There is a risk that any capital invested into property investments may be lost in part or full, we mitigate this risk by way of offering various levels of security against the property in the guise of charges with Land Registry. Although this gives a high level or reassurance there is still a risk that your capital could be lost, which is why you should not invest more money than you can afford to lose without having to alter your standard of living.

The estimated term of an investment is generally indicated at advertisement and we always insure there is a level of contingency to ensure that the exit strategy is realistic and that any delays in 

The investment opportunities on the Growth Capital Ventures platform are private unlisted companies and will be of limited liquidity. Currently there is no secondary market for any investments made through the Growth Capital Ventures platform. Investors in unlisted companies may normally expect to sell/realise their investment when and if the company floats on a publicly listed stock exchange, or is bought by another company, which often takes a number of years from initial investment.

Unlisted companies particularly start-up and early stage businesses rarely pay dividends. If they do pay dividends then the level will depend on the success of the investee company which may take some years to achieve, if at all. Companies have no obligation to pay shareholders dividends and generally investee companies will reinvest profits to grow and build shareholder value. This means that if you invest in an unlisted company through the platform, even if it is successful you are unlikely to see any return of capital or profit until you are able to sell your shares in the investee company. Even for a successful company, this is unlikely to occur for a number of years from the time you make your investment.

Investing in unlisted companies (start-ups, early stage and established) should be done as part of a diversified investment portfolio. Not every type of investment will be appropriate for every investor. To spread and therefore alleviate risk you should invest smaller amounts in multiple businesses. Investing in unlisted companies, particularly start-ups and early stage, is a high risk/high reward investment strategy and you should invest the majority of your investment funds in safer, more liquid assets.

This is a natural concern many newcomers to property investing have, and it’s not completely unwarranted. Sure, over the course of time, property generally increases, but what if your timing is slightly off? Buying property just before a crash is a genuine worry, and it’s difficult, if not entirely impossible, to predict and avoid.

That being said, there is still one thing you can do to lessen the risk: buy cheaply. Finding a bargain is essential if you want to mitigate potential market swings in the short term, and it can help you stay in business while others fail around you.

Think about it, if you can negotiate a deal to purchase your buy-to-let investment at 10% below market value, you’ll be giving yourself a 10% cushion against market fluctuations at the same time. It’s so obvious it warrants a ‘Duh!’, yet so many first-time landlords pay over the odds on their property investment. Don’t follow their lead.

Be patient. Do your homework, wait for the right property to hit the market, and act quickly when something suitable becomes available.

Another obvious concern is rising interest rates. There’s been a lot of speculation lately over long-term interest rate increases, so caution here is prudent, but it certainly shouldn’t prevent you from making a move in the property market.

While it’s possible for interest rates to drop again (they’re currently at 0.75%, but were as low as 0.25% back in 2017), it’s is extremely unlikely in the foreseeable future. It would appear that the only way is up, for now at least.

So, what can you do to mitigate that? The obvious thing would be to fix your mortgage for a decent period and some lenders are offering 10-year fixes at the moment, which makes it possible to do so. You will, however, have to take into account the higher rate you’ll have to pay and any repayment fees you’d incur should you wish to buy yourself out of the deal early.

It’s also a good idea to factor in higher percentages when calculating your potential property’s viability. Running the numbers with a higher rate now to find out exactly what margin you have for an increase can throw up some surprising figures, and it’s always better to be surprised before you’ve laid out your money than after!

Already have property? If you’re of a mind to, you could start paying an increased interest rate before it happens to create an extra sink fund. After all, having a backup vault is always handy, regardless of what business you’re in.

This is a big one for many prospective landlords. The fear of not being paid can ultimately put people off of entering the property market as an investor altogether, but there are ways in which you can lower the risk associated with tenants failing to pay up.

Firstly, there’s insurance that goes by another name: a rent guarantee policy. As one would imagine, this basically covers the landlord so they don’t miss their payments, even if the tenant decides to stop handing over the monthly moolah. Taking out rent guarantee insurance can give you complete peace of mind, but it does come at a premium. However, many letting agents, Petty’s included, offer this cover as part of their property management service, and the charge is incorporated into your monthly fee.

Obtaining solid references will help ensure you don’t let to someone who has a history of non-payment. Referencing can be tough for the individual to assess but, again, a reputable letting agent will be able to offer this service to you.

