The New Property Entrepreneur
The last five years have witnessed dramatic changes to the property investment landscape. Since 2015, we’ve seen landlords pay more tax, take on greater regulation, incur significantly increased costs and endure the threat of rent freezes. You could be forgiven for thinking that creating wealth through property as a strategy had had its day.
But Warren Buffett taught us to be fearful when others are greedy and greedy when others are fearful. So as 2022 slides into Autumn and the market looks fearful, what prospects exist for investors looking to make an impact in today’s property market? What are the key investment strategies that are going to make a difference?
Two people who are well-placed to have a view on this are Ritchie Clapson and Simon Zutshi. Ritchie is the co-founder of leading property development training company, propertyCEO, and is a regular Property Investor News columnist. With 40 years of development experience, he’s got a keen eye on the opportunities in all aspects of the development arena. Simon Zutshi is the founder of property investors network (pin) and the Property Mastermind mentorship training programme, which has been running successfully for the past 15 years. He is also the CEO of peer-to-peer lender, CrowdProperty. During his career, Simon has seen just about every type of property investment strategy going, from the traditional to the left-field, and his businesses teach a broad range of property investment strategies. So, what do these two property luminaries think will be the next big thing in property development and investment? And what are the best entry points for those looking to get into property in 2023 and beyond?
Ritchie Clapson
I think the first thing to say is that, as an asset class, property still makes a lot of financial sense, whether you’re developing it or holding it. The first question any self-respecting entrepreneur or investor should ask is, ‘is there a market for the end product?’. Given there’s currently a massive undersupply of housing in this country, plus they’re not making any more land, you’ve got to think that of all the asset classes, property has a massive advantage. It doesn’t mean you can build anything anywhere and guarantee a profit, but at least you know there will be a healthy underlying demand. Plus, the government is actively supporting property development, showing the importance of new housing in their thinking. And, of course, unlike other less tangible assets, property can’t lose all of its intrinsic value overnight.
So, where will the smart property money be made going forward? For me, property development has a lot going for it right now, and this looks set to continue for the foreseeable future. One of the interesting phenomena we’ve witnessed over the last few years has been the creation of a new stratum of property development that sits above refurbs and flips but below the scale of projects required by the larger developers. We’re talking about schemes of between 5 and 20 units; too large for jobbing builders to take on for their own benefit but not profitable enough for the bigger players. But with typical profits ranging between £100k and £500k, these ‘small-scale’ projects are understandably highly attractive for individual investors, producing many times more profit than the £40k or so produced by your average flip.
Not too many years ago, these types of development would have been beyond the scope of most private investors, but we’ve experienced a perfect storm of events that have catapulted small-scale development into the mainstream. We’ve seen an explosion in the volume of permitted development rights that allow existing commercial buildings to be converted into residential without full planning permission. Not only does this significantly de-risk matters, but it also means you can sidestep our broken planning system to a significant degree. Another key benefit is that with permitted development in place you’ll be able to secure commercial finance.
As our retail and commercial sectors have changed over time, we’ve amassed a considerable volume of unused brownfield commercial property that, if converted, could release over a million new homes. But the scale housebuilders can’t tackle this mountain of opportunity; their expertise lies in making millions by building lots of cookie-cutter houses on big empty fields, and not squeezing a handful of flats into an existing building for a few hundred thousand. So, commercial conversions are open season for individual property entrepreneurs looking to capitalise on what is arguably a once-in-a-generation opportunity.
A popular misconception about these small-scale developments is thinking that if they produce more profit, they must be more challenging to do.
In fact, the opposite is true. It’s simply a question of scale. You’ll likely have a development budget of several hundred thousand to do a small conversion, which dwarfs the budget for a typical flip. And not only do you borrow 100% of this money, but the scale also means that you can hire a main contractor instead of a local builder, plus you can afford to hire a project manager to manage the project for you. As a developer, it moves you from the shop floor to the boardroom, with a plum executive role, less hands-on activity, and crucially, a lot more profit left in your pocket.
If you wanted to maximise your position, I’d say the sweet spot in today’s property investment world is to combine small-scale development with building a rental portfolio – the landlord-developer model – whether residential or commercial. Every investor always runs out of deposits. With average yields at just 3.63%, it will take most buy-to-let investors a long time to grow a portfolio organically. What’s needed is an injection of cash. Small-scale conversion projects typically take less than two years to complete from start to finish. Imagine completing a 2-year small-scale project that produces £200k, which you use to fund the deposit for three buy-to-lets costing £200k apiece. Then you’d simply rinse and repeat four more times, and over ten years, you’ve done just five projects but have built an investment portfolio of 15 rental properties, or 30 if you’re prepared to run two jobs simultaneously. And if you need to keep going beyond that, you can, but for many, owning 30 rental properties will probably be enough.
