One of the most popular questions we are asked is where should I invest, and should I invest locally or further afield?
Now we certainly never advise someone to invest in a certain town or city as each investor has their own preference and goals, and needs to do their own due diligence on each individual property. We have however written this blog as we want to give both sides of the coin and give a varied view on what you need to look for if you decide to invest further afield.
We think it’s important to say that for some people investing close to home does not work. Now there is a lot of talk from so called gurus who say that there is always somewhere near to where you live (usually within 30-40 miles), but I think that it some instances that just isn’t the case for a variety of reasons, and if you did want to stay close then you would need to change your strategy amongst other things. There are people that do not want to change strategy but look for a different area instead, and they may look further afield.
We personally think there are two main questions you need to ask yourself at the start of your investing career which are:
- What are you comfortable with as a person?
- How hands on do you want to be? (a landlord vs an Investor)
If you have the mindset of a Landlord (and I know technically we all are!) then control will be an issue for you. Consequently, you will be restricted to local investing and most likely will manage your own properties instead of using an agent.
If on the other hand you see yourself with an Investor mindset then you could potentially invest anywhere, as your decisions will be based on analysis, informed decisions and you would be prepared to delegate more.
So, do you want to be a business owner/investor or a landlord?
And, are you investing for yield and return or capital growth as you may have to look further afield for this.
Yield and cash flow vs capital growth argument.
Looking at the UK as whole it shows that London and the surrounding areas seem to provide good opportunities for capital growth and in the current market that is still the case overall. Property prices are, however, comparatively high and consequently yields in these areas are the lowest in the UK.
The midlands and further north, in the main, provide lower priced properties. Relatively high yields of 8%+ on a single let property is not uncommon and in some cases higher. If you live in one of these areas then most Southern based investors would be envious that you have lots of cheap high-yielding properties on your doorstep. We are based in the midlands and we have other people in the south regularly saying that to us. There is always some people that say that there is no capital growth in these areas though.
Well we feel this is certainly not true and we have received capital growth over the last eight years for sure.
But also, worst case what if there wasn’t?
We believe investing is about getting a return on your capital and generally this is through yield and monthly income. You can also control the yield you receive a lot more than the capital return. This is because your capital return is affected by two main things over which you have no control:
- The Economy
- Supply and Demand
We would certainly argue that a capital growth strategy is much riskier and that your focus should be on cashflow/yield, and the capital growth is a bonus. Property is like any business and businesses survive on cashflow – not hoped-for capital growth or future value.
So, does that mean you should invest outside of London and the South East if you live there?
Let’s look at an example of differing properties to see.
We have clients who invest with us in the midlands who live down south. They say that they would be looking at a purchase price of around £250’000 to get a rental of £1500 pcm. After taking off all their costs such as mortgage rates, insurance, maintenance they say they would receive a cashflow of around £600 per month. This would give them about a 9% return on investment assuming they put a 25% deposit in. Whilst this isn’t to be sniffed at if you want to invest there let’s see the other options.
Now let’s look at a property in Coventry which is my investment area. You can still Buy a property in the region of £100’000 that will rent for £600 per month. After taking off all costs as above you would receive in the region of £300 pounds a month cashflow, giving a 14% return on investment (again assuming a 25% deposit).
As you can see the return on investment is higher. We also have other people in our network buying property further up north in places such as Blackpool or Preston. They say to us that you can still buy property up there for around 70k that will rent for £475 pcm giving a cashflow of around 230 after all costs and a return on investment of around 15%.
We think there are other advantages of buying cheaper properties that yield higher. This is because your risk is also diminished as you could have 3 properties further north compared to just one property in Farnham so even with 2 properties empty, you would still be receiving an income whereas if the one property down south was empty, you would have no income at all and it would be costing you money.
So, from a financial analysis and with your investment head on, it makes more sense to invest in a higher yielding area with cheaper properties. And if this is not near your own area, you may decide to look further afield.
There are however, many factors to consider when investing remotely. Here are six key ones:
- Managing the properties. A key element to the success of remote investing is having a good local management team. This will usually be a letting agent – or if you have enough properties to substantiate it, a property manager that you employ (we have this for one of our portfolios). Our criteria for using a lettings agent is that they must be an investor themselves and have a similar mindset to us. This can take a bit of time to find but you will get there.
- Knowledge. We believe you will never really understand an area unless you can spend a reasonable amount of time there. That’s what we did when researching our area for ourselves and other investors. There is lots of research you can do online with sites such as Rightmove, Zoopla, Nethouseprices, and offline at local property meetings, landlord meetings and the local council meetings. You can also work with other locally based investors and sourcers to find out what their thoughts are. When we were assessing our properties initially, we spoke to other local investors for their opinions and this was very helpful.
3. You will need to work out what it costs you to run the portfolio if you are going to manage it yourself. Like any start-up business, you will also need to spend a lot of time initially to get the ball rolling and you need to look at this as a business. But once you build a reasonable portfolio, that time spent can reduce a lot, and mean you do not need to spend as much time especially if you then use an agent.
4. Relationships with agents and/or tenants. The most difficult part is relationship building with local agents if that is one of your main routes to finding properties. Again, this can be overcome in time, whether that is a weekly telephone call or working with another local investor to source to help you on this. We know people who have teamed up with other investors and worked together to mutually profit.
5. Access to the right deals. It is perfectly possible to find deals remotely whether that is via agents or direct to vendor. You just need to have the right systems in place. This could be spending a day or two a week up there, working with other local sourcers, or starting a lead generation website amongst other things.
6. Finding the right tradesmen and power team- This is also important and can be leveraged if needed. You can speak to other local investors and look at online sites such as check a trade or trusted trader. These will help as you can get reviews of local tradesmen to see who has a good reputation in the area.
As a conclusion, we certainly don’t think you should be put off by those who say you should only invest within a 30-40-mile radius of where you live. For many people that simply is not viable. We are not saying that remote investing is definitely for you, but would just say to consider it.
What we would say is use a business head not an emotional one, and then we are sure you will get the right decision for you.