Investing in property Sir?
It has been an interesting few weeks (seven weeks in fact) since Armageddon beckoned but today, it would seem, the USA finally declared war on North Korea; or so North Korea claims but that, of course, is absurd. Well let’s hope so anyway.
Meantime John McDonald has said the Labour Party must war game the scenario of them gaining power which he says may result in a run-on the pound. Well that’s not encouraging John, but perhaps not far wrong.
Hoping for the best and accounting for the worst case is something we all must do and in the game of property investment it is easy to see how easy it is to be drawn into areas where higher yields apply without proper assessment of risk – the “what if” scenario. Yield/risk/return/weighted average unexpired lease term are a few examples of jargon used in property investment, but important to understand when considering certain property investment types. In the same way there are many ways we can spend our time from water skiing to singing in a choir or playing rugby to playing chess, there are just as many ways to invest capital and with international uncertainty, concerns over Brexit and next to no interest coming from the bank deposit accounts, income producing property is once again being considered by many investors. The yield (the annual rate of return an investor gets on the capital invested) is often the starting point but without a proper assessment of risk (will the tenant go bust, and if he does will the property let again easily) a purchaser will often experience buyer’s remorse very quickly.
Many people in the market now are experienced investors who know what they are looking for but there are new investors who see property as a good hedge against inflation. Generally this is true over the long term but those seeking to speculate rather than invest must accept the risk. Selling property is time consuming and expensive so having bought, the idea would be to hold for a time at least.
The adage “if it looks too good to be true then it must be” is always, without exception, or at least in my experience, true. If a yield is high then it is so for a reason. When considering investing in property establish your criteria. Think about what is important. It might be security of income, preference for capital growth, higher risk, higher return or just a secure place to put capital. Do you use 100% cash or gear? In today’s market cash is definitely preferred. To get the best deals, use cash and thereafter by all means borrow against it to make cash available again for the next purchase but always stick to the criteria you are comfortable with and avoid too high a gearing. High gearing can quickly take you out of the decision-making process if the income drops or a tenant fails. Hard work over many years can dissolve overnight without proper care and attention.
Property investments are not cash cows to be milked, they are businesses with tenants who are customers and the best property investment companies have good relationships, wherever they can, with their customers as happy customers pay rent and look after buildings which all one really wants.
Mark Hanson FRICS