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We interviewed Kate Faulkner, one of the UK’s leading real estate experts. We wanted to get her opinion on some of the challenges facing UK landlords and property investors today, as well as pick her brain for advice on how to overcome these challenges so that we can continue to scale our operations and achieve profitability.
Watch the full video (linked below), or check out the edited transcript further down the page.
You can find out more about Kate Faulkner at https://www.propertychecklists.co.uk
Well, I always think about property as a 20 – 25 year investment. For me it’s less about timing the market, it’s a hard thing to do, it’s more about finding that golden nugget that’s going to grow the value and deliver decent rental returns with very few vacancies.
The only problem with the market just now, in the summer of 2021, is that it is what can only be kind of described as frothy, the pandemic has just had this amazing effect, which has never happened before. Normally when uncertainty hits which is what we had this time last year, everybody battens down the hatches and the last thing anybody thinks about is moving home. But this time last year there was the complete opposite effect. And this unpredictability is still carrying on. So, if you’re new to investment, then probably just hold off for the summer, and use it to research, and look for those golden nuggets of property that I talked about earlier.
The other thing I would say, and it’s a little tip I’ve always done, is I always buy around November December time if I can. This is when everybody kind of goes on holiday even other investors, and people are desperate to sell so you can usually find a good deal. So, bearing in mind the year we’ve had I’d probably hold off a little unless you’re an experienced landlord, in which case, the most important thing is getting the right property on the right street.
I think out of all of the recent changes the EPC is probably the biggest one that landlords may not have got to grips with. Just like you need to have a plan to invest your money or wait for a property to hit a certain house price points that you can take equity out and reinvest every landlord across the country is going to have to have a plan of how you’re going to get their property (if it’s not already) to a C rating from an EPC perspective.
We’ve all got targets to achieve, and it’s not just landlords that are going to be hit by this change. For example, some really interesting stuff happened recently. If you’re a developer, from 2025, which isn’t that long away in property years, you won’t be able to fit traditional boilers like gas and oil boilers anymore. You’re going to have to go for alternative methods. That’s going to massively impact all properties in the future, but homeowners and landlords are going to have to look at retrofitting different types of heating systems that are more energy-efficient.
One of the things that is naturally expected to happen is that by the mid-2030s, you won’t be able to get hold of or maintain those traditional boilers. So, I think every landlord needs to have a long term plan. The thing that’s a bit frustrating at the moment is that now it’s by 2028 that you’ll need to get your property up to a C rating if you want to be able to rent it. But there are moves afoot, and we’re waiting for with bated breath, to bring this forward to 2025, and that doesn’t leave landlords much time to upgrade properties.
You’ve got to see this cost as an investment, you’ve got to see it as an investment in your customer, if your tenants are saving money on bills they’ll have more money for rent in the future and that’s the way you have to look at it.
Plus, the more energy-efficient your property is in the future this is going to really capture tenants’ attention. Inevitably they’re going to start clicking onto the fact that more energy-efficient property is going to save them money in the long run. It will make the property more appealing to tenants, so you’re going to be able to fill your vacancies faster, and keep those costs down as well.
We were all expecting some big Capital Gains Tax bill to come out in 2020. One that would punish landlords for keeping homes over people’s heads, which seems a bit cruel if I’m honest. But it didn’t happen. However, there’s a paper out recently, that’s reviewed the capital gains taxes at the moment and it hasn’t really commented on the actual tax you pay, or why you pay, but what it has said is that there’s been some tightening of rules as to how quickly you have to pay it.
Actually what it’s saying is there are some real issues coming up that the kind of having to pay the Capital Gains Tax bill so quickly after you’ve sold a property, which can be incredibly difficult particularly if you’ve got quite a complex case, somebody is getting divorced for example, and they’re having to sell the property for that reason.
There are lots and lots of other things to be considered, so the good news is, and I expect this will happen, that the tight rules and regulations of how quickly you have to pay Capital Gains Tax are probably going to be extended, so that’s a good thing.
Essentially, they’re saying to everybody, look we prefer you put money into finance and if you’d like to make money through the property you can put your money into financial investments that go towards property and earn it that way rather than into buy to let. So this is a real indication of where the government is heading. So we already pay higher tax rates, and we are waiting there is going to be a few more reports on this I think for landlords so we’ll wait to see what they say.
