OK, so I run a Lettings Agency and first and foremost the business depends on taking on properties to let, finding tenants and then ideally managing those tenancies and properties. No great surprises there.
We also offer a variety of consultancy services to people thinking about investing in property specifically to rent it out. Sometimes the people we see only have a vague idea that maybe,,, sometime,,, somewhere way off in the future,,,, they might just,,,, if the stars are in the right configuration and Pisces is rising…….. put some money into property.
At other times people are much further along in their thinking and they’ll come to us with a specific property or two in mind that they’re considering making an offer on. Again this is great for us, the more landlords we talk to the greater the likelihood that we’ll develop a long-term relationship with soem of them.
However, increasingly I find myself advising people against making that big investment and instead talking to a financial advisor to get advice about all their investment options. Why would I do this when it’s basically bad for business? Let me explain.
Before looking at the property details, doing our research and producing our assessment reports etc, we always take time to find out about the client:
- Who are they?
- What is their background?
- How much do they know about the property market?
- What are their objectives financially – regular income? Lump sum?
- What is their appetite for risk?
- How long are they investing for?
- What is their exit strategy?
And many other questions of course. Often people have it all thought out and a pretty good idea of what they’re getting in to but not always.
Becky (not her real name) was a young lady in her late 20’s who came to see me a couple of months ago clutching the details of a two bedroom flat in Brimsdown that she’d been told would get her a 9% yield. Gross yield of course but yes it probably could and 9% is pretty impressive.
So why would I advise her to walk away from this great deal? Because she only wanted to invest for two years max!!
All of a sudden that 9% was not so attractive. The capital growth in the area was minimal which was why the yield forecast was so high, so she’d be selling for only slightly more than she bought it.
If you then take a look at the one-off costs involved, including legal costs at both ends, surveyor costs, mortgage set-up fees, agency fees and stamp duty, and then look at the ongoing costs during the let including maintenance costs, agency fees and possible void period, suddenly that 9% doesn’t look quite so impressive.
Add to that the potential risk and cost of a bad tenant, damages, rent arrears etc. and the possibility of making a real-time loss suddenly becomes apparent.
Similarly when it came to selling she would either have to
– sell with the tenant in place which would mean that only investor buyers would be interested and she would likely achieve a much lower price for the flat or
– sell the flat once the tenant had left which could mean waiting months for a buyer with no rental income.
That’s an awful lot of risk, potential expense and let’s face it stress for a new-comer aiming for a maximum 9% gross return. I pointed Becky in the direction of an independant advisor and wished her well.
The property itself was snapped up a few weeks later and is hopefully providing a good return for the new owner.
Sometimes a great deal is not a great deal for everyone. We run property clinics to help people getting into property for the first time, make sure that they’re asking themselves the right questions and are going in to it with their eyes open..
Our next clinic is on 19th March – see here for more details.
