Feeling the squeeze!
The first half of the year is now over and, still we feel in limbo!
Brexit has now turned into a leadership competition which, although is a slight breath of fresh air relative to before, we remain no closer to certainty in the market.
Couple this with the fall of Countrywide and Purple Bricks, and you’d be forgiven for thinking that the whole property industry – let alone market – is about to implode!
The key fact right now is that investment property returns are not what they were.
I’ll ignore the tax issues for now, as that is a separate – and massive – topic, but, crucially, affects us all differently so isn’t a tangible way of analysing the current market.
Due to the unbeatable cost of borrowing (historically low interest rates), the ‘smart money’ is using its capital base to borrow as much as possible.
This increases the supply of money, which in turns increases demand – which leads to higher prices.
So, properties are more expensive to buy. Should you, therefore, sit out and wait until prices fall?
No! A phrase commonly used in stock market investment is “Time in the market, not timing the market”.
This applies to property investment in a more exaggerated way, due to the ability to utilise leverage (mortgages).
We are seeing estimated net returns of 8%, rather than 10% at the moment.
How do we calculate ‘estimated net return’?
[Gross rent in] – [total cost to buy] + [total estimated monthly costs] = estimated net return
£500 gross rent in
£27,000 purchase & renovation costs
£314 monthly costs (mortgage, repairs, insurance, management etc.)
Provides a return of:
£186pcm (£2,232pa) cash flow on a £27,000 cash investment
8.3% cash on cash return (estimated net return)
Can you bolster your returns by renovating?
Yes, but this is very competitive right now. You also need to factor in the time that your cash is tied up, i.e. the opportunity cost.
So, what should you do?
Carry on regardless – but adjust your expectations accordingly.
It’s incredibly frustrating to have very few properties to look at. It’s also frustrating that they’ve already gone (often over the asking price) before we’ve had a chance to view or make an offer.
All you can do is keep looking, act quickly, and make sure you have your ducks in a row. Have your finance, purchase vehicle, and solicitor all lined up ready to go.
What are we going to do in 2019?
We still believe now is the time to buy, buy, buy – but with realistic expectations.
We are ramping up efforts for our other deal flows. Direct-to-seller marketing campaigns (print & online), networking, auctions, title splits, portfolio sellers, and probate cases involve an incredible amount of time, effort, & expense, but they do yield results if sustained over the long term.
It’s very easy to ease off from these sources when there are plenty of deals around, but you need to keep on top of these relationships and endeavours regardless of the current market trends – otherwise, you have to start all over again!
Rather uniquely, there is another source of deals at the moment – high-earning landlords. Those landlords who are in the 40% tax bracket are being hammered by the new interest rate relief changes. Those landlords who still own the properties in the personal names are having to offload as their rental properties start to cost them a lot of money.
They don’t like to be messed around as they will either have a paying tenant or an empty property. Either way, it’s costing them money and they want a swift conclusion.
How can Homesure help?
Our investment company, Homeinvest, is dedicated to building boring property investment portfolios. For more information, visit www.homesureproperty.co.uk/investment.
At the time of writing, our service is still closed to new clients due to subscription levels. We have chosen to reduce the number of clients we take on to ensure that we deliver the best possible service to our clients, rather than a lesser service to many.
To reserve your spot on the waiting list, register here.