Today: How the Spending Review will affect the Property Market

PropVestment: Spending Review

Today, Wednesday 20th October at lunch time will announce his plans for the Comprehensive Spending Review setting out the Government’s spending plan for the next four years. It has been widely accepted that the worst hit is going to be public sector workers, with estimates of up to half a million job cuts on the cards. The other major factor that will affect Property Investors is the speculated 20% cut in housing benefit spending and other welfare spending cuts.

The most effected areas will therefore be where there are a high proportion of either public sector workers or high concentration of residents on housing benefits or other benefits.

London will be the least effected and most resilient region as expected; having only 4% of the workforce in the public sector, however there may be areas with high concentrations where there are council estates etc. These small packets of property will see prices suffer as rental yields fall and lack of demand from affluent tenants, these kinds of phenomenon will be short lived as do investors should buy as prices fall over the next few years. Prices will bounce back, London has scarce land and there is always demand, as people move away and then a mix of students, foreign workers and professionals move in. This has been seen all over council estates in the inner city areas especially in zone 1 and the boundaries with zone 2. Of course in the short run it will be difficult and investor will need cash that is stalemate for a while, but there will be bargains and great long term gains for those who have the patience and capability to wait and sit tight.

Some of the worst hit areas may be stereotypically middle class areas such as Oxford, Cambridge, Canterbury where over 40% of the work force is public sector and property prices have already dropped 3-9% over the past three years. This supports the prediction that properties associated with public sector workers will be hit hardest, due to unaffordability and potential job losses.

Update from

Benefit cuts mean families with less money.
The bulk of the spending cuts will be coming from the welfare budget and we’re talking total cuts of £18bn a year by 2014 with an overall decrease of £81bn. This includes previously announced cuts in Housing Benefit and Local Housing Allowance as well as significant cuts to other benefits and tax credits. That’s going to mean a good deal less money sloshing around amongst people on lower incomes. Unless you are only renting high-end properties, and that’s generally quite unusual, then it’s likely that the people you are letting to will have less ready cash. That could spell trouble on rent levels and also with arrears.

Unemployment hurts everyone
The Chancellor’s “best guess” regarding job losses is that these changes will add nearly half a million unemployed to the dole queue, predominantly amongst public sector workers. These job losses are already filtering through with many quango employees already receiving redundancy notices. Job losses, and even fear of unemployment, make people more fearful of making changes. It’s easy to argue that’s good for landlords as many people will stick to renting or move back to it until the dust settles. But in any case uncertainty in the employment market is bad news.

Cuts will slow down Councils and Courts even more
We’ve looked at the economy in general. But start thinking about how these cuts might affect how you run your affairs as a landlord. Do you ever have any dealings with your local authority? If you let HMOs, you certainly will and there are plenty of situations that see a landlord interacting with their local Town Hall. Councils are notoriously slow in dealing with paperwork and decisions already. The CSR cuts the grants to local authorities and requires greater efficiency and job cuts. I can’t see how that’s going to improve the service landlords get from their local council.

One other government department that has promised to find savings is the Ministry of Justice that administers the courts system. Whether we’re talking squatters, rent arrears or anti-social tenants, getting legal action takes a long time already. Landlord Action recently noted that getting the relevant Court Orders can take as long as six months. We agree with them when they say that’s too long. Action needs to be taken in weeks not months. But it seems that these Ministry of Justice cuts will extend rather reduce the time that landlords have to wait for proper legal protection for their properties. That’s going to cost landlords a lot of money.

Do you let a student house?
Thinking more laterally, we can see that even less obvious changes in today’s announcement will likely have an impact. The Higher Education budget will be slashed by 40% and the recommendations of the Browne Report implemented for university funding and tuition fees. The doom-mongers are saying that these moves will see a drop in student numbers. Any such decrease will doubtless have an impact on landlords renting to students in university towns and cities.

There may be trouble ahead.
Whilst we can see the logic in some of the Comprehensive Spending Review cuts, we certainly take no pleasure in them. Such is the magnitude of George Osbourne’s plan, that they must be considered carefully. We don’t have the full picture yet and the devil is always in the detail. So whether you think they are right or wrong, every landlord must agree that they’ll have a significant impact on the residential lettings market all over the country. And we believe that for many landlords the impact will not be good news.


