As a dedicated fan of what we call Passive Income Through Property, one of the main questions I’m faced with from property investors is the issue of control over one’s property.
This is particularly true when speaking with UK landlords who understandably like to run their own show. What do I mean by this?
For example often when I speak to a buy-to-let (BTL) investor about say Hotel Room Investments, the questions that arise immediately run like this:
1. It’s too good to be true. How can you (ie the developer) promise something like a 10% net yield when the average buy to let Gross yield s closer to 6%? And that’s excluding management charges, insurance, agents fee, purchase costs, wear and tear, void periods, etc etc.
2. Even if that’s possible now, says the landlord, how can I guarantee the developer or hotelier can keep this up? I’m relying on the hotelier’s business model and the hotels performance. With my own property, I’m in control of all this!
3. What about my exit strategy? If I want to get out of a buy-to-let I just sell it, and usually for a decent profit.
4. Its far too risky. I know what I like and I like what I know. Haven’t there been some massive train wrecks with these types of property investment, especially overseas?
These are all very reasonable concerns of course, and on the face of it the landlord has some very valid points: After all It’s pretty easy to source and buy a UK residential property pretty much anywhere that isn’t going to be a complete disaster: even a bad decision made now will probably come right in the long term by virtue of capital growth, providing you can stick with it. On the other hand its very easy to buy a bad passive investment without expert guidance. Seems a no-brainer.
What underlies a lot of this thinking is a sense of control through ownership.
But property ownership can easliy give us just the illusion of control. Buying an investment property is one thing, living with it is quite another.
The BTL control idea is borne out of this kind of thinking:
Principle 1: I can plan my borrowing. Fixed rate mortgages mean predicable borrowing costs. Reality: Swap rates and base rates are utterly outside of our control. There is a Bank of England base rate increase coming. Not today but it will come.
Principal 2: I can adapt or improve my property to increase rental income and property value. Reality: whilst a Good Thing to do, there is a high capital cost to this and both the rental market and resale market depend mostly on macro-economic factors such as employment levels and GDP, all outside of our control.
Principal 3: The Private Rental Sector is too important to UK PLC for the government to jeapodise it. Reality: the recent Summer budget attacked landlords tax situation aggressively, on three counts, arguably for pure political gain. The chancellor was able to do this as the majority of the population (non-landlords) seem to regard landlords as greedy, and the government will gain more support than they lose.
Principal 4: If things get too bad I can always sell up. Reality: if things are bad for you they’re probably bad for everyone, so selling may simply not be an option, just when you need to.
These are just examples, there are many more. In fact just add to this list another column for every supplier to a BTL business, such as block service charges, government regulatory controls, stamp duty, insurance.
The good news is that once property investment is recognised as a whole string of uncontrollables, these can be anticipated to some degree. The risk is still there but stress-testing your property portfolio is essential to survival in the rough and tumble world of BTL.
Passive property investment means seemly relinquishing all of this perceived control, but what are you really sacrificing? The sacrifice is perhaps going to be doing far more work up front when deciding what to invest in. The rewards of getting it right is hassle free property income.
Let me be clear, this is not about the right or the wrong way to invest in property. Buy to let investment can be incredibly lucrative over the longer term and any mistakes made at the buying stage will most likely be rectified in time. Just be mindful that whatever we buy, we do not pull many of the strings at all.
In conclusion, I believe that proper research is the absolute key to dealing with risk and understanding the control issues in any property investment, whether it’s a holiday home in the sun, a room in a Scottish Castle or a tasty rental flat in Harrow.