One of the things that has been suggested is that rather than pay 18% for low rate taxpayers, you would match that Capital Gains Tax, with the tax that you already paid so if you’re a 20% taxpayer you pay 20%, if you’re a 40% taxpayer you’d pay 40% And that could hit landlords quite hard, so we don’t know whether that’s going to happen or not it would be quite harsh if it did, I think.
And one of the things that I would say again, make sure at some point this year or early next year you go and see a tax accountant. Because one of the things they can do is they can mitigate tax for you before tax changes happen under the current tax regime. If it’s announced that that tax regime changes in March and you haven’t taken the advice beforehand there’s nothing you can do.
It’s a really really good question. I think, and it’s quite basic really, what you want to do is you’ve got to work out, is property the right investment for you? Some people just go straight into it, “okay, I want to invest in property”, and then when you start asking them questions and what they’re expecting the property to deliver they have unrealistic expectations. We’ve even spoken to people who’ve got millions to invest and in terms of what they’re hoping to get out of it, it’s just not going to deliver it.
I’m not regulated for financial advice, but typically what anybody who is regulated would say, and it’s the mantra that I live by, is don’t have all your eggs in one basket. I remember back in the last crash of 2008, property values went down, but actually, a lot of my shares went up.
You want to make sure that you’ve got the risks spread out. So I always say to people to talk to an independent financial advisor and to find one that’s really into property investments. A financial advisor that’s got property sector clients already or is investing in property themselves.
And I think you’ve got to be really clear about what you expect from the property. Why are you investing in property? Most often it’s to make money. Which is lovely, but do you want to make income? do you want to make capital growth?
Achieving both can be almost like Moses kind of parting the sea. You’ve got properties that deliver good income, or you’ve got properties that deliver great capital growth but don’t expect any income from it (particularly after the taxes that you have to pay today). You often have to choose one or the other. The only way you can kind of get both is if you buy a property where you can instantly add value to it, increase your yield, and build capital growth right from the start.
And then you’ve got to remember that you’ve got lots of rules and regulations. So how are you going to keep up with 400 rules and regulations? And we haven’t mentioned anything to do property yet.
I think those are the kinds of things that you’ve got to think through first. After that you need to look at the location, ideally, you want to find properties locally, but that’s not possible for everybody, except for people in London, so you might need to be looking to buy somewhere else.
A lot of people look up north. But actually, I’d suggest actually look a little closer to home, because you’ve got the Milton Keynes, Oxford, Cambridge arc, that’s in place at the moment. It’s commutable and seeing great growth.
It’s really important to look to see where the investment is, infrastructure changes, those kinds of things.
Only after you’ve looked at all these factors can start looking at the property side. This is the bit I like doing, but it’s a laborious process. You either love it or hate it but you can’t get away as a landlord today without doing it. You’ve got to look at what’s in short supply now, and what’s also going to be short in supply in 20 years.
You can find things like the local plans for development. You want to find the population growth expected in that area, and how many houses are going to be built, and then see if the local authority got a track record of delivering the number of houses required for that increased population. Next look to see if they have an economic growth plan for the area. If there’s no economic growth plan planned, and there’s no population increase, well, where’s your natural growth going to come from? Where’s your natural increased demand versus supply?
We all talk about the biggest buzzwords online about “how do you buy below market value?”, and you can do it, but it’s not easy. I used to do a presentation called, “Buy property 20% below market value, find out how”. I’d get everybody into the seminar, lock the doors and I’d say to them, “right, okay, here’s a contract. Which one of you would like to sell your properties to me for 20% lower than market value.”
They would just start looking at me thinking, she’s bonkers, we’ve come to buy. And I go, “well how many here, put your hand up if you’d like to sell your property for 20% less than market value.” They would all go, no, no we don’t want to do that. We want to buy it, and I go “right, okay, but if none of you in this room are going to sell me for 20% less, why would someone else? It’s not going to be that easy.”
