Property Investment and Management

Property Investment and Management for Beginners from First Purchase to Managing a Portfolio. 

Over the coming months we are taking a look at property investment and management for beginners from first purchase to managing a portfolio. This month we look at what is an investment and identify types of property for investment.

1. What is an investment 

An investment is an asset (in this case property) that is purchased with the hope that it will generate income or appreciate value at some point in the future.

As an investor you will use and, in some cases, borrow money to purchase a property in the hope of generating rental income and/or reselling it later at a higher price.

Investing in property is not for everyone and there are differences in the price, return (yield) and the amount of input or ongoing management that is required from you the investor.

You will read and hear the word yield a lot if investing and here is a brief explanation:

The net initial yield is the passing rent or net income divided by the gross property value including notional acquisition costs.

So if buying a property for £200,000 and it has an existing tenant and lease in place at an annual rent of £20,000 and the acquisition costs are £5,000 (valuation and legals) then the net initial yield is:

£20,000 divided by £205,000 = 0.0975609 * 100 = 9.75%

The net initial yield reflects the return on investment at the time of purchase but does not take into account income or increases in the market value over time.

So different property classes will have differing yields dependent on the risks attached to the income stream that you are buying.

2. Identifying a Type of Property  

We will start with a very brief description of each property class and the potential up and downside to each:

Residential 

Often referred to as the “buy to let” market this has become an increasingly used investment vehicle.

People often feel they understand the issues with residential as people have either owned or rented before and feel that many of the issues are more understandable.

This sector can be further split but we will just concentrate on the basics here. The initial yields can be higher on residential, which means that the price you pay for a set return (i.e. rent) can be higher than other sectors. This is in the main due to a lot of demand from investors wanting to become Landlords.

With a housing shortage and increasing rents many are keen to get on the ladder and many of the banks have specific “buy to let” mortgages to assist you.

Yields can be as high as 4-5% so securing an income of £20,000 per annum could cost £400,000 +.

Things to consider:

• The cost of works to ensure the living accommodation is fit for purpose
• Ongoing legal requirements (electricity tests, boilers services etc.)
• Potential voids in rental income when tenants exit the property
• Management of the tenants and issuing Assured Shorthold Tenancies
• Retention of repairing and decorating obligations
• Insurance
• Service charges (if part of a larger block)
• Ground rent
• Changing legislation to limit no fault evictions and leasehold reform

Commercial

Commercial property is more commonly let on longer term leases of between 5-20 years, and on fully repairing and insuring leases.

Many are let between Landlord and tenant (company) with the personal guarantors of the company directors. Once let the tenant is responsible for all outgoings so as an investor there should be no further costs unless the tenant defaults in some way.

Initial yields are generally about 8-9% so to but an income of £20,000 per annum you would pay in the region of £235,000.

Things to consider:

• Initial cost in ensuring the property is in a tenantable condition
• Legal costs involved in agreeing and completing the lease
• Landlord & Tenant Act controls what can be done if a tenant defaults (quicker than above)
• Cost of re-letting is more than residential
• Once let to a good tenant – very little more for the investor to do
• Dilapidations pick up any depreciation or repair issues

In our next article we will take a look at identifying your budget and choosing a property.

Please do contact us if you have any questions office@jsreakes.co.uk

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