But how busy will you need to be to build this portfolio? Well, another advantage of small-scale development is that it’s highly leveraged. Whereas a refurb or flip will typically see the developer in the role of project manager, rigorously managing events on-site and banging heads together as necessary, this doesn’t happen with larger projects, where your appointed project manager deals with all this on your behalf. Your job is to find the projects, make sure the numbers work, appoint the team, and arrange the finance. I would expect to spend an average of half a day a week on a small-scale development. Sure, there are peaks and troughs, so you’d need some flexibility, but I don’t know of too many enterprises that can generate a six-figure income from so little time expended. You also have an option to build to sell or build to rent; there is tremendous flexibility.
The critical point is to educate yourself – it’s not only about avoiding the pitfalls; it’s about spotting the opportunities that allow you to pay more for sites than your competitors. But overall, small-scale development has taken a giant stride into the mainstream and should undoubtedly be on the radar for those investors looking to stay ahead of the investment curve in 2023 and beyond.
Simon Zutshi
While no one has a crystal ball regarding the property market, we’ve certainly seen peaks and troughs in the past, and history can help guide our thinking. I suspect we’re not facing an imminent crash, and the government has been taking action to stimulate the market, which is a strong positive.
One of the biggest learnings in any investment strategy is to see opportunity when others are running scared. It’s easy to view things like a global pandemic or a recession as a reason to sit on your hands.
Yet time and time again, we’ve seen how those that acted in the ‘bad times’ went on to make a killing. Later, others would look back and say, ‘if only I’d invested back then…’. Yet here we are again, on the brink of a recession, and many of those same people are once more glued to the sidelines.
It’s been a seller’s market lately and so tricky to pick up bargains. Yet I believe one of the biggest opportunities over the next year will be from landlords looking to divest themselves of their portfolios. Landlords have had a rough time of it these last few years, and many want to retire early and sell up now rather than wait to incur further costs and onerous regulations down the line, or maybe face another 2008 ‘crash’. Many have already exited; witness the shortage of available rental properties that has pushed rents skyward. That presents an excellent opportunity for investors, as many of these landlords will be prepared to sell at a discount, and that’s where you can lock in some significant value.
A key challenge for many such established portfolio landlords who are selling up will be capital gains tax. The personal allowance for CGT is currently just £12,300 per year. So, if they’ve got a lot of profit tied up in their portfolio and don’t have these assets in a limited company, they’re going to face a chunky CGT bill unless they offload properties over several years. One tool that enterprising investors can use to alleviate this problem for these divesting landlords is something called a purchase lease option (PLO). These must be just about the most misunderstood tools in the entire property universe, yet when you know how to use them effectively, they can unlock many different types of property deal. In the above example, a PLO would allow you to offer the landlord the ability to exit the market immediately, sell their units over time so as not to trigger additional CGT, and get a guaranteed income from units that aren’t yet sold, all without them having to worry about tenants or day-to-day repairs. And for your part, you can control the property without needing to own it or have a mortgage against it, plus you’ve got the option (but not the obligation) to buy the portfolio down the line. Like so many angles in property, you need to know what you don’t know – and I consider PLOs an essential tool in the investor’s toolbox in the current market. They work with all sorts of strategies, from buy-to-lets to development.
As recession looms, it’s natural to look for recession-proof property strategies, and for me, there are two that fit the bill. Serviced Accommodation (SA), where properties are let out in the short-term to holidaymakers or businesspeople on portals like Airbnb, is an area that has boomed recently. The pandemic understandably led many people to opt for staycations; however the current cost-of-living crisis is likely to have the same effect and will continue to make holidaying in the UK an attractive proposition. SA requires robust systems and reliable logistics, but it maximises yields and, as a ‘commercial’ property, units may also be purchased within a SSAS pension if you have one. The second recession-proof strategy I’d consider is high-end HMOs; however, I strongly suggest you avoid the lower end of the highly-saturated HMO market. I’m talking about ‘co-living’ units with a premium finish and a real community vibe. The big advantage for co-living tenants is that they get top-notch accommodation, with more space (albeit some is communal) for less than renting a one-bed flat. Demand for this type of accommodation will increase significantly over the next few years, particularly in our city centres.
I can also endorse Ritchie’s previous comments about small-scale property development. This used to be seen as a high-risk, highly complex area, but today it sits as arguably the best cash-generating strategy around, plus it’s extremely highly leveraged. I’d urge anyone looking to grow their portfolio or where cash flow is not their number one objective to take a look at what’s involved – it might surprise you how accessible it is. And the ‘landlord-developer’ strategy is golden.
As I write this, the government has just announced some draconian tax changes, including a permanent stamp duty reduction designed to stimulate first-time buyers and those looking to move at the lower end of the market.
This tells me we’re likely to see more demand for flats and smaller houses, and so an excellent place to be from both a development and investment perspective.
And while the market continually evolves, there are several constants I recommend you adopt when it comes to investing in both the good times and the bad. Hold for the long-term, have more than one string to your investment bow, and get yourself educated because, at the end of the day, it’s knowledge that will allow you to maximise your returns. While everyone else is weighing up vanilla, you’ll have a much broader range of flavours to choose from. And you’ll end up with more profit as a result.