This is such a common mantra of mine that you will end up getting bored of me going on about it. But I hope that by then this phrase is indelibly inked into your brain.
You cannot treat property as an investment such as a pension, even if your “why” for doing so is to create a pension.
There is no such thing as a “buy, let and forget” property. You will become unstuck, eventually, if you act this way.
Property is not a static, hands-off investment. You need to:
- Comply with legal and regulatory requirements.
- Be aware of the wider macro-economic factors that could affect your investments.
- Manage the tenant during the tenancy of your property.
- Manage the property.
The latter two are directly relevant to the profitability of your business and hence the very reason you decided to enter this fray in the first place and so should be taken seriously, if for no other reason than you want it to generate a return in excess of plonking the cash in the bank.
The first is what stops you being fined or at worst, having a criminal record.
So you must approach this professionally, as a business and understand your responsibilities.
In this article I will cover:
- The regulatory environment you will be conducting business in.
- The macro-economic factors that you need to consider.
I have mentioned it a few times now: Property investing is a business whereby you are providing clients (tenants) with a product (a property to live in). In fact, I have a section on it. With that, comes responsibilities concerning contractual obligations with your clients and health, safety and amenity rules with your product.
Whilst you can outsource most things to a letting agent to deal with, you cannot outsource your statutory obligations. If something goes wrong that your letting agent didn’t sort, it will be you, as the landlord, that will end up in court or on the wrong end of a fine.
Some breaches are criminal offences, such as failure to provide a gas safety inspection certificate.
So, I would argue you have an obligation to understand the regulatory regime in which you operate, just as you would when running any other business.
Indeed, this is necessary even when considering what properties to buy. For example, if you are looking to buy a property suitable for conversion to a House in Multiple Occupation (HMO), then new national standards introduced on 1st October 2018 now mean that a bedroom must be a minimum of 6.52 sq.m, for a licensed HMO. Within that, any en-suite space is not included, neither is any floor space below 1.5m in height (so be careful with loft conversions).
What’s more, local council’s may impose amenity standards in excess of this, so your local authority website should be your first port of call.
It should be clear to see that failure to understand this could lead you to buying a wholly inappropriate house.
Aside from the product (the property itself), there are procedural regulations you need to abide with. E.g. a property cannot be marketed for let without an Energy Performance Certificate (EPC) and as of 1st April 2018, the property must be a minimum of Grade E in order to be let. There are rules about documentation you need to supply and deadlines by which deposits should be protected. There are strict protocols in seeking eviction. And so on.
I don’t say this to put you off – but rather, to be clear about what you are taking on. There is nothing to really be worried about as most of this is understanding the procedural knowledge or the regulations which apply. It can be studied and learned.
But do be aware that this exists and plan for it. This is part of running a property investment business and part of being professional in your approach.
The Wider Macro-Economic Market
As property investors, we don’t operate in a vacuum. We are exposed to economic sentiment, competition and changing demographics and trends. These need to be understood in the context of our property investing endeavours.
It helps to have frameworks to use when considering such impacts. A good approach is to undertake a PEST analysis (or the wider PESTLE analysis) of your chosen Investment Blueprint. This makes you think about the wider factors that may impact your chosen approach.
Needless to say, these factors can change and so you should be revisiting this analysis at intervals along your investment time frame.
PESTLE stands for:
- Political factors. Property investors are impacted when sentiment turns against landlords. A government sets policy, so a good example here is tax policy and the introduction of Section 24 discussed above.
- Economic factors. The biggest factor for property investment is the cost of capital as driven by interest rates. This impacts profitability as well as opportunities for expansion.
- Social factors. This includes population growth rate, demographics and attitudes. These will all affect demand for your product and the level of service you provide. An example is fast, reliable broadband being a must-have these days, particularly for students and young professionals.
- Technological factors. Not quite so relevant to property as an invention such as Facebook is never going to replace the need to live in a property. But it helps to keep a pulse on technology changes, particularly with how people find property to rent or systems that make your life easier as a landlord (much more on that later).
- Legal factors. Big impact on landlords here, from Tenancy Agreements to eviction processes. It is important you keep track of this space.
- Environmental factors. Included here for completeness, but this has little relevance to property investors, except be wary of investing next to a river prone to flooding!
Consideration of your PESTLE factors should be part of your Investment Blueprint as well as giving you insight into the risks you should mitigate. Do all the signs point to interest rate rises or a contraction in mortgage availability? Then a long-term fix on your next remortgage or purchase might be a prudent risk mitigation.
We have considered the legal, regulatory and macro-economic environment in which you will be operating. Failure to adhere to legal requirements will land you with a fine at best, a criminal record at worst.
An understanding of the wider factors that will influence your investment is also important. These should be reviewed on an appropriately basis and requires you to have a good understanding not just of property-related announcements but also economic factors and current affairs.
So how do you get educated?
There are a number of ways:
- Join a professional landlord association such as the RLA or the NLA (I am a member of the latter). This is cheap and they have tons of educational resources, although these are focused on the mechanics of being a landlord. They also have libraries of all the different tenancy-related documents you will ever need.
- Networking events: When I started in the property, these barely existed and if they did, it was a few like-minded investors gathering for a chat in the pub over a pint. Nowadays, this is big business and you could probably attend a networking event every week, depending on how far you are willing to travel. These vary in quality and intent. Personally, I find the independent, unaffiliated events better value. There are large groups of networking events run under various property education company banners, but be aware that these are more commercially focused (i.e. they will try and sell you things).
- Forums: Again, when I started Facebook didn’t even exist (yes, I am old)! These days there are a variety of property investment forums and Facebook groups on every facet of property. Take a look at them all and see which resonate with you. You will notice that each have a particular culture and vibe, generated by the most frequent and / or popular posters. You may or may not agree with them. Just be aware that if you just congregate with others that share the same outlook then you may end up with confirmation bias and as a professional investor, you need to understand a variety of viewpoints and come to an independent conclusion.
In short, do things properly, or not at all. You cannot build a sustainable business by flouting the law, breaking mortgage lending requirements or otherwise trying to operate under the radar or in the grey areas.
Be the CEO of your property investment business.