Property Tribes - Ep1 Property Topics Going Head to Head with Paul Mahoney - Flats v Houses - Nova

Property Tribes – Ep1 Property Topics Going Head to Head with Paul Mahoney – Flats v Houses

Vanessa Warwick:

You are joining us for another themed week here on Property Tribes. It is going to be powered by Nova Financial, and joining me all this week as my guest, I’m delighted to have on board Paul Mahoney, MD of Nova Financial. And Paul, we’re really excited about this week because we’re going to call it Property Topics Going Head to Head, and it was really born out of this whole idea of discussion being such a great way to learn because it teases out the issues. And it’s really what Property Tribes’ knowledge base is based on, lots of people having differing opinions, teasing out those issues, and the viewer can look across all those opinions, see who is making those opinions, and then start to build their own opinion on that particular topic. So you and I, we don’t always see eye to eye, but that’s healthy, isn’t it? We can learn from each other.

Paul Mahoney:

Absolutely. And look, thanks for having me back. It’s great to be doing another sponsored week with you, so that’s brilliant. And I completely agree. Healthy and friendly discussion is always a positive thing. I think we’ll both agreed that there’s no one right way to invest in property. People have different approaches and different opinions, and numerous different ways can work. So we’ll discuss that in more detail. You’re right, we don’t always agree 100% on our own strategies, but that’s fine too. So hopefully some of our discussions will tease out the logic supporting various different strategies, and create a good forum for discussion.

Vanessa Warwick:

Well, that’s awesome. And we are going to be covering five different topics throughout the week. And the first one we’re going to go to is flats versus houses. But before we go there, Paul, I just wanted to really just ask, obviously we’re recording this post COVID-19 lockdown, there’s been very, very significant changes in the property market, lots of uncertainty, have the strategies that you promote to your clients at Nova Financial, have they changed at all?

Paul Mahoney:

Good question. I like this question, and I’ve been asked this question quite a lot lately. And the reason I like the question is I like the answer more, and the answer is no, our strategy hasn’t changed from before all of this. And I suppose the reason I’m proud of the answer is our strategy has always somewhat been about mitigating risk, because we are aware that recessions happen and that sometimes it can be quite easy to make money in good times, but what’s not so easy is surviving or even thriving through bad times. So our approach hasn’t changed all that much because it’s always been in consideration of the fact that things like job loss, and recessions, and struggling economies do happen every 10 to 15 years historically. And therefore we’ve always tried to account for that.

Vanessa Warwick:

Absolutely. And I’m glad you mentioned mitigating risk as well, because I think this way of learning through hearing differences of opinion and forming your own opinion, rather than just listening to one person and accepting their input as a complete singularity, I think that’s a lot more healthy way to learn and mitigate risk, because you’re not just getting one source of information.

Paul Mahoney:

Yeah, absolutely. And I think when it does come to following somebody’s advice or guidance on an approach, I think as an individual investor, you also need to be aware that at the end of the day it’s you that’s riding the roller coaster. It’s your investments, and therefore you need to be well aware of them, and comfortable with them, and happy with that approach for you. So completely agree, taking from different sources, and I suppose working out what logic you most agree with, and then running with that. But then perhaps not just sticking to the one strategy forever either, because things change, things evolve, and your situation is likely to change and evolve as well.

Vanessa Warwick:

Absolutely. Property’s a very longterm investment. And what I think we would both say is don’t be offended if somebody doesn’t agree with you. It’s not a personal thing. If they’re interacting in a professional manner, putting through reasoned arguments, you shouldn’t feel offended by that, you should welcome it because you can test your own opinion on their opinion and, as we say, learn and grow through that. And do you know what, Paul? I actively seek out people that don’t agree with me because I want to test my opinion to make sure that my logic is as strong as it can be.

Paul Mahoney:

Absolutely. Yeah, and in my experience, and especially through having conversations like these, a lot of the TV and interview type stuff that I’ve done, generally the most entertaining is when you disagree with someone, but you’ve both got very good points to support your argument. So I’m pretty confident this is going to be one of those.

Vanessa Warwick:

Good. No, I know what you mean, because sometimes you go to panel debates and everybody just sits there going, “Oh yes. I agree with so-and-so,” and it’s actually quite dull, so we’d like a robust and healthy debate, and that is what this week is going to be all about. So for our first installment, in the blue corner, that’s me, I am going to speak in favor of houses, and in the red corner, that’s Paul, Paul is going to speak in favor of flats. Now, I know, Paul, that it’s not as black and white as we’re making out, because I totally agree with you that there are certain circumstances where flats are good, but my main reticence about them is that they are leasehold rather than freehold, and they generally come with service charges and ground rents, and they can greatly eat into an investor’s cash flow. So that’s my number one reason why I’m not so keen on flats. So what would you say to that?

