How to be an overnight property success

Posted 23 January 2015

As in most new businesses, desire trumps need. Setting up a property portfolio from scratch can take years and, as in most businesses, the secret of success is, perhaps, not so secret after all, says finance expert Lawrence Watts.

What follows is a road map of how one client built a portfolio (although I have changed some details to protect the innocent!)

So, in the first instance, Billy (let’s call him that, mainly because that’s his name!) bought his first property in 1983 in cash (earned from street trading), in a Home Counties town. Within four years, property prices had increased by 63% (1983-87) and he sold it and bought a new main residence and two buy-to-lets. He then moved out of the main residence and rented a tiny flat for himself, his then partner and their daughter. He let the main property out as bedsits. A tough call, but it suited the market at that time.

You will recall that, between 1989 and 1993, property prices fell off a cliff and interest rates shot up, but by 1996, prices were recovering. Billy then re-mortgaged all three properties and bought two more.  In 1998, he married and his wife sold her house. With the proceeds, they bought three more properties.  His brother then joined the party and they bought a further three properties (all on a shared basis).  His wife managed the redecoration and maintenance of the properties.

Between 1998 and 2001, property prices rose by some 50% and he re-mortgaged the whole portfolio (well, in fact, I did) and bought another five properties and we repeated the operation in 2006 (by then, property prices were up by 70%, approximately). His property portfolio was 21 homes. The yield at that time was circa 7.5%, but interest rates were 6.5% on average.

Right now, interest rates are at an all-time low – profits are flattered and frankly exceptional.  Capital appreciation is back.

Some points you should know: -

  • Billy managed all the properties himself and saved, say, 10% per annum in agent charges. Up until very recently, he undertook all maintenance work himself.
  • He worked full-time as a healthcare worker – this is a “switched-on” guy with ambition and guts (and a vision).
  • He invested every penny of profits back into his properties.
  • After 1997 (when I got involved), he only rented to professionals.
  • Up until 2008, when interest rates fell, he made very little income from the portfolio. In other words, on a £5.25m portfolio, with £3m in mortgages, with rents of £189,000 and interest of £150,000 (at 5%), gross profit was £49,000 but, over the 22 years, capital appreciation is say £2m. The portfolio is now worth £6m.
  • For the record, one of the properties he bought in 2007 is still below the purchase price now.
  • In the first 25 years, he rarely could afford to go on holiday. Remember, unless you sell to release capital, the margin between income and mortgage interest costs is not necessarily that high.
  • He is also resilient and tough. He did use solicitors as and when tenants couldn’t (or wouldn’t) pay. He could and would face up to difficult tenants. He also maintained his properties to high standards. I guess he married well!
  • He also bought in the best streets, in the best part of town. It may reduce initial yield, but it maintains yield (better tenants) and, in the long run, produces higher capital appreciation. I also believe that, once the ‘London effect’ is over and investors look further afield, his part of suburbia will do very well. I mention this, because I think that is where growth will happen next.

The key point of this story is that Billy managed his outgoings by using his job to pay for day-to-day living costs and reinvested his rents to improve the fabric of his business (literally).  In fact, he invested and was willing to be patient before reaping the benefits of his investments.

My view on his portfolio is that it’s time to move on. IHT (inheritance tax) alone would be circa £1m and at age 63, there needs to be an end game. In other words, sell.

So, what can we take from Billy’s experience:

  • Investing in property is a business. Do your research as to where best yields can be obtained and best possible capital growth – look beyond your locality.
  • Consider it as a long game.
  • Prepare for much higher interest rates (oh, by the by, you could consider borrowing against your main residence, since rates will be lower – but do you have the nerve?  Also, make sure you tell your lender why).
  • Sit down and work out your return, after all income and costs. Repeat the exercise on a regular basis and manage both sides of the accounts.
  • Hone your skills – do a decorating/joinery/bookkeeping course. It will save you money, unless your marginal earnings and time are of higher value than the cost of a tradesperson.
  • Sell, if you see better opportunities elsewhere – why don’t landlords do more of that?
  • Look to build partnerships with friends and family – but do choose carefully.
  • Plan your exit.
  • Remember that having ten properties can actually be less risky than a couple – but reinvest profits to bring down mortgage borrowing as quickly as possible.
  • Don’t be put off by the naysayers.

There is lots of evidence that investors buy at the top and sell at the bottom, for various reasons.  Property is illiquid, compared with shares, but consider price movement over the past year. Hunt for likely value!

Finally – take independent advice. And talk to your spouse – believe me, it’s a joint effort.

Lawrence Watts is a chartered financial planner with HBB. Contact 07982 235543, 01727 862477

And for those who like statistics...

From Nationwide’s House Price Survey

Period Average UK House Price Percentage change
1983(Q2) – 1987(Q2) £27,386 -> £42,987 +56%
1987 – 1993 £42,987 -> £51,918 +20%
1993 – 1998 £51,918 -> £58,403 +12%
1998 – 2001 £58,403 -> £87,638 +50%
2001 – 2008 £87,638 -> £174,514 +99%
2008 – 2012 £174,514 - £164,955 -5%



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