Finally, there’s the long shot: upfront rent. This will not happen often, but it some rare cases you may be able to negotiate with your tenant to be paid up front in exchange for a reduced rental charge for them. This, however, usually only happens when you let to someone you already know or when time comes to renew an existing tenants tenancy.

Things go wrong, there’s no avoiding that, unfortunately, but you can lessen the risk by being canny when you buy and not being cheap in the short term. Let me explain.

When you are looking for a buy-to-let property to invest in, check for obvious structural issues that could zap your profits before you’ve even found a tenant. Surveys can be worth their weight in gold here, but even a cursory glance at things like the roof (missing tiles), windows (poor seals, rotting woodwork), and walls (damp patches) will give you an idea of whether or not you’re going to need to spend a fortune just to make the place habitable.

Maintenance doesn’t stop at structural issues, though. White goods and boilers can pack up at any time, and you’ll have to foot the bill to repair or replace them. Many landlords make a big mistake here by thinking short term, opting for cheap appliances instead of paying a little bit extra for better quality items. Laying out more money than you need to may seem counterintuitive, but if it means fewer call outs and a longer lifespan for the goods in question it’s often worth the extra expense.

Getting a call from a tenant to say that such-and-such needs repairing or replacing never comes at a good time, so it’s vital you’re prepared for such eventualities. Some landlords opt for an insurance policy to cover such things, while others prefer to set up a sink fund. Which route you choose is completely up to you, but you must make sure you put something in place from the get-go.

It may sound melodramatic, but accidents of this nature do happen from time to time and for some prospective property investors this is a very real concern, albeit one that will occur very infrequently.

Obviously, insurance is going to be the best course of action here. You’ll need cover anyway to get your mortgage, but you can further protect your investment with a better policy than the minimum requirements needed to obtain financing.

On top of this, there’s the option of emergency landlord cover. Many see this as overkill, but for others it can bring peace of mind by covering issues such as leaks, boiler breakdowns, and the like.

Ahh, the dreaded void period. Not being able to find tenants is a worry for any landlord. After all, who wants to see expenses going out when nothing is coming in!

Doing your homework before investing is by far the best thing you can do to ensure that there is ample demand for your property. Look at other rentals of a similar ilk in the area. Are they being filled quickly of left languishing in agents windows for eons?

Also, look at where demand is coming from locally: Is it students? Young professionals? Corporate clients? Knowing the demographic of the majority of tenants in the area will help you choose the correct investment property to accommodate their needs and, therefore, avoid prolonged void periods.

Keeping abreast of local news and developments can give you an insight, too. How healthy is the biggest employer in the area? Is the local university expanding? Are there property developments proposed nearby that could weaken the rental market? All these things can be taken into account in order to gauge whether or not an investment is sound.

Landlord legislation is changing all the time and for anyone who isn’t immersed in the minutiae day-to-day it can seem incredibly overwhelming. Being compliant is more important than ever, with growing fines and threats of custodial sentencing being bandied about, but it’s also becoming more difficult to stay on the right side of the legal fence as the goalposts seem to change with every passing day.

This is where a good letting agent is going to earn their keep. Opting for full management service from a reputable agent who, preferably, is also ARLA Propertymark accredited (like we are here at Petty’s) will ensure that your business remains compliant and your investment isn’t at risk.

All of this may seem daunting, but the fact remains that buying property is still a sound investment, providing you know what you’re doing. If you feel as though you need a little more help or guidance, we’re always on hand. Our lettings and property management teams are experts in their field and our industry accreditations show our commitment to providing an exemplary service to all of our customers.

On top of this, we’ve been operating in East London for well over a century now and there’s no one locally who knows more about E11 and its surrounding areas than Petty’s. So, if you’re looking for property management advice or simply would like to list your letting with us, give us a call. We’d love to help.

• The value, reputation and appeal of the location where your building is situated will fluctuate.
• This could hold positive or negative consequences either way. If your building is situated in a particularly run down area that is soon to be regenerated, you may benefit from the ‘facelift’ as new visitors will be gravitating towards the area.
• Alternatively, your business may be seen to be behind the times if the area is being regenerated and your shop/premises does not match up with the new aesthetic.