Paul Mahoney:

Look, it’s a very good point. And I suppose the service charges and ground rents is, I suppose in most people’s view, the downside. I suppose what I would say to that when comparing the two … Actually no, I’ll take a step back as to why, in general, both for me personally and for our clients at Nova, our approach is generally focused on flats, and that is because I think the way that we look at property is slightly different to how some people look at property, and that is we will look for the best possible location, firstly, and then we will allow that location to determine the most suitable property. Now, what that has resulted in is generally, over the past few years, we’ve been focusing on places like Birmingham, Manchester, Liverpool, [inaudible 00:07:24] being driven by those areas having an abundance of all of the types of things that drives demand for property.

Paul Mahoney:

So just very briefly, in short, that’s what’s led us to these locations. And when we look at the household makeup, in general, in those areas, your average person per household is about 1.8 people on average across those cities. And therefore it’s a one or a two bedroom apartment that makes the most sense for that household makeup. So that’s what’s driven us toward that based upon ticking as many of the fundamentals boxes as we can. So just in short, that’s what’s got us there. And I suppose, just we’ll take one step further than that, generally we will be focusing on low maintenance properties. And what I mean by that is new or newish rather than old, because there’s a big difference there in [inaudible 00:08:20] what the service charges are going to cost you because of that maintenance.

Paul Mahoney:

Generally when we’ve compared the likely maintenance of a house to reasonable service charges in a building that has reasonable services, and what I mean by that is obviously if you add in things like gyms, and pools, and 24 hour concierges, that adds a lot of costs, but average services, let’s say, the costs aren’t all that dissimilar over, let’s say, a 7 to 10 year period. When you consider things like replacing boilers, and maybe fixing the roof every now and again, and giving the house a repaint, all the things you don’t have to do with a flat generally, those overall aren’t that dissimilar. And therefore if a flat makes more sense in the location … Well, I suppose, on that point, sometimes the house just makes no sense in a location. There’s no point [inaudible 00:09:18] but I suppose that’s another point to consider there is we’d be more focused on the location than the time property.

Vanessa Warwick:

No, I get that. And it would be very foolish for anybody to say, “Oh, don’t touch flats,” and that’s not what I’m saying. I do see good reasons for them. Myself, we’ve got flats in London, mainly in North and East London. We’ve had them for 17 years now. They’ve done extremely well. So I think flats in city centers are definitely worth considering, also because very often they are entry level in terms of price and also in terms of rent. So they’re the most affordable property in the area, so there will be a lot of tenant demand. And we know that a lot of young singles want to rent in city centers, et cetera. So I’m less a fan of them outside of city centers for those reasons.

Paul Mahoney:

And I completely agree. We’re agreeing too much here perhaps, but no, I agree, absolutely. And that’s what I was talking about, the location. I think the location and the skewing of demand in that location should determine the type of property. Now, that’s what’s led us toward that type of property predominantly. In fact, all of my properties are flats, my personal portfolio, and predominantly most of our clients go for that type of property. And that’s more about the location than it is the type of property. And I’ll just cover other points on that, so far as you mentioned about service charges and other things some people get caught up on is the length of the lease.

Paul Mahoney:

Now, in my opinion, if the lease is sufficiently long, it’s what’s sometimes referred to as a virtual freehold. So for example, if you’ve got a 250 year lease, sometimes we’re going to ask questions about, “Well, every year that lease reduces, the value of my property reduces,” and that’s not necessarily true because generally the value of the property will only start to reduce once the lease length is closer to 80 years. So if it’s 250, most of us will only live about 85 years, so that’s well beyond the timeframe you’re going to own the property.

Vanessa Warwick:

I think, as I mentioned at the beginning, we are recording this post COVID-19. A lot of changes in the property sector. And one of the key trends that is coming through in terms of priorities for tenants is outside space of some description, and also somewhere to have a home office. So I think anybody thinking of investing in flats going forwards, they need to look for flats that have balconies, or roof terraces, or close to a green outdoor space, and also where there is room, maybe a box room, where they can work from home if needed. And obviously very good internet connection is a huge part of that as well. And flats often do have extensive broadband connectivity, which is in their favor. I’m agreeing with you too much, Paul.

Paul Mahoney:

And look, I think you’re right, it’s all about livability. There is going to be more focused moving forward on livability than there has been in the past, and that’s likely to be driven by the fact that more people will be working from home. So again, something that’s always tied in to our approach has been livability of tenants, but also saleability at some point in the future. And considering the fact that the biggest portion of people you might be selling to … well, you’re likely to be selling to will be owner occupied. They make up, in most areas, about 50 to 60% of the market. They’re very emotional buyers. So things like the flat facing the right direction, such as South, or Southeast, or Southwest, having a usable floor plan, for example, you don’t want an en-suite in a one bed because then you have to walk through your bedroom to get to the bathroom. Little things like that that some people wouldn’t think of.

