2015 has been quite a year in the property world.
As always – the only certainty is change…
A strong property market has significantly altered what’s working and what’s not for property investors and developers.
Without a doubt – many of the popular, mainstream strategies are no longer as effective as they were in the post credit crunch apocalypse and many people are struggling to adapt to this change.
In addition to this, the Chancellor is making a major play against BTL with a host of tax changes that will make the industry less attractive to many. It now looks like some of the lenders are jumping in and changing the goal posts as well.
Without a doubt – all of these factors will cause difficulty for the mainstream – but opportunity for the contrarian few who will adapt quickly and capitalise.
To better understand the current face of the industry, we at the Property Education Group have just run a survey to identify what the main pain points currently are and what you think will be happening in 2016.
The results we interesting to say the least…
Some of the obvious points that came out of it are:
The biggest pain point by a significant margin is a lack of finance to invest.
The industry is hungry for business and systems knowledge.
Interest in strategies like Rent to Rent have significantly reduced.
Using the results and data collected, plus our own educated points of view and stance on the current market, PEG has put together it’s top 5 predictions for the property market in 2016.
Of course, please do not take this as investment advice – it’s is merely our point of view and it will be interesting to reflect in 12 months time…!
Prediction 1 – There will be a run on cheaper, high yielding Northern Properties.
A significant change to the market is the fact stamp duty will now be payable on BTL property above £40k, and mortgage interest payments will no longer be offset able against elements of tax relief. (I do not intend to go into the details of the changes here as the are more complicated than I just mentioned with lots of ifs and buts).
Inevitably, the more expensive a property the more this will play a part as the larger stamp duty bills will certainly persuade many not to buy and the low yields mean many investors could actually be paying to own these properties after the tax laws have changed.
There are still many areas in the country, however, where you can buy property for under £40k (even if it is above 40k, the stamp duty burden is still largely irrelevant) and the high yields mean the tax changes have far less effect.
As an example, one of my mentees turned business partner has recently purchased a 2 bed terrace for under £30,000 and, after a £7k refurb, has rented it out at £495 per month. After refinance, the interest payment on this mortgage will be less than £150 per month meaning cash-flow before costs of around £350 per month. Although the tax laws will affect this profit, it will be a much smaller percentage of profits than in more expensive units.
I would not be surprised if a larger proportion of Southern money finds it’s way up North to invest in these assets. Of course, an excellent sourcer/refurb team/letting agency is a requirement to make these properties perform. As both John and myself operate this type of service in both the NE and NW we will be able to keep a close eye on this to see what happens!
Prediction 2 – Commercial Conversion will continue to grow in popularity.
Without a doubt, I believe commercial conversion to be the most attractive investment opportunity in the market. Here’s my reasoning:
Wholesale to Retail. You buy once, and then create multiple units. If you are planning to hold and rent out, this will avoid much of the stamp duty effect that will come into play next year.
Add Value. In a strong market, commercial conversion presents the best opportunity to add value to a building and either sell to release profit or refinance out (largely area dependent on which works best). Although there will always be BMV property in any market – in our current one they are few and far between and therefore we should focus on adding value rather than buying BMV to recycle cash. Commercial conversion offers the best vehicle for this.
Increased Yields. Again, similar to the above point, in a strong market the yields generally drop. With commercial conversion you can buy a cheap asset and convert it to multiple units meaning your price per unit is often far less than the average property prices in your area. This doesn’t have to be a full conversion either – I actually like buying distressed blocks of flats on one freehold and then renovating.
An example of this is a project we completed in 2014 which was 3 offices and 7 flats. This was purchased and refurbished for £200k, meaning the price per unit came in at under £20k. Each of these units rents out in excess of £400 per month giving over 20% gross ROI! (As an aside, the building was revalued at £415k meaning all the original money was taken out).
JV Investors. It is clear that lack of finance is an issue in the market. This surprised me as with interest rates so low, property is a great place to invest. My assumption is finding deals that a JV investor can recycle their money from is much harder in the current market, as well as yields dropping.
