Is Now a Good Time To Start a Property Investment Business?
There was a time when investing in property was strictly for the super wealthy but of course those days are long in the past. Changes in attitudes, low interest rates, ready access to cheap finance, a long record of historical capital growth, a large and growing rental sector, a shortage of homes and a belief that property should play a part in most balanced investment portfolios has meant that over the last 20 years, residential property investment especially has become much more common.
And in periods of economic uncertainty as we are in now, property is often viewed as a relatively safe haven. With the economy officially in recession and the consequential downward pressure that creates for interest rates, is it therefore a good time to think about starting a property investment business?
Of-course as with starting any business, there are always risks. Some of these can be managed – levels of gearing, geography, getting professional help – but others are outside our control such as changes in the market, interest rates and taxation. Almost no one starts a business without a long period of reflection – a risk assessment in all but name – and yet so often when it comes to property, there is a perception that either there are minimal downside risks or that any downside can be easily managed. If the last few years have taught us anything, it is that this perception is false.
If that longer period of reflection hasn’t convinced you, the last few months should have. I don’t think many professional landlords envisaged a time when whole swathes of their tenants would be unable to pay their rents – and if the professionals didn’t see it coming, what chance did the part-time landlord have?
Alongside that, not for a long time has the regulatory environment been so heavily stacked against the “small” landlord. Recent tax changes to mortgage interest relief, high transaction costs (mainly stamp duty land tax), local authority licensing requirements, new tax compliance such as the introduction of ATED and capital gains tax returns and the legal complexities of dealing with difficult tenants all weigh disproportionately on the small private landlord.
The difficulty is that unless you have large amounts of capital to invest, it is almost impossible to build a property investment business where economies of scale can help mitigate some of the issues and risks alluded to above without first operating as a small, private landlord for some time.
In a period of high compliance costs, a relatively complex and at times expensive taxation regime, historically low levels of capital growth, tenant payment levels affected by Coronavirus and banks that are retrenching from exposure to the market, the barriers to entry seem higher than ever. It is tempting to say therefore that no, this isn’t the time to start a property business.
However, the market fundamentals do remain broadly unchanged – there is massive demand and insufficient supply – and it is therefore always going to be tempting to some with perhaps slighter higher investment risk profiles. Of course, the recent temporary reductions in stamp duty land tax will also tempt some into the market. So, with that in mind, what guiding principles should the new property investor follow:
Be conservative – don’t rush in. Take your time finding the right property, the right mortgage and deciding on the right level of gearing.
Take advice – good tax advice is crucial. As is the right managing agent. Geography is a factor but take recommendations from friends or trusted websites. Look at the options – some agents offered guaranteed rent schemes, look at their additional charges and services.
Be in it for the long term. The days of swift capital growth are broadly finished, stamp duty increases alone make that difficult for most so long-term returns are the order of the day.
Have a plan. Do you want to build a portfolio as a nest egg? Are you looking for an income yield, capital growth or a mixture of both? Are you prepared to renovate and/or build? What is your tenant profile?
These are just some of the things the new investor needs to consider. We can of course help with tax advice and that is always a good place to start.
If you are looking for a property specialist accountant and advisor, please feel free to get in touch.