It’s a big ask to ask somebody to do that. You have to understand the reasons why someone might. For example, if they’re in financial trouble, they need to sell quickly, they’re trying to fund another property, or they’ve made lots of money out of it so they’re not actually that worried about it. And so, it’s all about really understanding things from the other person’s perspective.
Bearing in mind you’re going to make money out of their loss. So, you’ve got to think about things like that. And then the other big thing I’d say, just make sure that you ignore all the media information about house prices, what’s happened to house prices, because those reporters, they’re just after headlines, they’re salesmen. Those headlines are sales tools to get you to come and look at the site. What you should do is always check out the sole property price history online, it’s free and find out how that property performed during the last recession. Did it go down 120%? Or did it just fall by 10%? In which case it’s probably a good buy.
Just to give you a quick example of this. If you look at all the data at the moment, the Northeast has gone up by 14% in the last 12 months. And a lot of the northern areas and Midlands have, but that’s because they were lagging behind. So, if you take the average house price today compared to last year it might have gone up by 14% overall, but for people that owned in 2007 which is the best height of the market, their properties have only gone up by 5%, which means if they own with cash, they’ve actually lost quite a lot of money.
Well, there’s the easiest one is to say so during COVID. One of the stats I saw, was there have been 47 legal changes over the last 12 months. You might take a little break and when you get back the eviction rules have changed.
I remember I had such a bad day, they wrote eviction rule changes the Friday before Bank Holiday August. These were the changes coming up, but before they were implemented on Tuesday, so I’d written all about these new changes, then the government reneged on them. They changed the rules the Friday afternoon before Tuesday. It was so complicated that normally when you write about these kinds of changes, you have maybe 500 or 750 words to write, but I couldn’t tell everybody the changes within those limits.
You’ve got to have a way of keeping up with those laws that drop into your inbox and tell you that day they are changing. You almost need to put an hour or two aside a week just to catch up with all of the changes.
I think the other thing is making money is not as easy as it was. There’s more of a cap on house prices now, we’ve had in the past, partly because of the limits of lending and that’s a good thing. It means that we’ve had kind of anything from sort of two 5% property price inflation depending on where you are around the country they can differ dramatically you know the difference between two to five is quite huge. And you’ve got to really focus in and make sure you understand the price growth potential and the rental potential of that particular property on that particular street, because you might have a road of terraced houses with two or three beds, and the three-bed might be a huge success, and the two beds might be 10 to a penny. Supply and demand don’t work for those. That’s the kind of detail that you’ve kind of got to get into.
In the past, all the numbers kind of worked for landlords. Now, the market isn’t working for landlords as easily. It’s still the beauty of properties that even in a bad market they can make lots of money, but you have to be a lot smarter, you have to plan a lot better. And you have to really look at this as a business.
Yeah, I know I’m not a good technology person and I quite like some time away from screens. having said that, if you’re not into the technology that’s available now you are going to miss out on some of the most fantastic tools to help you be a successful investor.
I mentioned property prices earlier, if you’re not going on and checking those very regularly, looking at how much they’re currently selling for? and how much is has that property sold for in the past, versus what you paid for it? how does that compare to inflation? how is that giving you a positive investment return versus inflation from a cash perspective? You’re gonna miss out, potentially on making the right decision moving forward.
So, that’s one just easy way of doing it. And the other side of things, we mentioned the tax side of things, you’ve got making tax digital coming up in a matter of years, and while we all love a spreadsheet, that’s not going to be good enough. And with all the changes that are being made, you are going to need to look for tools like the Landlord Studio app to help you understand your finances and stay on top of what’s coming in, and what’s going out, and the tax implications of that.
The HMRC is going to require you to put your tax returns in much faster and much more often. We’ve already seen the changes to taxes, and they’re only going to get more complicated. If you try and do this with spreadsheets, you’re going to fail.
So you need to adapt to the technology that’s around. Even something as simple as tracking your mileage. You’ve got to claim for every single penny you can. You might have got away with not taking on board all the technology up to now, but I’m afraid that’s not going to cut it for the future. And you don’t want to miss out on the many useful tools that you’re going to be able to use to run your portfolio.
Find out more about Kate Faulkner at https://www.propertychecklists.co.uk/
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