More updates to come as new develops

Please post your views too.

PropVestment Guide: Top Tips for Property Listings

Top Tips for Property Listings

With so much online and offline marketing now available through traditional estate agent, and corner shop window listings, through to listing online or Zoopla, Right Move, Gumtree, Findaproperty etc…It is vital your listings catch the attention of viewers and then that attention must be converted into interest. Here is a basic guide of some of the essentials you must get right whether listing to sell or rent, offline or online to get maximum impact.

  • Be Simple & Truthful
  • Lots of Photos & Map
  • Eye catching Title
  • Appropriate contact information
  • Content
  • Technology, Video & Social Media Read more

Today: New Laws for Landlords, All Tenancy agreements upto £100k become ASTs

Landlords and tenants should be aware of significant new changes around tenancy agreements as of October 1, according to The Deposit Protection Service (The DPS).

From Today, shorthold tenancies where the annual rental amount is above £25,000, but not more than £100,000 a year, will become Assured Shorthold Tenancies and this will apply retrospectively.

However, tenancy deposit protection should not apply retrospectively and, therefore, only new deposits and renewals taken on or after October 1 will definitely need to be protected. The advice from The DPS is to protect all deposits now as it is better to be safe than sorry.

Going forward, this closes a loophole that previously left many of the most vulnerable tenants with no protection. Higher rate tenancies were not originally included under tenancy deposit legislation, which only covered ASTs up to £25,000. Tenancies valued higher than this were seen as contractual tenancies and deposits did not need to be protected.

But this situation, according to The DPS, left some groups such as students or large house-shares vulnerable.

The Deposit Protection Service (The DPS) is calling for all landlords, and tenants, to be aware of this change and also to protect themselves until there has been clarity in this policy area.

This does mean extra paper work for Landlords but it is better to be safe than sorry, the procedure of registering and updating details on the DPS website is very easy and straight forward,

Your tenants can also check if they are covered and overall gives a Landlord a much more professional impression. Make sure you are registered and upto date with all the latest legislation. Do not hesitate to email us: if require any advice, its free!

Protect Your Property and Finances: Landlord Insurance

PropVestment: Cover yourself for the rainy day

Are you covered? Do you know your BSI for each property?

Many Landlords, me included, have not always got the right insurance in place for their properties and portfolios. One of the main reasons for this is the lack of information available in the everyday press, news and media. It is not like normal insurance which is shoved down your throat at every bank, supermarket or post office you visit. It is more specialised and can be tailored very much to your needs and you’ll be surprised at how many companies do provide it, and the reason it has come to my attention is I drove past a Direct Line Landlord insurance bill board yesterday.

There are many different types of Landlord. From the individual who is renting out their second home to the ambitious property tycoon with an ever-increasing portfolio of trendy dockside apartments. The common theme for all landlords is the need to purchase landlords insurance to protect their investment.

As a landlord, you are effectively using your property as an extra source of income – and this needs to be protected. A normal home insurance policy is not valid when you are taking an income from the property. A residential landlord policy is what is required.

With the correct landlords insurance policy in place, you can relax knowing that should any damage be caused to the property you are protected against the financial consequences. With this peace of mind in place, you can worry about running your property and nothing else. Read more

SAVE up to £1,500 per Property in Tax relief by Being GREEN

Save money Saving the environment

Landlord’s Energy Saving Allowance (LESA) is a tax allowance of up to £1,500 per property that private landlords can claim when they install energy efficiency measures in their rented properties.
So for a portfolio of 10 properties that’s £15,000 tax savings. Being Green and energy efficient is important, this added financial incentive is easy to take advantage of, but it won’t be around for ever. Further at present in the economic climate it easy cheaper and easier to get improvements done, and do not forget winter is coming.

In 2004 the Government introduced a tax allowance called the Landlord’s Energy Saving Allowance (LESA), allowing private landlords to claim back money when they improve the energy efficiency of their rented properties. This is a very simple process with expenditure offset against tax through your annual Tax Return form, up to a maximum of £1,500 per property. Read more

First time buyers face scarce supple due to council property

London Property has No Recession: Observations from Savills Auction

On Monday I went to The Royal Garden Hotel, Kensington to the Savills Residential Property Auction. The atmosphere of auctions has changed, and there were some shocking observations I made, both subjective and objective.