• The needs of clients will change over the years and as such will affect the value of your property.
• The requirements of tenants as technology changes will affect the usability of your property. For example, if your building is not equipped with under-floor cabling, it may not attract tenants looking for an office building.
• The overall design of the building will also influence a tenant’s decision to lease your building. If it looks outdated or particularly run-down compared to the buildings in the surrounding area, you may not attract as many prospective tenants. Furthermore, the materials used and layout of your building will be a factor that a tenant will take into consideration.

• A major factor in the value of a building is how much income it can gain for the owner.
• If a tenants credit quality weakens materially the buildings sale value will suffer.

• If a tenant has leased the property for an extended period of time, the resale value is generally safe. In contrast, if a tenant is set to move out whilst you are trying to sell, prospective buyers are less likely to want to commit time to filling your property.
• If your tenant is considered unreliable buyers may be less likely to want to purchase your property.

Market cycles and risk

• The property market responds to what is happening in the economy. The commercial property market can grow very fast leading to oversupply or grind to a halt leading to undersupply. It’s important to remember cycles will happen – growth periods will lead to oversupply resulting in market weakness, stabilisation will occur resulting in tenants occupying vacant space which will in turn lead to lack of premises to hire and so forth.

• Property value is determined by initial yield. Initial yield is the current rent per annum divided by the value of the property including any purchase costs.
• The initial yield will fluctuate across the property market over time and will, as a general rule, reflect the general economic cycle.
• Interest rates within the economy will also affect the average initial yield.
• Any property investor will face the risk of initial yields rising which will cause property value to decrease – this may be due to rising interest rates or any other reason, however during a recession you may risk rise in premia. This can mean property yields could rise even if interest rates may not.

Every property is part of a business sector, an example being a shop, warehouse or office. Property sectors perform differently from the property market in general, the same way business sectors in the economy behave differently.

For example, in 2007 the return on average for the property market collectively was -3.4%. During this year offices were outperforming, showing a -0.5% return where shops generated -6.1%. Of course these are just averages as some shops will have performed better than some offices, but the sector effects are plain to see. It is a good practice to spread your holdings across different sectors so you essentially reduce the risk of being hit by economic decline in a single sector.

You can find the value of any financial asset by discerning the discounted value of its future income stream. The income stream comes as dividends in equities, whereas in property, it comes as rent.

• Property value will change based on how the market expects your property’s rental income to increase, the same as how equity values will reflect expected growth in dividend income.
• The expectations of rental growth will have an effect on the value of your property.
• When investing in a property, your rental growth may not reflect what you initially anticipated, meaning your returns will also be lower than expected.
• Many factors such as the national economy, lack of alternative space or vacancies, local trading conditions and other factors will affect your rental growth.

If you invest in commercial property through a vehicle such as a unit trust or fund, this usually helps to reduce the risks inherent in investing, but there are still risks involved using these structures.

Liquidity will depend on the time needed when transacting a sale and how easy it will be to trade at the market price.

It’s important to remember that direct property investments are seen as relatively illiquid compared to most equities and bonds.

Even in normal commercial market conditions it is slow to transact property, and in the case of an economic downturn or poor market, it can be very difficult to find a buyer especially at the right price.

As far as indirect investments go, open-ended investment companies (OIECs), listed property company shares and real estate investment trusts (REITs) are classed as the most liquid.

Due to the fact they are equities listed on public stock exchanges and are priced in real time, they can be traded quickly in normal market conditions.

There is only a small amount of secondary trading with indirect property investments to do with unit trusts and funds, yet these indirect investments are classed as more liquid than other properties due to the fact the fund manager will be able to accommodate and transact small sales easily.

It’s important to remember that a fund manager may need you to wait several months if you need to get your money back, if a large amount of investors want to sell at the same time or if the sale takes place in a difficult market.

In contrast some unit-linked property funds have now stopped accepting new investment where they have received large amounts of cash from investors and have been unable to secure or purchase the suitable assets required.

Although institutional fund managers currently dominate trading, other parties including HSBC make a secondary market in property unit trust. There have only been a handful of secondary transactions as interests in limited partnerships trade infrequently. As a rule of thumb managers will try to match buyers with sellers but you should never assume a suitable match will be easily made.