Paul Mahoney:

And nice, well lit apartment maybe, if it’s in a … if it’s in a tower, maybe slightly higher up in the building might be more desirable if it’s got a few, all these sorts of things. Whereas in the past, in a city center, you could pretty much buy anything and it would rent reasonably well, and you’d probably be able to sell it to a landlord reasonably easily as well because it rents quite well. I think the focus will move away from that type of property a bit more so toward more desirable properties. So there needs to be a bit more livability consideration as opposed to it just being about the numbers for landlords when buying those types of properties.

Vanessa Warwick:

I like that word livability. Put yourself in your tenant’s shoes. And I think one thing I would also add to what you just said, Paul, was I think it’s a good idea, if you’re going for a two bedroom flat, to buy one with two equal size bedrooms and make sure one of the bedrooms is en-suite, because that does open up the flat to friends that maybe want to share, and there won’t be somebody the smaller boxy room. So I think that’s a good point as well, to think about the layout of the flat. You mentioned where it faces. There can be a huge difference in the atmosphere of property if it’s facing over a bin store or if it’s facing over some beautiful views of a river. And it’s probably worth paying a little bit extra to get those premium views.

Paul Mahoney:

And quite often what we find when we look at a new build or off-plan development is those things aren’t necessarily priced in. Sometimes they are, but quite often they aren’t. A great example is where I’m talking to you from now, this is a Southeast facing corner apartment. It’s much more livable than the same floor plan facing the internals of the development, but they were pretty much very similarly priced. And this is much more rentable and much more saleable than those properties. So that’s something worth looking at based on what we’ve just been discussing.

Vanessa Warwick:

Yeah, I think my final point about houses is that you own the freehold, you can make additions to them, maybe go into the loft, add value, extend, develop. Obviously, I’m sorry, Paul, but with a flat, you can’t do that.

Paul Mahoney:

No, you can’t. And I think that all comes down to where I probably should have started is for most of our clients, and for most of the properties, for example, that I’ve personally bought, the aim was to be quite passive. So it’s been more about taking X amount of money, getting some leverage, putting it into this property. For example, 50 grand into a 200 grand flat, it’s going to give me X amount of net yield a year, it’s likely to grow by X amount, and over 10 years, this is about what I’ll achieve, and not much more than that. It’s been a very unemotional and commercially minded approach.

Paul Mahoney:

And what we found is that worked quite well for your mum and dad investor that wants to better utilize some resources they’ve got spare but don’t really want to be too hands on. So we found and we think that works quite well for that sort of person. However, you’re completely right. If you do want to be a bit more hands on, or if you want to progress in your property knowledge, or how complex the deals you’re doing are. Then there’s definitely more opportunity to create value in houses.

Vanessa Warwick:

You mentioned the mum and dad investor there. You have to be careful that there aren’t too many mum and dad investors in your building. Very often developers do sell off plan to investors, and you can end up with a lot of flats under ownership of landlords all seeking tenants. But I guess, Paul, that just boils down to due diligence, like any property purchase would.

Paul Mahoney:

It’s a good point. It’s a good point, and it’s a point that’s often raised by lenders. However, I don’t necessarily agree with it. So this is going well. I’m disagreeing with [crosstalk 00:17:52]. The reason I don’t necessarily agree with it, depending on the location, this is. Now, if this was a block of 200 flats 10 miles from a city center, completely agree with you. Filling that building when they’re all for let might be difficult. If it’s a block of 200 flats in the center of a major city, it doesn’t really matter or make much difference if the whole building is landlords or if most of them are owner occupied and there’s only five landlords, because you’re not just competing against that building, you’re competing against all the other buildings within a mile radius, at least. And therefore 200 flats in the center of Manchester is a drop in the ocean whereas 200 flats out in a secondary regional town is a lot to fill. So I think that’s another thing just to consider, sometimes that point doesn’t matter all that much, depending on the location.

Vanessa Warwick:

Well, I am going to agree with you there, Paul. I think that’s a very valid point. Well, we’re going to conclude today’s edition of our Property Topics Going Head to Head, and that’s it for today. We hope you’ve enjoyed this first discussion. And we would invite everybody watching to join the conversation in the thread and say your pros and cons, the difference between investing in houses and flats. We want to see what you think.

Vanessa Warwick:

We’ve just tried to spark a discussion here, but we want really to encourage the community to get involved over the following week, and really start listening to the discussions, and then adding your thoughts to them as well, because we know we’ve got lots of experienced landlords, and also we welcome the thoughts of newbies as well. They often see things through fresh eyes. So let’s hope we can get the whole community engaged over the next week or so. Tomorrow our topic is going to be investing close to home or investing further a field. And again, Paul and I do share different views on this, so please do join us tomorrow as our Property Topics Going Head to Head week powered by Nova Financial continues. Paul and I will see you tomorrow.

 

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