So, you've drawn your attention to an advert in a newspaper or on social media, or you've listened to a podcast or watched a webinar, or you've gone even further and attended a property seminar or meeting. All around you people are telling you about the incredible world of property investment and how you can build a property portfolio with little (or no) money, all whilst 'leveraging' the skills of others, to enable you to earn 'passive income' which will keep paying you each month without much involvement.
Well, I'll put my hands up and admit that I've been there and seen that. I've even been lured in by the magical and incredible tales of people who have been down and out, suffered personal tragedies and been penniless or thousands of pounds in debt, and who have managed to turn their lives upside down through the power of property investment. It's like hearing a rags-to-riches fairytale… but I'll keep my thoughts on that for another day!
One thing that you will hear on property courses or podcasts, or read in books and magazines, is that investing in property can be 'passive'. The concept is fairly simple – you buy a property, you instruct a letting agent to find a tenant, the tenant moves into your property and pays the rent, and the letting agent then manages the property for you and sorts out the paperwork, deals with the legal issues, deals with maintenance and repairs, chases the tenant for any arrears, and carries out regular inspections. The letting agent then pays the rent to you each month (minus their commissions of course). All so that you can sit back and relax, or (as they often say on the aforementioned seminars or meetings) live a jet set lifestyle whilst on the beach in the Caribbean. Sounds brilliant, doesn’t it?!
The truth is that this vision is a fallacy. From years of experience in managing my own properties (often with, and now without the aid of letting agents) I can assure you that property investment is far from passive. Granted, it is more passive than doing a 9-5 job, but by no means is it as passive as many claim it to be. Here's 5 ways why property investment is not passive:
1. Sourcing investment properties
Sourcing the right investment property can take weeks and months of time in (a) researching the right city that will provide the yield or return you are looking for, (b) researching the areas within the city or town to find out where local schools, universities, hospitals, major employment opportunities and local amenities are located, and to understand the tenant demographic within those areas (c) travelling to your chosen investment area to carry out property viewings, and (d) continually liaising with estate agents on offers made.
Even when you have managed to find the right investment property, you then need to apply for a buy to let mortgage (assuming you are not buying outright with cash) and that entails a lot of paperwork, either with your mortgage broker or with the lender directly. You’ll need to dig out your payslips, bank statements, tax returns if you are self-employed or P60s if you are employed, forms of ID, and everything else barring your inside leg measurements(!) to get a buy to let mortgage these days.
You will also need to appoint a solicitor to carry out the legal conveyancing work, and keep on top of them (and the estate agents) to ensure that the purchase is progressing. Again there will be a plethora of paperwork to deal with and review, before the deal can finally be completed.
Finally, when you have completed the purchase, more often than not (unless you are buying a brand new property or are fortunate to buy a property which is in pristine condition and needs no work) you will need to carry out some level of refurbishment. That could be a minor scheme of redecoration, or replacing some carpets, or simply fitting smoke detectors in the property. Or it could be more substantial work such as re-wiring, re-plumbing, replastering, fitting a new kitchen or bathroom etc. You’ll need to find reliable and trustworthy tradesmen to carry out such work, and that’s not always easy.
You may think that you can outsource all of the above tasks to a property sourcing agent, like myself. This is true, but you will still need to deal with the paperwork with the lender/mortgage broker and your solicitor, so there will still be a level of involvement.
2. Finding good letting agents
If you are not going to manage the property yourself, which is the chosen path of many investors who want a ‘passive income’ with a hands-off approach, then you’ll need to use a letting agent. However, finding a good letting agent is easier said than done. I would recommend a local, independent agency where you can speak to the manager or owner of the business. They are more likely to be responsive and hungry for your business than a large chain. In any case, you’ll still need to keep on top of your letting agent to see how quickly they can let the property for you, and to make sure that the rent is being paid each month (and that the agent is in turn paying you promptly).
You cannot simply ‘let and forget’ – you need to make sure that the letting agent is doing their job properly and that you are being paid each month correctly. You’ll need to check your rent statements to see if there are any maintenance issues, how much has been spent on repairs/maintenance, and whether the agent has correctly charged their commissions. I’ve had instances in the past where letting agents have overcharged me on their commissions, but because I reviewed the rent statements each month I noticed it immediately and got the issue rectified.
3. Self-managing
If you decide to self-manage the property yourself, then you will never have ‘passive income’. There are so many things that you need to understand and so many processes to follow if you self-manage. I would not recommend this approach to anybody unless you have sufficient property experience or have the time to learn the basics of letting and managing property, through doing courses with the NLA/RLA or a local landlords association. I do not consider the training provided by ‘weath creation’ companies who are promoting property investment to be anywhere near adequate. If you fall foul of one of the many legal obligations at the start of a tenancy, you may struggle to evict a difficult tenant and your problems with soon multiply.
4. Maintenance and repairs
Whether you like it or not, every property will need maintenance and repairs from time to time. Firstly, there are annual gas safety checks that need to be carried out by law. Then you’ll get other issues such as condensation or mould on walls/windows, leaky taps, blocked drains and gutters, kitchen appliances failing etc. You have to be prepared to repair and maintain your property in order to keep the tenants happy and to protect your investment. If you are using a letting agent, then they will arrange for such maintenance and repairs to be dealt with, but you should still review all expenses being incurred to make sure that contractors are not overcharging you and to make sure that the same issues do not keep occurring each month.
5. Paperwork and admin
Finally, owning an investment property is the same as running a business. You have income from the rents, and you have overheads and running costs (mortgage payments, letting agents’ fees, repairs and maintenance bills, service charge/ground rent if you have a flat etc). You also have tenancies that need to be managed, especially if you need to go down the route of an eviction. You need to keep on top of all your paperwork to ensure that everything has been done by the letter of the law. You will need to keep on top of your accounts, by recording all rental income or expenses, and then submit a self-assessment tax return each year. Your letting agent will not do your book keeping, and your accountant cannot submit a tax return without having all the income/expenses recorded. So you will still need to record your income and expenses at the very least, or hire a book-keeper!
You can now see from the above that property investing is not ‘passive income’. If you decide to invest in more advanced strategies such as HMOs (houses in multiple occupation) or serviced accommodation, then the level of your involvement will increase even further.
Whilst I am not trying to deter anybody from investing in property – far from it given that it is my business to help investors and manage their properties – I want to provide a full, complete and fair picture of investing in properties. This is something that I feel is not being provided by many course providers or speakers at property events, often because they want to make it look as easy and glamorous as possible in order to sell tickets for further courses or mentorship programmes (but that’s another story!).
If, after reading the above, you want to invest in properties and want to work with someone who provides honest and fair advice, feel free to contact me to see if I can help you in any way.