We recommend that you invest in a fund that has many properties in its portfolio as there is less risk involved than that associated with a fund responsible for a single property. You also reduce risk by investing across different sectors and geographical areas.

By investing in listed property companies and real estate investment trusts (REITs) as well as other quoted property vehicles you help reduce risk by diversification. Their shares will also offer liquidity as they are equities, but these shares will be more volatile due to real-time market pricing and changes in investor sentiment. These companies may also trade at a discount to net asset value (NAV).

Put simply, gearing is the use of debt. Limited partnerships and unit trusts are classified as geared vehicles and although they can expose investors to more risk they can potentially reap higher returns – as long as the gearing level is at 70 per cent or higher. Gearing measures the relationship between equity and debt in your investment.

If there is a high proportion of debt to equity this is known as a highly geared investment. There is an inherent risk involved with high geared investments as there is more chance that the investment will not gain enough income required to pay off the debt.

The risk is higher if your geared vehicle is invested in one property, but could be reduced if you have a reliable and high quality tenant as this would reduce the risk of default on the income stream from rent that you have used to secure the loan.

It’s important to consider these points when you are assessing the risk involved in a geared vehicle.

• What does your tenants credit look like
• What is the length of their lease
• Investment horizon
• Term of the loan
• What is the assumed rental growth

Remember, your investment will come into difficulty if your tenant stops paying rent, and before your vehicle could re let the building you would almost certainly default on the loan payments meaning your investors would lose money and possibly a large part of their capital. Tenant default is not terminal for an ungeared vehicle.

With property, there are two main potential ways to make a return:

• Rent – you can earn an income by letting out property to tenants.
• Selling for a profit – if you buy property and later sell it at a higher price.

Even if you don’t want to buy a property yourself, you can get these potential benefits indirectly by investing in a fund investing directly in property.

There are also other related ways to invest, for example through property maintenance and management services.

Property prices and demand for rentals can go up and down, so direct and indirect property investments are for the long term.

If you’re willing to wait, you can ride out the losses in a slow housing market and earn profits again when times are better.

If you’re over-invested in property – for example, if most of your money is tied up in a buy-to-let property – you might end up in trouble when housing markets slow.

To avoid this, you should diversify your portfolio by holding different kinds of investments.

• Money tied up – unlike shares or bonds, it takes a long time to sell property.

• Big commitment – when you buy a property, you’re putting a lot of eggs in a single basket.

• Buying and selling costs – with estate agent and surveyor fees, stamp duty, land tax, solicitors’ and conveyancing fees to consider. From 1 April 2016, you’ll have to pay an extra 3% on top of each Stamp Duty band when you buy an additional home or a residential buy-to-let property.

1. Demanding – doing maintenance work and managing property takes time and money. You might need to extend the lease – if you don’t own the freehold outright. This is another cost and can take some time to negotiate.

• Prefer investments that feel more tangible than stocks and shares

• Are willing to take the risk that you might not earn a profit on your investment

• Understand and accept the additional risks that go along with borrowing money to buy a property

• Understand and accept the costs and time involved in owning and running a property and the impact that this will have on your potential return.

When you become a landlord, you’re effectively running a small business – one with important legal responsibilities.

Section 21 etc

Tax relief

You’ll likely need to pay income tax on rental income as well.

Up until the 2016/17 tax year, landlords could deduct mortgage interest and other allowable costs from their rental income, before calculating their tax liability.

From 6 April 2020, tax relief for finance costs will be restricted to the basic rate of income tax, currently 20%. Relief will be given as a reduction in tax liability instead of a reduction to taxable rental income.

The changes started to be phased in from April 2017.

These changes mean your taxable income will rise, affecting your tax bill, especially if you’re a higher or additional rate tax payer.

For the tax year 2018-2019, buy to let landlords can offset 50% of their mortgage interest payments against their rental income. 50% of the mortgage interest payment qualifies for a 20% tax credit.

From April 2019 this will change again, with 25% of mortgage interest payments qualifying for offsetting against rental income, and 75% qualifying for a 20% tax credit.

You’ll need to cover the costs of buying, which can include:

• survey fees
• solicitor’s fees
• Stamp Duty Land Tax.

There are also running and maintenance costs associated with any kind of rental home.

