Vanessa Warwick: Welcome along to day two of Buy-To-Let Blueprint powered by Nova Financial and I’m joined all this week by my guest and co-presenter, Paul Mahoney MD, and also found our of Nova. And actually Paul, we should point out a landlord as well. Would you mind sharing a few little insights into your own portfolio?
Paul Mahoney: Yeah, absolutely. So my own portfolio is pretty well in line with what we generally recommend for our clients, and that is central locations in major cities. The areas we’ve been focusing on are the Midlands and the Northwest, or more specifically Birmingham, Manchester and Liverpool. So central areas focused at young professionals in areas which are somewhat limited from a supply perspective, because land is limited commodity, and where there’s strong growth factors such as population growth, economic growth, infrastructure spending, all those sorts of things. And that’s done me very well up until now.
Vanessa Warwick: Fantastic. Well for this installment we’re going to be talking about kind of when a newcomer comes into the property sector, how they can devise a strategy that’s going to work for them. Because I think we touched on the first video that it can be very, very overwhelming. And obviously there’s some very high risk strategies, and there’s much lower risk strategies. So what’s your view for somebody with no property experience at all when they come into the sector? What would be a safe way to get started where you’re going to be able to sleep at night?
Paul Mahoney: Yeah, okay. So I think just safe, and being able to sleep at night are two key points there, absolutely. I’m a big believer that investing isn’t just about making money. As I said before, it’s also about peace of mind and confidence, because with your first investment, if you do it badly or not even if you don’t do it badly, if it just goes badly, you’re probably going to be once bitten, twice shy. You’re not going to rush into it again, which you never want to rush into any investment, but you do want to continue to make progress. So firstly, I’d say your first investment should be a fairly safe one. You should be investing somewhat similar to what I’ve just mentioned, so far as what I’ve done. investing in central locations in desirable properties that you know are going to be desirable to a good target market. And my strategy there and the strategy we often recommend for our clients, the reasoning behind that is, even … it’s easy to make money when, the economy is doing well.
Paul Mahoney: And when the property market’s doing well, anyone can make money. Where you need to be careful though is what happens on the other side of the economic cycle. In a recession, is there still going to be tenants available for your property? And certainly, when you look at history, generally in central locations, there are. Because there are still jobs, there are still facilities, there are very strong reasons for people to live there. So even if property prices dip a little bit, your property is still rented, so it doesn’t really matter. Whereas that … and that’s what we call depth in a market.
Paul Mahoney: The further you go from those central locations, generally the more that depth tends to thin a little bit, and there’s slightly less and less reasons for people to have to live there, and therefore you can be slightly less confident in sustainability in bad times. So that’s, in a general sense, our view on mitigating risk when it comes to property investment, and that’s obviously especially important when it comes to leveraged property invest, a property with mortgages, which in our view is what really makes property a good investment. But you do need to consider the risks that are associated with that.
Vanessa Warwick: Of course. And now, we will touch on some more of those, I’m sure. I am a big advocate of novice landlords starting out with what I call a bread and butter work horse, which is a buy to let terraced house in a good central area, like you said, with good transport links, good streets in a good school catchment area. Do you have a view on houses versus flats?
Paul Mahoney: So, not necessarily on the type of property, but I look at it from kind of the other way around, if you like. I’d prefer to focus on the best location, and all the fundamentals that support that location, and then let that determine what the best property is for that location. All of my properties are flats.
Vanessa Warwick: Oh, interesting.
Paul Mahoney: And the reason for that is all of them are in very central locations, and in those very central locations you’ve got single occupancy rates, which are 60%, 65% of the market. If you add dual occupancy to that, so two people living in the properties, you’re at over 80% of the market. So one and two bedroom apartments makes sense in those locations. So, that’s been my strategy, and quite often the strategy that our clients follow as well.