HMOs – the big gold rush of the last 3 years – is starting to hit saturation in many areas and so less attractive as an investment proposal. Commercial Conversion gives investors a MUCH better investment proposition…
Commercial conversion is, without a doubt, my preferred acquisition strategy for 2016 and it is already proving easier to attract JV finance than BTLs and HMOs. However, markets inevitably change and there will inevitably come a point in time when supply outstrips demand for flats in an area (see what happened in 2006/7 in some of the new build developments in areas such as Glasgow, Nottingham etc) and available stock to convert will reduce – although I don’t think that is a concern for 2016…
Prediction 3 – New No Money Down Strategies will be develop rapidly.
Ok, so we can’t all go straight into 7 figure plus commercial conversion deals. NMD will continue to be a fantastic enabler for those with tight budgets. Over the last 5 years, we have seen a growth in deal packaging and HMO R2R strategies, but without a doubt deal packaging is more challenging in the current market and HMOs are seeing saturation in many areas.
As always, strategies will evolve and new and exciting concepts born.
The 2 that we are using currently and will continue to leverage and scale in 2016 are:
Lease and Leverage. A truly 80/20 strategy where we match landlords to companies, charities and other organisations, broker a long term deal and take a margin in the middle. On one of these deals alone in 2015 we have generated £1500 per month guaranteed profit with no management burden over a 10 year contract. The demand is high from certain demographics and presents an excellent opportunity.
Serviced Apartments. A take on the R2R strategy but rather than rent the rooms out individually, the whole apartment (or house for that matter) is rented out on a nightly basis. In my 6 years in property I have never come across a strategy that offers such high returns compared to the effort involved in management. Of course, as with all strategies you can get it wrong – but as an example we just took one booking over new years eve that has paid the whole months rent that we pay the landlord!
As part of any layered property business – I always recommend a cashflow strategy and a wealth strategy (i.e. ownership of assets). There is a remarkable sweet spot presented here where you can kill 2 birds with one stone and invest in a commercial conversion deal and then operate the flats as serviced apartments!
This is exciting and presents an amazing early mover advantage for 2016.
Prediction 4 – We will have to become more business savvy…
Without a doubt, the chancellor is pushing the industry to be more corporate focused. This will force investors to treat property as a business rather than just an investment.
This is good as it is how I have always advised my mentees to treat property.
So, you are a business owner, an entrepreneur, creating your perfect lifestyle.
You should not, therefore, be ‘self employed’ and working for yourself…
No. Your job is to build a business ‘machine’ around yourself that grows and operates your property business without you.
Never has it been more important to have a solid business plan, systems, procedures, outsourcers and employees in place to grow your legacy.
I predict 2016 to be the year of the business systems revolution in the property industry!
Prediction 5 – The power of the lettings agency.
I suspect that this final prediction will surprise many. It surprised me when I put it in here!
I have to be honest, I fell out of love with this model about 18 months ago after having setup Phoenix Rentals to manage my portfolio, then my clients’ portfolios and finally other landlords portfolios.
The main reason was it seemed like a lot of work for not a lot of return (or fun!).
That was before I re-built the ‘machine’ and put a powerful, motivated and incentivised team in place.
So, whats my view on the letting agency now?
This business should not be viewed as a letting agency, rather an entity with the ability to generate multiple, synergistic profit centres whilst delivering your landlords a fantastic service.
You see, the industry is becoming ever more regulated, which is fantastic as it drives some of the amateurs out. This increases demand for your service.
It also means there is a lot more practical items to consider as a letting agent – the deregulation act, smoke detectors, legionella risk assessments etc etc. These have to be done and so are additional income streams for you business.
If the proposed tax changes are implemented, I truly believe we will see landlords driven out of the market. Less landlords equals less rental stock. Supply and demand means rents go up and so does your management fees.
If you are an excellent property manager, this is a fantastic way of finding clients to source property for – leading to a bigger sourcing company.
If you have properties on your books this gives you low hanging fruit to pick and negotiate lease and leverage deals or serviced apartment deals with your landlords on a win/win basis.
The list goes on…
Get this right, and you have at the core of your business a synergistic model holding everything together and increasing profit margins across your group!
Now, I know a lettings agency is not for everyone – so lets not call it a letting agency – just an in-house management function 😉
So, that’s my 5 predictions for 2016.
Way off the mark or some sense behind the theory?
Of course, predictions are one thing, taking action and implementing knowledge is a whole other ball game. To help you crush it in 2016 I’ve prepared a special report with our ULTIMATE 5 Steps for property growth in 2016.
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