In 2015 there were some serious changes proposed to the way buy-to-let investors and those that buy second homes are going to be taxed, giving rise to much doom and gloom among the property investor community. It has even led to a legal challenge being launched against the government’s plans to reduce mortgage tax relief to the lower rate of tax of 20%, as opposed to allowing higher rate tax payers to deduct 40-45%.
Although the details have yet to be finalised on the tax changes, so bear in mind things may still change, I think it’s highly unlikely that the government will backtrack on the changes proposed, so from a property investment perspective, it’s worth thinking through how to maximise earnings in the current and new environment to come.
Time to get real about property investment returns
It never ceases to amaze me how much rubbish many property investment companies put out about the kind of returns you can get from property investment. Many still sell it as a ‘get rich quick’ idea and claim in books, articles and sales videos that property prices double every ten years. This is utter rubbish.
Since 2000, the Land Registry shows that property prices took two big hikes: one in London Boroughs in 2000 and the other around the rest of the country in 2003. Since then, London has seen a post-recession boost, but that now seems to be waning. Around the rest of the country we have seen substantial falls during the crash and the Hometrack cities index shows that prices have recovered to their pre-credit crunch rates in only NINE of the 20 cities they monitor.
Investing in cash, long term, doesn’t maximise property returns
That means anyone who invested with 100% cash in 11 out of 20 cities across the country has seen their asset value fall dramatically when you take into account the effect of inflation.
For example, let’s take a property bought for cash at the height of the market in 2007/8 for £100,000.
Since then inflation, ie the cost of living, has increased by nearly 24%.
That means to retain its value, a property bought for £100,000 cash in 2007/8 needs to be worth £124,000.
But, looking at Hometrack’s analysis, that same property around the country (using averages) would be worth:
Belfast: £53,100, losing the investor a fortune
Property price growth predicted to slow further
The reality is since 2004 we haven’t seen anything like the capital growth in property we have seen in the past – even in London – and it’s not predicted to grow at the rates it has previously done either.
So it is high time anyone considering investing in property stopped believing the hype and did some serious research using independent investment expertise.
How can you make money in property?
The key thing we are short of is property. But this doesn’t mean it will always go up in value. It can only do so if people can continue to pay more and more money for a property. This means areas need to have successful economies which generate higher incomes and wealth for the people buying there. London is the best example, attracting huge international wealth, raising property prices for those who currently own, who then have more money to spend on the next property.
Without growing demand – ie, an increase in population – and without a growing economy which generates increased wealth for property buyers, prices will stay flat.
The North East is a great example of this. In November 2015, property price averages were around £100,000 according to the Land Registry. This was the same average as May 2004, so zero growth for 11 years!
Investors need to buy with cash, refinance with a mortgage and build!
What investors need to think about now is putting their skill set to good use to help build more properties and bring uninhabitable ones back to life.
If you buy a plot of land and build – not huge projects, just one or two properties, or buy a large home with land and split it into more properties where demand allows – you can make a 20-30% return the instant it can be sold on the open market.
To help with cash flow, investors could look to partner with local builders and share profits so everyone is incentivised to build a good property at a decent cost.
If investors hold onto the property to let them out, the yields would be much higher than buying an existing home, doing a few tweaks and letting it out.
You need to work for property investment returns
There are estimated to be between a million and two million landlords in the UK and if 10% of them built a new property rather than bought an existing one, that would add 100,000 to 200,000 more properties a year to our stock levels.
It’s this kind of thinking and initiative that will help the government see the positive impact investors can make to add value to the country rather than the current view that they just ‘take’.
The days of armchair investment really are over, whatever sales pitch you hear. If you are serious about making money from property, then you absolutely need to shift your strategy to bringing new properties to the market, not just relying on buying existing ones.