Even in property hotspots, investors can get caught out
I’m offered property investment opportunities almost daily, and I use the same thought process to assess each one. Whether I decide to invest or not, I try to learn something from each. It is the story of a ‘golden opportunity’ I was offered a few years ago. See how due diligence proves you should never invest in existing property in a deprived area, no matter how attractive the numbers look on paper.
“Property investment opportunities like this don’t come along every day”
I was taking a much-deserved break, catching up on some reading in a coffee shop in a town in the North of England. There I was, minding my own business when my phone rang. A property investor’s agent told me how the investor needed to sell a row of houses on a single street.
Now, I knew something about the town where the street was located. From a demographic viewpoint, it appeared to be an area that would benefit from increasing demand. New employers had moved in, and the government had promised investment in industry and infrastructure. The investor needed to sell the properties for personal reasons.
A small expenditure could balloon yield
There were eight properties in the package being offered to me. Two of the properties were tenanted. The rents were low for the town because each house needed some repair work to bring it up to scratch. With this work done, the agent was certain that the rents could be increased to realistic market rent and all the properties let. She estimated the work would cost around £5,000 per property.
On the face of it, this property investment opportunity was too good to miss. So why did the investor want out? Was there something he knew that I wasn’t seeing, or being told?
Wisdom matures with experience
I did some digging, starting with researching the rents in the area. I discovered that the rents were indeed low, and with some maintenance work, I was sure they could be increased. However, I didn’t think they could be increased as much as the agent was projecting.
Experience has taught me to be conservative with my numbers. The agent estimated that an expenditure of £5,000 on each property was needed to improve them, increase occupancy, and increase rent. I worked the numbers by £6,000 to repair and a rental price of £50 per property per month lower than the agent suggested. Even so, if I could get the properties fully tenanted, the rental yield after repairs would still be very attractive.
Why so many owners?
My next port of call was to find out more about the properties being offered to me. So, I searched the Land Registry website to discover when the investor had bought them. It turned out they had been bought and sold as a single investment three times in the previous five years. That set some alarm bells ringing. What was it that had prevented three property investors from making money on these properties? Why is it that people weren’t choosing to live here? Was it simply the state of the properties, or was there something more serious going on here?
If it were only the properties at fault, I was confident that I could turn them around. But I can’t fix a whole community that’s broken. It’s possible that all three previous investors didn’t have the experience, knowledge, or network to fix up and turn around. On the other hand, it could be that the location in the town was bad for investment. That can’t be fixed.
Narrowing the research
I decided I needed to look a little closer at the town, and see what was so wrong with these properties. I found that the demographics in this part of town weren’t conducive to property investment.
The first thing I found was that this area of town, to the east of the centre, was very different to the western side of town. Here, income levels were lower. The median property price was lower. The population here had stagnated over the last ten years. All the new people who had moved to the town had moved into the West. That’s where new businesses were setting up, and where infrastructure spends had already started to happen. The West had everything going for it, while the East, where this ‘golden property investment opportunity’ was located, appeared to be sinking fast.
Still, could there be light at the end of the tunnel? I decided to make a few phone calls to local agents and the local authority.
A history of deprivation
I had already discovered that the properties were near local council housing. That’s not necessarily a red flag, but I needed to know more. It turned out that there had been a lot of work done to clean up the area in the previous five years. But it was mostly superficial. The tenants hadn’t changed. Unemployment here had hardly budged. The local secondary school had been failing its students for years.
My guess was that as soon as the next economic downturn would hit, this area of town would slump back to how it had been a few years earlier. It wasn’t the properties that needed fixing, but the whole area. So, this ruled out spending money to improve the properties to increase the rents. But could I spend enough to make them attractive to tenants, and get them all rented?
It brings me to locational negatives, the real reason three previous investors (including the current one) had chosen to sell:
- This location wasn’t attractive to the type of tenant who would provide good, stable income.
- Poor-quality tenants come with all sorts of problems. Non-payment of rent, higher maintenance costs, and ‘moonlight flits’ where white goods and furniture are stolen among them.
- I’d need to offer reduced rents to get the properties tenanted. That would further eat into potential yields.
Lower-than-expected rental income, higher-than-expected costs. Not good for investment returns. My final port of call was to my investment property manager. They have a lot of experience in this town. They confirmed my suspicions from my research.
Don’t get emotional, get real
When I was first called about this property investment opportunity, I was excited. The numbers that the agent had quoted made the investment look very attractive. My guess is that the previous three investors had been equally excited. None stayed the course. That indicates they had discovered the same as I had done. The difference being is they had sunk money into the project before realising their mistake. They’d been carried away on a tide of excitement, the promise of big bucks, and failed to do their due diligence and research.
The moral of this story is to always do your research, right down to the street level. Just because town ‘X’ is undergoing massive regeneration, with huge infrastructure spend and inward investment by new businesses, does not mean that every suburb, street and property is a buy. Don’t get overexcited. Use all the information and contacts at your disposal to get to the real potential of any investment property – the numbers don’t lie.
We work hard to find investors the best properties in the best locations. Our unique Hotspots Algorithm analyses 108 data points across 324 areas in the UK. It pinpoints the factors that make a location perfect for investment. Contact one of the Gladfish team today on +44 (0)207 923 6100 , and find out more.
Live with passion,
Brett Alegre-Wood