A sales or letting agent will also charge a fee. If you want to use an agent, compare costs to make sure you get the best deal.

When you sell the property you might have legal and marketing fees to pay.

• Landlord insurance – isn’t legally required, but taking out a policy can help protect you and your investment.
• Buildings insurance – which you’ll need if you have a buy-to-let mortgage – can also help protect your investment

Because buildings and land are valuable, you might find yourself targeted by fraudsters.

• Landlord insurance – isn’t legally required, but taking out a policy can help protect you and your investment.
• Buildings insurance – which you’ll need if you have a buy-to-let mortgage – can also help protect your investment

Because buildings and land are valuable, you might find yourself targeted by fraudsters.

The kinds of consumer protection that cover most investments don’t apply to buy-to-let properties.

So it’s all the more important to find out everything you can before you commit to a property and a mortgage.

Do you need to improve your diversification?

You might see from your list of investments that your portfolio is too heavily concentrated in one area.

Here are some common problems to look out for:

• If all your cash is in a single savings account, you should think about spreading it between an instant access savings account and other alternatives, like cash bonds or an investment fund. You should also think about moving some of it where your cash within one particular UK bank or building society exceeds the FSCS protection limit of £85,000.
• If you have a lot of cash – more than six months’ worth of living expenses – you might consider putting some of that excess into investments like shares and fixed interest securities, especially if you’re looking to invest your money for at least five years and are unlikely to require access to your capital during that time.
• If you’re heavily invested in a single company’s shares – perhaps your employer – start looking for ways to add diversification.

From the 1st April 2019, if a firm fails, the FSCS may be able to compensate you for any misleading advice, poor investment management or misrepresentation if the firm that gave you that advice has since failed, up to £85,000 per eligible person, per firm.

The Financial Services Compensation Scheme (FSCS) increase for investments, pensions and a range of other financial products and services brings protection limits into line with the existing £85,000 limit for bank and building society savings.

Previously, investments, pensions and certain other products and services were only covered up to £50,000.

Consider your appetite for risk

While diversification is important, you should keep in mind how much risk you’re prepared to accept on your money.

If it is important to you to avoid losses, you might want a portfolio that has less in shares and more in cash and fixed interest securities held to maturity, for example.

• Find out more from our investment guide to risk, Know your risk appetite.
• Read about making an investment plan.
• Use Which? investment portfoliosopens in new window to find out how much you could gain or lose.

If the changes you need to make to your portfolio are complex, or you want more help understanding risk and diversification, consider getting help from a financial adviser.

How to find an IFA?

As a general practice, you always consider the best interest rate that a mortgage broker can get you and include that in your deal analysis while purchasing a property.

However:

What if the interest rate doubles in a year or few years time?

Would you still receive the cashflow you expected when you purchased the deal?

In my time within property, I myself have seen interest rates ranging between 0.5% to 6%.

Imagine what it would be if you have to actually put money back into the property paying the debt from high interest rate, than earning cashflow.

Risk Description:

Increased interest rates over time will impact your cashflow and may actually force you to pay the debt instead of earning cashflow.

Risk Mitigation:

Stress Test The Deal:

The easiest mitigation for this is to stress test your property deal at a higher interest rate when you buy the property.

Current interest rate is about 3.5% approximately if you purchase on a limited company or less than 2% if you buy on your personal name.

However, if the interest rate increased to 7% what does that mean to your deal.

You can easily stress test the deal at 2%, 3%, 4%, 5%, 6% and see what happens to your deal before you purchase.

Establish a point where you will have to start paying from your pocket than earning money and question yourself if that is a deal for you.

Long Term Fixed:

As a practice we at Limitless Monks started to refinance the property post refurbishment for a longer term fixed interest rate, protecting ourselves from potential future interest rate increases.

We have been doing so opting for mortgage products which are 5 years fixed, given our investment period on a property is 7 years.

Increase Your Equity:

The not so easy way if you are in the situation of paying money, is to pay off a bit more of the debt and increase your equity.

This sure will impact your ROI, however will ensure you don’t have to pay from your pocket each time.

There are always ways and means to take your money out later when things are right.

The valuation of a property is a tricky one and can happen in three instances.

1. When you buy the property
2. When you try to refinance the property to take your money out
3. When you sell the property

Property is an industry where a lot of your money is at stake should the market conditions change.