Key Points: First 50 Properties

Average Guide Price £259k
Average Bid (Sold) £288k
Average Bid(RNM) £324k
Average Highest Bid £301k
Average increase on Guide by Highest Bid 19%
  • Sellers’ Auction, High Prices & Reserve not met too often
  • Properties sold up to 205% of guide price
  • Reserves not met on over a third of properties Read more

How to calculate your REAL return on Investment: 5% can becomes 35%

The REAL return on Invetsment

Traditionally property return on investment is calculated by rental yield, especially when it is being compared to returns of other types of investments. However I believe it is a much more exact science, and can vary significantly depending on specific properties and on how the investor structured the deal when purchasing the property. A traditional yield of 5% can actually be 35% if the deal is right.

Let me start with a simple example. A two bedroom flat, bought with standard Buy-to-let 75% finance, at 5% interest only for £200,000 that is renting out for £10,000 per year. Traditional yield will be 5% (rent/value=10/200=5%). Under the way I calculate it, the rent less the mortgage interest divided by initial money in, therefore for this deal ((£10,000-£7,500)/ £50,000) so its 5%. The “real” return on investment is still the same.

But wait, what about capital gains, this is still a form of returns even though they may only be realised at a much later stage when selling and that will be liable for Capital Gains Tax. Well that is not strictly true, if the investor remortgages again after a year with similar terms, 75% of the capital gain can be realised. So if we make a very conservative and modest assumption in present gloomy market conditions of a 5% increase in value that is £10,000 and if we take 75%, and add it to the surplus cash from earlier that is a total of £10,000 return, effectively 20% return on the deposit paid. That is an amazing return, which I can’t see any other form of investment where the risks are so low and the investor has so much control over the asset.

There are certain things we have not considered like remortgage costs, legal and stamp duty, maintenance, and tenants. These will of course change calculations. Also the reason I simplify with a interest only mortgage, because if it was repayment that add to the capital or equity of the property so in effect cancels out the cost, although in realisation it will only be 75% realised when remortgaged.

Let’s be a bit more adventurous now, and add a few more clever changes to the model. We have to cap the borrowing at 75% LTV because that is the realistic maximum in the current lending condition. Let’s say the purchase price was 15% BMV (below market value) but the Mortgage was LTV, and the investor used a £10,000 personal loan at 10% compounded with capital and repayment due in two years, to part gather the deposit. So the initial investment in, is £10,000, the rest is the personal loan and the BMV saving. Assuming rent is steady; let’s look at the situation in 2 years time.

Property value in two years is now £220,500, so a refinance would raise an £15,375, less the loan that needs to be paid back (£12,100), plus £5,000 rent surplus which means £8,275 cash inflow, or 82.75% over two years on what was invested, so that is 35% return on capital invested per year.

There are incredible deals available; you can look around yourself, internet sites, auctions, personal contacts. If all else fails, contact us, You have to be clever with the way you invest, market condition are against us so we must beat the system and be innovative in our thinking.

Please take caution in tricky deals and do all your due diligence, the figures I use are fictional but are close to what is really possible.

How do you calculate your return on investment?

Two Sides of the Coin: Landlords should be the Heads

Your call, Heads or Tails?

There has been a great deal of negative press associated with the property market over recent weeks. But I believe every cloud has a silver lining, every disappointment is an opportunity and that there are always two sides of a coin. Head and Tails. I like to consider myself along with fellow investors as the heads side. Here’s a few instances where this is the case.

  • Tails: Headline says “No Buy-to-Let”

Heads: High Rental Yields. It is true that banks have been very tight on buy to let mortgages, and we haven’t seen anywhere near the 85% lending we did a few years back, moreover many deals fall through because valuators are being very pessimistic with valuations. So what does this mean, well if the number of buy-to-let properties is not increasing that means supply is not increasing. Demand in the UK continues to rise, especially in London and the South East, this is pushing up rents as there is more potential tenants for each property, this is great news for Landlords. It means properties can be let faster and rents will be higher also. In my opinion Investors should embrace this and make it a win-win situation, hold steady and enjoy the higher returns on your investment.

