The Cost of Short Term Thinking: How not walking away from a 6.5% return could lead to a 175% gain in the long run
Dear friends, new landlords and new investors
The recent surge in UK interest rates has left many residential property investors feeling uneasy about the future of their investments. While these fluctuations may appear challenging, adopting a long-term perspective on property investment can provide valuable insights and opportunities.
In this blog, I will share why staying fully invested in your property portfolio and considering selling only as a last resort is a wise strategy during periods of high interest rates. Also at the end there is a real live example of what we could miss out on by only focusing on the short term.
This doesn’t serve as financial advice but the aim is to broaden your perspective on the benefits and beauty of having a longer term vision when it comes to property.
The Power of a Long-term View:
Capital appreciation potential:?Property investments have historically demonstrated the ability to deliver significant capital appreciation over the long term. Despite temporary market fluctuations, such as increased interest rates, property values tend to rise over time, providing investors with a potential return on their investments.
By maintaining a long-term perspective, investors can capitalise on this growth and build wealth for the future. Often we hear the phrase 'Property doubles every 7-10 years on average' and I have always held that as a belief and seen it play out across the country many times.
Steady rental income: While interest rates may affect property values, the demand for rental properties often remains strong. Higher interest rates can make purchasing a property less attractive for potential homebuyers, leading to an increased demand for rental properties.
As a result, property investors can benefit from a steady stream of rental income, which can help offset the impact of higher interest rates on their overall returns.
Diversification and risk management: By remaining fully invested in a well-diversified property portfolio, investors can mitigate the risks associated with market fluctuations. Diversifying across different property types and locations can help to reduce the impact of localised market changes, providing a more stable long-term investment strategy.
We do encourage our own investors and landlords to spread their income across Buy to Lets (B2L), HMOs and Service Accommodation (SA) delivered through residential house purchase or commercial conversions.
Market cycles and opportunities: Property markets move in cycles, and experienced investors and landlords understand that periods of high interest rates can present unique opportunities. By staying fully invested, investors can capitalise on these opportunities, such as acquiring undervalued properties or benefitting from increased rental demand.
Why Selling Should Be a Last Resort:
Transaction costs: Selling a property involves various costs, such as agent fees, legal expenses, and potential taxes. These costs can significantly reduce the net proceeds from a sale, making it a less attractive option during periods of high interest rates. In the most recent budget personal?capital gains taxes were slashed and corporation taxes were hiked by over 30% to the new entry level for small businesses of 25%
Loss of potential returns: By selling a property, investors lose out on the potential for future capital growth and rental income. In a rising market, this could result in significant opportunity costs, making selling a less favourable option for long-term investors.
Re-entry barriers:?If investors decide to re-enter the property market after selling, they may face challenges such as higher property prices, increased borrowing costs, and stricter lending criteria. These factors can make it more difficult for investors to rebuild their portfolios and capture future growth opportunities.
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Summary with a live case study:
While high interest rates can be concerning for residential property investors, maintaining a long-term perspective and staying fully invested in a well-diversified portfolio can help navigate these challenging times. By focusing on the potential for capital growth, steady rental income, and market opportunities, investors can build a resilient investment strategy that delivers lasting value.
Selling should be considered only as a last resort, as it can involve significant costs and lost opportunities for future growth. Instead, stay the course and leverage the power of long-term property investing to weather the storm of high interest rates.
While writing this I looked at one of the properties we have just sourced to an investor. I wanted to see what the picture may look like 10 years out.
The property had a purchase price of ￡380,000 which was a mixture of HMO rental income and commercial income from a shop. Total gross income ￡57,000
Now normally we would crunch the numbers and assess the ROI over a 12 month period. The question one should ask is how long do I intend to hold this for – 12 or at least 120 months. I think we know the answer to that question!
The deal actually presented a perhaps unexciting 6.5% ROI
Drilling down?and looking further out, for simplicity let us assume a ￡380,000?cash purchase, and no refinancing onto a mortgage. Also all the rental income is banked after deducting operating costs and fees. These would be management, maintenance and utilities for HMO and estimated at 40% of gross rent and the commercial unit 15% of rental.
If we also assume 5% growth in capital value each year and similarly for HMO rental.?
We also assume that after 5 years there is a renegotiation on the commercial lease which enables a 20% increase in rent.
Finally for the sake of this example we bank all our rentals in a non interest bearing account for 10 years. Yes I know laughable, but just stick with me.
The end result would be a building that should grow from ￡380,000 to just under ￡590,000 in value an up-lift of ￡210,000. The total net rental profits banked would be a whopping ￡456,000 for this one building.?
So in simple terms. You put down ￡380,000 for?bricks and mortar, however over 10 years you could bank ￡456,000 and then sell and pocket ￡210,000. Drop the mic for a?175% return?on you original investment and?mostly a hands off investment !