of your investment you won’t encounter the odd bump in the road, but it will be the odd bump and very rarely do such bumps send you completely off course.