  • Tails: Headline says “Falling House Prices Falling- Negative Equity

Heads: BUY BUY BUY. If House prices are falling, if you have the ability and cash, you should buy, these lower prices will only be a short term phenomenon, and they will recover strongly, land is a scarce resource especially in our ever growing cities and the populations are rising, its simply economics that prices will rise. Furthermore lower house prices only affect you if you want to sell, why would an investor sell and face such high capital gains liabilities. It’s about building a strong portfolio over time that can provide a steady income stream for years to come. Negative equity is meaningless and lower prices means greater rewards in the future, so buy.

What the new shorthold tenancy classifications for UK private property landlords means

  • Deposit guarantee scheme for all properties earning upto £100k rental per annum
  • Failure to do so in 14days means no Section 21 (eviction order) can be served
  • Fines up to three times the original deposit
  • Student accommodation and multiple occupancy also affected
  • Advice: Use a reputable and experience lettings agent, email for our quote and special offers.
  • New legislation mainly affects high rental properties in particularly in London
  • Extra Red Tape that makes it difficult for honest, reputable Landlords

Read more

An Alternative Investment: Thinking outside the Property Box

This week there is a small deal which will appeal to most of our readers. It is a studio flat on Edgware Rd W2 minutes from Edgware Rd Station and Hilton Metropole. It is a self contained studio with a separate kitchen. The property is in a popular purpose built block called Cambridge Court. The property is off market and available exclusively through us.

This deal has been packaged as an investment only. The property comes with the benefit of a tenant paying £300pw. The block has a lift and is well maintained.

This may seem a lot of money to rent a studio property for those not familiar with the area. We assure you this is not an enhanced rental designed to encourage a sale. It is the market rental for this area. In fact in the summer the property can be rented for well over £500pw as a short let. A short let is a period less than 6 months, typically 1 or 2 months. Many use this as a cheaper alternative to hotels in the area.

There are two ways to purchase this property.

One the normal, boring, old school way: you buy the property, it is transferred over to you and you take a fresh mortgage.

The other is an ingenious alternative way, fresh thinking outside of the box by us:

The current owner has a mortgage of £167,000 on the property with the Bank of Scotland. He is paying 1.94% on this amount. This comes to £270pm. In order not to lose this we have created a strategy whereby you can benefit from the same terms. The mortgage terms would be passed on to the buyer via a document mirroring those same terms. This agreement will come with an option to purchase within a fixed period of time.

Though this way is a little out of the ordinary, it will be completely water tight and will come with full legal guarantee. Looking at the property this way you would need to put £70,000 into the property and will be postponing the actual purchase of the property.

We however appreciate many will not want to go down this route especially with it being a relatively low cost property and may prefer to do things in the conventional fashion.

Under this way you will need to put in 25% of the property value which comes to £60,000. And the rest will be borrowed. The table above illustrates both methods more clearly.

A note worthy point is even the more modest return of 5.9% will easily beat the best return offered currently by banks. According to the recent survey by the Money Supermarket the return offered for a 5 year bond is 4.9%. The yearly yield from our property beats this marginally.

This is not where you make your money in a property however. The bulk of the return is made on capital growth. If we assume a modest rise of 5% per annum the property at the end of the year will be £306,000. This means the property has increased buy £66,000, a 100% increase over the 5 year period. A 5% increase for this location is a very cautious estimate; this location was pretty much immune to the effects of the recent credit crunch, especially properties less than £500,000.

To confirm this property you will need to call our offices and place a deposit of £5000 down on this property.

This article is an extract written by one of my mentors Suresh Vagjiani, MD of Sow & Reap

Old School Way New Way
Purchase Price £240000 £240000
Deposit £60000 £70000
Loan Amount £180000 £170000
Annual Mortgage Payment £9000 £3298
Service Charge £1500 £1500
Management Fee £1560 £1560
Annual Rent Income £15600 £15600
Net Income £3540 £9242
Net Return on Deposit 5.9% 13.2%