Vanessa Warwick: Well, let’s talk a little bit more about the conditions that we find ourselves in, because for somebody just starting out now in 2019, obviously we’ve got Brexit, we’ve got uncertainty, there’s concerns about interest rates. When there is so much uncertainty, I think it’s even more important to play it safe. And particularly one thing that none of us can really have any crystal ball idea of is, government intervention. We’ve already had a huge amount. We don’t know even who’s going to be in charge in a few months time. It’s so all up in the air. And I think, just going, as you say, starting with something very, very low risk is probably even more important than ever in these conditions. And I get so concerned when I see … I’ve seen it today actually on Facebook, somebody saying, “Oh, I’m just starting out and I’ve bought a seven-bed HMO.” There’s so much legislation, compliance, tenant management skills needed. It’s like putting it a learner driver in a Ferrari.
Paul Mahoney: Yeah, absolutely. And I think HMO is a big one. It’s a big buzz word. Obviously. I think that the haters come off at a little bit over the past 18 months or so. But we just get so many people coming to us saying, “I just want an HMO.” And you ask them, “Why?” And they’d say, “Well, aren’t they really good?” They don’t really know why, but someone might have told them at some point that they were great, you know? And again, we approach that from the opposite direction. What is the goal? What are we actually trying to achieve? And then we work out, well, what’s the best way of getting there, rather than starting with the product.
Vanessa Warwick: No, no, no. That does make perfect sense. I think also, we mentioned everybody’s got a different starting point. I’m going to put you a little bit on the spot now, because we had a very interesting question came up when I was doing an interview with John Howard in front of a live audience. And somebody said, “If you were starting out in the current market conditions now with 100,000 pounds, what would you do?” John gave his answer. So I’d just like to reframe that a little bit and say, probably most people have access to maybe 50,000 pounds if they’re starting out. If a client came to you with that starting position, what would be your recommendation?
Paul Mahoney: Yeah, okay, good question. And I’ll sort of tie into that some of the things that I think are important in the current market, because of the changes or some of the uncertainties. So 50,000 pounds isn’t a bad starting point really, depending on the location that you want to look at. But if we’re looking at leveraged property, and I’d certainly say that’s the best option for that person with 50,000 pounds, rather than trying to buy something they … find something they can buy for 50 on its own, with a 75% buy-to-let mortgage, which is what I call the average maximum, meaning that’s where most lenders will go to while still being at acceptable rates, you can go above that, but the rates tend to start to rise, and therefore it’s less of a good use of your money. So we leveraged that 75%.
Paul Mahoney: Obviously we need to take out some … if they’re a first time buyer without a home, then they’ll have very little stamp duty to pay. If they already own a home, then they’d have the extra 3% so you need to account for that. They’re going to have some legal fees and things as well. But let’s say they can leverage that to about 180,000 after the costs. With their 180,000 pounds, they could go to any of the cities I just mentioned before, like Birmingham, Manchester, Liverpool, and maybe Leeds even. I’d say those four cities, from our perspective and our opinion I suppose, have the strongest fundamentals in the current market. From the things that, again, I mentioned before like population growth, economic growth. I’m sure you’ve heard of things like the Northern Powerhouse games?
Vanessa Warwick: Yup.
Paul Mahoney: A lot of major businesses moving a lot of jobs to those cities at the moment, things like HSBC and Deutsche Bank to Birmingham, Ernst & Young to Manchester, lots of jobs, especially services, jobs moving to those areas, and also lots of young people moving from London. Net migration within the UK is now very strong to the north. And that makes sense in my view, because a young professional earning, 30, 40 grand a year in London, they’re really going to struggle to buy their first home. They’re really going to struggle with living costs, and they move to those cities, and then not so much. So that’s some of the fundamentals, and the reasons we think those cities are quite good. I’d say buy as centrally as possible. Buy the nicest property possible, because obviously desirability … well, demand is driven by desirability. So again, I wouldn’t say to go and buy something you need to renovate, or do any major works too, because you’re just starting out, and you want to start simple.
Paul Mahoney: So buy the most centrally located property, the nicest property possible that you have worked out, or you’ve got advice on is going to be under strong demand from a particular target market. If that target market is young professionals, then you want things like bars, restaurants, cafes, and jobs on your doorstep. If it’s a young family, then you want to have enough bedrooms, firstly. You want to have schools, all those sorts of things. So work out who your target market is, and then what’s the best location and type of property for that target market, or the other way around, either/or.
