90% of property is a poor investment
My opening title, "90% of property is a poor investment" always comes as a bit of a shock to property investors but when you think about it, what I'm saying is blindingly obvious.
First the good news.
Anyone who ever bought property in the UK, and managed to hang on to it long enough to survive the bad times, has made a pretty penny - or two.
The U.K. has more millionaires now that at any other time. In fact the number of millionaires in this country has doubled in the last four years alone.
And the reason for this change is primarily due to increases in property prices. So clearly most property has done well, has it not?
So we think property is a good thing, don’t we?
If our offspring asked us whether they should continue to rent or buy a place of their own it is almost certain that we would recommend they buy a property, providing they can afford it.
If we would recommend such a thing to the people we love most, then clearly we believe property is a great investment.
OK - Now the bad news.
Although most property has gone up in value most of the time, much of the housing stock in the UK falls into one (or more) of the following categories:
- The property is old and high maintenance.
- The property has poor insulation, inefficient heating systems and costs a bomb to run.
- The property is not near to local facilities, shops or restaurants.
- Nor is it near to public transport routes.
- The property lacks most of the hi-tech features that we have come to expect over the last ten years.
- Built typically 50 years ago the property is no longer fit for purpose. Look at the bathrooms and kitchens. Now look at the general layout.
This doesn't mean it won't go up in value – it just means that property that does NOT fall into the above 6 categories is going to be a far better investment simply because more people would want to rent or buy it.
Is property a good investment?
I accept that some things that might be wrong with your property you can fix, others you can't.
Sometimes it's these very problems that offer you an opportunity to make money. Other times they will simply limit the potential of your investment in the years ahead. These days, people renting a property expect a lot more than they ever did 50 years ago. Your property investment will either exploit this opportunity - or be a victim of it.
That's why I believe ninety per cent of property in the UK is unsuitable for investment purposes. They are high maintenance, poorly located, and badly designed. These are purchase decisions of the heart, not the head. That's fine if you are going to live in the property but not if you are buying it to rent out and make money. These properties are bought by people who pay top dollar (see “the house you live in is a bad investment) and are loved and cherished by the people who live there – but that does not mean it is the best place for your money.
Will the 90 per cent of property that I sneer at go up in value?
Yes, they almost certainly will!
Will they go up in value more or less than property that satisfies the criteria I have just outlined?
Almost certainly less!
That's why as an investor you must limit your choice to that property that has the most potential to achieve the highest returns.
Often it will be more expensive – the question you have to ask yourself is whether it offers the best potential. If a property is cheap it may be a bargain - or there may be a reason it is cheap.
Not all property is equal and if you are buying property as an investment you need to exploit both the rental income and the capital gain to maximise your returns. The harsh reality is that people remember the rental income but not the expenses. they also remember how much they paid for the property and what they sold it for but not how much they spent on maintenance and other outgoings like service charges, council tax and repairs.
If you don't believe me just look at how many receipts ou have from B & Q and garden centres every year.
If property is a good investment with you living in it, imagine how much better it would be if you rented out to someone else? That's the acid test if are serious about property. It means that instead of buying a bigger property every time you get a bit more money because "it's a good investment" that money may be better spent in buying a second property which is then rented out to someone else.
What is the yield on my rental property?
When looking at property as an investment the figure that you should be interested in is called the yield.
If you are putting £100,000 into a property and you are getting £5,000 a year in rent then your gross yield is 5%. To work out what the gross yield on a property is you simply divide the annual income from the property by the value of the property. So in the example just given where the property is worth £100,000 and the rental income is £5,000 a year:
Divide £5,000 by £100,000 = 5%
Yield is useful because it means you can compare the returns on your investment property with the returns on other investments you may be considering. If you have money in a savings account and the interest is 5% then the return on your money can also be expressed as a 5% yield.
What is the difference between gross yield and net yield on my rental property?
"Gross yield" is the total amount of income you get from your rental property expressed as a percentage of the value of the property.
"Net yield" is the amount of income the property generates after paying all expenses.
What expenses would reduce your gross yield?
ALL expenses reduce your gross yield. Some of them are tax deductible and some aren't:
- Mortgage costs
- Agents fees
- Repairs and renewals
- Tax on your profits
If my property goes up in value what happens to the yield?
If you buy a property at £100,000 and the value doubles, if the rental income remains the same (at say £5,000 a year) then the yield halves to 2.5% even though the rental income has not fallen. Now you may feel that this is an unfair measure. After all, you only paid £100,000 for the property, not £200,000. That is true. But the fact remains you now own a £200,000 property that is only returning you £5,000 a year so your yield has indeed halved. To be fair this is an unlikely scenario. When property prices rise we would normally expect rental prices to rise as well.