Sunday 24 March 2019

It's a great investment, right?

All too often are those words spoken... "it's a great investment, right?"

"Well, buying a new build is hardly going to give you the best rental return, let alone capital appreciation..."

"But it will go up eventually right?"

That is true... property, most of the time, appreciates if you give it long enough. Time to revisit a nifty article I wrote a while back (High Yield HMOs vs Low Yield New Build) to dig up a graph that I made to demonstrate this exact point. The point being that you pay for the "shiny factor" in the new build, or newly refurbished home. 

Now there could of course be a multitude of reasons to buy a new build or newly developed property. Time is the primary one of course. Those with busy jobs cannot afford to invest the time into sourcing new bathrooms, flooring, paint, dealing with tradesmen and so forth, that much is true. Money is another. In the case of first time buyers using the help-to-buy scheme they can only take advantage of the scheme when the property is eligible (it must be new build and the developer must be registered with the scheme). So we've identified a few caveats where it is not perhaps not feasible to buy an older style property (leaving aside personal preference as Victoriana is not everyone's cup of tea of course).

So how do we calculate how good an investment is? Normally there would be metrics we can use such as Gross Yield (annual rent divided by purchase price) or Return on Capital Employed (more applicable when you’ve added value and refinance to represent how much return is made on the money left in the deal. In our hypothetical scenario we are adding time and effort into the mix though. How do we calculate that? Well if you are a homeowner it goes without saying that you will, at some point, have to put in some time and effort to carry out (or have carried out) repair works to the property you live in. Something, at some point, will break and you will need to call a plumber, tiler, electrician or some other trade professional. So aside from routine maintenance what about improvements works? Installing a new bathroom is considerably more time-intensive because of choices that need to be made - design, colour, you name it.

Back to our analogy. New build - 0 time/effort choosing bathrooms and kitchens, it’s already A* quality. Older style property doer-upper - considerable hours pouring over bathroom designs and the like. The temptation is also rather high to overspend with this sort of thing because you want to make it “just right.” So how much do you value your time? To see the real trade-off between the two you can’t just compare purchase price against what it would be worth in 5/10/25 years, but how much time and effort you spend updating/refurbishing/maintaining it. Same goes for the exterior. Although by and large a new build developer will appoint some kind of managing agent this is of course an expense that you, as the leaseholder, will need to bear. The time spent maintaining the outside is outsourced, so you are paying for someone else’s time. I would argue that if you are going to buy a property and hold it you are planning to hold for the longer term, 15-25 years. in that space of time you would expect to have to carry out some form of work, be it bathroom/kitchen or maybe even a roof repair. I would therefore wager that less time is spent upgrading and repairing a new builds style property; this is however reflected in the returns over time (see graph).

So which is the “best?” Well that still very much depends on how hands-on you want to be. New build is certainly less involved from a repair and upgrading perspective, but if youdon’t mind the odd repair or upgrade then you can’t beat an older style property, they have always done better over time in terms of saleability (less identical supply on the market at any given time) and have lower fixed outgoings on the whole in the form of service charges, ground rents and the like. So from a purely investment point of view I would have to lean towards an older style property from an appreciation point of view. Is an older style property suitable for everyone? No, one size doesn’t fit all - which is right for you? Bear in mind however that there are better vehicles out there than new build properties - the yield is likely to be in the region of 3-4%; better returns can be made by working together with a property investor to leverage their skill and expertise and employ the money into a bigger, more profitable scheme rather than become a landlord yourself. I for one am working with a few bigger developers in order to accelerate my returns. If you’d like to hear more then by all means drop me a line and start the conversation. 

Sunday 10 March 2019

Live in Clapham? About to Retire and Privately Rent? You Could be £13,400 a Year Worse Off!

You read the personal finance pages of the newspapers and it all seems to be the impending pensions crisis ... where people aren’t saving enough for their retirement. But it’s not the lack of Clapham peoples’ future pension incomes that are my immediate concern. The fact is that so many of the future retirees in Clapham over the coming decade, who never bought their home in the Millennial years of the 1990’s and 2000’s, will have to make some tough decisions regarding what house they live in when they retire anytime between now and 2038.

In Clapham (or SW4 to be exact), there are 193 privately rented households, where the head of the household is between 50 years and 64 years of age (meaning they will be retiring anytime between now and 2038). They are working now and easily paying the rent, yet what happens when they retire?

A Clapham retired couple, who currently privately rent and who have paid their fully qualifying NI stamp over the last few decades are likely to retire with the couples State Pension of £1,091 per month plus a tiny bit of private pension if they are lucky. Given that the average rent in Clapham is £2,029 a month - a lot of that pension will be lost in rent. This means taxpayers will have no alternative but to step in and top up the rent payments with Housing Benefit, yet...

The maximum housing benefit for a couple in Clapham is currently £910.87 per month … leaving a significant gap when you consider the average rent in Clapham is £2,029 per month

It is most people’s opinion that retirees are either council tenants or own their home outright. Looking at these figures though, it looks like both these ‘mature’ private renters could be having to make some decisions on their lifestyle and where they live, possibly looking at downsizing the home they rent to make things more affordable in their old age. Also, the government will be in for a horrible surprise as more of Clapham people retire and continue to rent from a private landlord. Numerous Clapham private renters, with little or no savings, will have to rely on Housing Benefit, which will put greater pressure on the public purse.

The average Clapham retiree will need to find £13,418 pa to stay in their privately rented home after retirement

A recent report from Scottish Widows suggested that 1 in 8 OAP’s will be privately renting by 2032, up from the current one in 15.47 OAP’s whom currently private rent (or 6.47%). In fact, in that report they said the equivalent of more than one-third of the whole annual NHS budget would be spent on Housing Benefit for OAP’s in retirement living in private rented property.

What does this mean for mature Clapham homeowners? I see many using equity release schemes to stay in their homes to pay for a better retirement and others more open to downsizing, selling their large home to a family that needs it and moving into a smaller apartment or bungalow ... yet lets be frank - they aren’t building bungalows in large numbers in Clapham anymore.

And for the Clapham landlords? Well with the younger Millennials showing no appetite in jumping onto the homeownership bandwagon anytime soon, it can only result in the demands on the buy to let market from Clapham tenants rising substantially. Of course, many Millennials will inherit money from their home owning parents in the coming few decades, yet a lot won’t as it will be spent on nursing home care and any leftovers (if any) split between siblings.

For those retiring in post 2050/2060, there is better news as official reports suggest those retirees will enjoy a State Pension approximately similar to today’s pensioners with auto-enrolment into top-up private pensions through their employer.

The solution to all this is to build more homes, of course. Last year we created/built just over 217,000 households in the UK, up from a post Millennial average of just under 150,000 households a year. We need to get back to the building booms of the late 1960’s and early 1970’s when on average 300,000 households were built ... but back to reality ... that won’t happen so it looks like we are turning into a nation of renters, which is of course good news for Clapham’s buy to let landlords!

Do let me know if you are looking to invest and you could use a hand. if you are a ready and able investor sign up to my list that will bring packaged deals to your inbox! If you are looking for no-obligation advice then drop me a line and let's start the conversation.

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