Paul Mahoney: Talking about things that are important in the current market. Yield is very important in the current market, because things like worries around interest rates, and around lending, or and that, the recession … the economy and things tie into that. People are worried about Brexit causing a recession. Whether that happens or not, no one really knows what Brexit means, or what the results of it are going to be. It’s just a bit of uncertainty. I don’t necessarily think it will be negative. And I think if anything, the market will pick up once all of this is resolved. But having that buffer on yield is very important, because if you’ve got an extra few thousand pounds coming in per annum over and above all of your costs, well if interest rates rise, or if you have a bit of a vacancy period, it doesn’t matter as much. And that’s safety.
Paul Mahoney: There’s not really any other major risks with leveraged property investment. The two are interest rates and lending. They’re the two main things. Renting your property out so you can service your mortgage, and the costs of that mortgage. The other risks are pretty minimal, because as we’ve seen, property tends to trend upwards over the longterm. Even if the property price dips, so long as you’ve got a tenant, you’re safe. So they’re really the two main risks. I think a lot of people over-complicate the risks of property investment, but they’re really the two main ones, and they’re relatively easily mitigated. So long as you’re investing in the right properties and the right areas.
Paul Mahoney: So for this person, consider all of those things. Get advice, as much as possible, let’s say. Yeah, speak with people who’ve done it before. Speak with a mortgage broker as well. Make sure you get in place the right mortgages, and things that work for you. Not only the cheapest mortgage, but if this person wants to buy again in two or three years or recycle their money, or keep building the portfolio. For example, putting in place a five-year fixed mortgage doesn’t make any sense. So making sure that they speak with a broker that understands their strategy as well, getting placed at the property management, because that’s very important, unless it’s-
Vanessa Warwick: Very important, particularly if you’re buying remotely as well.
Paul Mahoney: Absolutely, yeah.
Vanessa Warwick: Because from what you’re saying, you’re not necessarily saying to somebody to buy within like a 15 minute radius of where they live. There might be a more suitable investment for them remote from where they live. So property management is absolutely-
Paul Mahoney: Absolutely.
Vanessa Warwick: … crucial to have somebody doing that for you.
Paul Mahoney: Yep, absolutely. So generally if you’re speaking with the right advisor in these areas … that are familiar with these areas, they should be able to help you with that. Having the right property management, very important. And then reviewing and reinvesting as time goes on. Don’t just set and forget. Make sure that at least every year or two you’re taking another look at your investment, seeing whether it might be worth remortgaging, and reinvesting, and building as time goes on. I’d say they’re the main pointers that I’d have for that person who’s starting out.
Vanessa Warwick: Yeah, and I think what I’ve taken away from that actually, and it’s good to reiterate this point, is that the fundamentals of property do really remain the same. Yes, we’ve got all this government intervention, taxation, uncertainty, political, economic things going on. But actually if you really understand the fundamentals of property, you’ll be able to see that you can still carry on. And I have to say, Paul, I love that saying that you told me in another interview, that it’s not timing the market, it’s time in the market.
Paul Mahoney: Absolutely.
Vanessa Warwick: And so many people will sit on the fence for years waiting for all the lights to be on green, and they might never be. You mentioned analysis paralysis. I think people do get into that, and they get stuck. And sometimes, as I said, the lights always aren’t on green. Yes, you’ve got to step forward safely, but you do have to step forward.
Paul Mahoney: Yeah, absolutely. Yeah, taking action is absolutely key. You don’t want to do it blind, but absolutely. You definitely need to to implement.
Vanessa Warwick: Yeah. Well, we’re going to be talking about that throughout the week, and just a reminder that this themed week, Buy-To-Let Blueprint, is loosely based on Paul’s new book, The Property Pension Plan. We are going to provide a link underneath the video where you can get this book free, just for the price of the postage. So do look out for that if you want to deep dive into Paul’s book, you can do that. But join us tomorrow, and we’re going to be talking about the importance of mindset when it comes to investing. So join us there as Buy-To-Let Blueprint Week, powered by Nova Financial continues.