Risk Description:

The property is purchased at asking or above market price leading to loss of equity resulting from market fluctuation.

Loss of equity also can result from undervaluation of the property during refinance phase should the investor ignore the numbers game and invest at will.

Risk Mitigation:

Buy Below Market Value

Always, buy the property at a below market value price which will ensure you don’t lose out should the market value of the property fall.

i.e.

You either buy a property that is in good condition and is being sold by a motivated seller at below market value, or a property that is not in a good condition where you can add instant value to secure higher market price at later point in time.

The Differentiators

Understand the profile and quality of houses within the current street and work out what differentiators can you add to your property to ensure the valuation can meet your expectations.

A refinance pack to go along with all such differentiators explained in detail can go a long way to secure correct valuation.

Property investment is a carrot of financial independence at one end but is also a debt business at the other.

Should you not be careful growing your portfolio, you could end up with spiral debt that will not just be difficult for you to manage but you may end up passing it to your future generations.

One spot of bother we started having within our earlier days of buying first few properties was the rising debt.

Risk Description:

Growing debt due to increased number of properties within your portfolio can result in passing a debt ridden portfolio instead of a legacy to your family.

Risk Mitigation:

Set And Monitor Debt To Equity Ratio:

We started to then check the ratio of debt to equity with purchase of every property.

The moment we have our loan to value increase beyond 70%, we trigger our mitigation to divert our cashflow into over payments on mortgage.

Even better, we now started to factor in just 70% loan to value within our remortgage numbers across the portfolio and right before any property purchase.

Life Insurance:

You are the only one who can ensure you pass a legacy to your family and not a debt ridden portfolio.

If an investor need to be able to do that, life insurance is a must which helps to pay off the debt should something unforeseen happen to the investor.

The setup we have created is a trust within the limited company which will receive the insured amount that can be further used to clear off all the mortgages.

Note: Review the insurance with purchase of either each property or every year to ensure the insured amount is good enough to pay off the majority of debt.

Having a property empty for a longer period of time or continued repairs within your property only means that an investment is a bad apple out of lot.

Here is the deal:

Your investment is going to be as strong as the effort you put in due diligence of the area and the property you wish to buy.

Risk Description:

Property you purchased remains vacant for number of months or is subject to continuous repairs eating into your cashflow.

Risk Mitigation:

Expenses Fund

Remember the deal analysis where you calculate and take out 10% for lettings fee and 15% as expenses fund?

That has to be the saviour if you have been diligently moving the expenses fund into a separate account or have been backing it up in your account.

Rental Demand

The street you want to purchase your property in has to be analysed for number of properties available to number of properties let in a given period.

You can easily do this in Rightmove rental section by checking and un-checking the “include let agreed properties” checkbox.

Before you purchase, ensure you check the demand for 1 bed/2 bed/3 bed/ 4bed properties within the area and look to purchase as per demand.

You can further read on investment area analysis within below post.

Buying a property and going through a painful journey of refurbishing the property and then letting it out to find that tenant isn’t paying the rent, is the last thing you want to hear as an investor.

Risk Description:

Tenants have not been able to pay rent as per agreed schedule resulting in zero cashflow from the property.

Risk Mitigation:

Rent Guarantee Insurance (RGI) 

Ensure your property insurance has rent guarantee included so you are covered should the tenant not pay a couple of months. This will protect you as an immediate work around while you work with the letting agent or the tenant to get your rent arrears paid.

Work With The Tenant:

What we find in our experience is invoking the human aspect and managing the relationship with tenant actually resolves half the problems.

Try and understand the reason why the tenant has not been able to pay the rent and push towards a rent pay back plan for the arrears.

This most of the time works.

However, the issue is too many landlords shy away from speaking to the tenants when there are reported issues.

You can always give enough notice to tenants via your agents and meet them to discuss the issues and find solutions.

Must Read: Top 6 Tenant Issues In Rental Properties And Your Response As A Landlord

Have A Guarantor:

As a standard practice where we sense that we have a good tenant but have not been able to prove the credit requirements, we do ask for a guarantor who will be responsible to pay in a default scenario.

This has worked for us and enabled us to take benefits tenants into our portfolio like any others. This has to be worked out with letting agent and included within your lettings process.