Why Property? (The Nightingale Conant interview)

April 07

Nightingale Conant recently interviewed me for their newsletter.

Having read it, I thought it would make a good little article for this newsletter as well:

NC: Mark, why did you start in property?

MH: When you look at housing statistics across Europe, the UK stands out for two reasons.

While in most other countries, a huge proportion of the population rent, about 70 per cent of the UK housing stock is owned by "owner-occupiers", that is to say, we own our own houses.

The other huge difference is in the remaining 30 per cent. In many parts of Europe, the rented sector is still dominated by the state. In the UK however, huge numbers of council houses were sold off in the 80s and 90s, and councils typically have waiting lists measured in years. Into this void steps the private landlord.

The track record for landlords has been great - houses that sold for around a few thousand in the early 1970s were worth several hundred thousand now. For the last tens years, the rise of Buy-To-Let mortgages has made the business of landlording possible for hundreds of thousand of new investors.

Despite the success of many, however, there are literally millions of people financially able UK residents have not yet taken the plunge into property investment. Why not? Because of uncertainty about the market, outdated beliefs about the problems, and a simple lack of knowledge about what it does, and does not take.

My parents believed really strongly in education. They sacrificed a lot of things they could have had to send all three of us to good schools, and then on to University (which is noat cheap.)

I went to Oxford, where I studied Mathematics and Computation, and when I graduated, started work in IT. I quickly noticed that there were many very bright people working in IT, who despite intelligence, education and years of experience, were not doing well financially.

After I had been with the company about a year, I received my first annual statement from their pension fund, and was shocked to discover how little I could expect to receive when I retired, even if I stayed with the same company for my entire working life. Being in IT, I realised that I would probably move around employers a lot, and while I would do well in salary terms, this would cause my pension prospects to look poor. So I came to the conclusion that I should find some other thing in which to invest. I found a mentor who knew a lot about rental property, and learnt from him about what I might do, but it took me a while to get started.

I lived with my parents for about 2 years after graduating, which was hard for all of us since I had become used to being self-sufficient. However, I was able to save up a deposit on a studio flat, and decided that the first thing to do was get my foot on the ladder.

After I had been living in the flat for about 6 months, I started going out with Mary, and we quickly got engaged. The flat, a studio, was never going to be big enough for both of us, so we went house-hunting. We discovered that we could either sell the flat, and buy a starter house, or we could take out a "commercial loan" on the flat, and put in a tenant. We decided to give landlording a go for a year, and see what happened. A friend knew someone who was looking to rent, and she became our first tenant.

At the end of the year, we discovered that the rental property had put a bit of money in our pocket, but gone up in value dramatically. So after a while, we moved again, refinancing our house on a commercial loan basis, moving on, and letting the house out.

After that, once Buy To Let mortgages were introduced, and the financing became easier, we started buying properties specifically to let out.

NC: What is it about property that seems to make it such an attractive investment?

MH: There are three main reasons for me. Firstly, compared to other forms of investment, property is relatively stable. Yes, there will be booms and busts over the next 20 years, but if you look at the period since the Second World War, then property prices have had a relatively straightforward relationship to incomes. Straightforward, that is, compared to shares or bonds, let alone "alternative investments" like wines or sports cars. Certainly, there has never been a property crash where the market went down 40 per cent in an afternoon!

Secondly, unlike shares, it is possible to pick up bargains. If I wanted to buy a share, then my broker would quote me a price, and it would a simple yes/no decision for me. With property, however, I can make offers, and work to identify the vendors who value things other than the highest price.

Thirdly, it is very simple to improve properties. If I were to buy a share in a public company, then there is very little I could do to improve the value of that share - buy their products, maybe. If I buy a property, then there are a huge range of things I can do to make that property more desirable very cost-effectively.

NC: Is property investment only suitable for those with huge amounts of money to spend?

MH: When you have a lot of money to spend, then of course it is possible to do certain types of deal. However, it is also possible to get started in property investment by working harder, and more cleverly, rather than needing lots of seed capital.

When I got started in property, I was not a high earner. Although I worked in IT, I was working in front-line support, doing things like changing the toner on laser printers, and showing people how to make the font bold in WordPerfect. To put things in perspective, at the time I was earning less than newly qualified teachers were.

Nor was a I born with a silver spoon in my mouth. My parents spent decades of their lives sacrificing things like new cars or foreign holidays to pay for our educations. And for this, I am eternally grateful.

It is possible to start investing in property profitably for as little as two to three thousand pounds, if you are prepared to commit every evening and weekend to learning and deal-sourcing.

It is a balance - the more cash you have available, the less time you need to invest. The more time you have to invest, the less cash you will need. Education and knowledge have a huge impact, and reduce the need for both.

NC: What about making money in property? Is selling the only way to turn a profit?

MH: It is a way to make a profit, but it is certainly not the only way. For the first seven years of my investment history, I did not sell a single property. I just put in tenants, and let them pay my mortgage for me. Then, after a few years, the property had gone up in value, so I was able to remortgage, and generate some extra capital I could use as a deposit on the next investment.

The last ten years have been great for capital appreciation, with increases around the 15-20 per cent mark in some areas in some years. I am certainly not expecting the markets to rise like that over the next ten years, though.

One of the key skills you learn as an investor is to differentiate between what you know and what you hope! I know that I am lousy at predicting what house prices will do in the short term, so I pick investment strategies that will work whether house prices go up, stay flat, or decline.

For me, the most successful strategy has been one of positive cashflow. If a mortgage is costing me £500 a month, and the tenant is paying me £850 a month, then it really does not matter to me that much whether the property goes up in the month or down in the month. I am still getting the after-tax positive cashflow in my pocket.

What I have seen happen over decades, though, is that even when there are crashes, prices come back and move on to even higher levels. So even if prices did go down for a few years, then I am confident that in twenty years time they will be much higher again.

NC: So, property is a long term investment strategy?

MH: Absolutely. If I needed to invest, because I knew that I would need a lot of capital in 2 years time, then I would not go with property. I have always had a 15-20 year time horizon in mind.

In fact, over the past decade, things have gone better than I had ever expected. Heh - if I had known what things were going to be like, I would have bought ten times as much in the early 90s - I told you I was lousy at predicting short-term house prices movements.

NC: What would be your final word of advice for someone thinking of investing in property?

MH: Get good advice, and remember that property is a business!

There are an awful lot of people out there who have no interest in your financial well-being beyond keeping you solvent long enough to pay their commission.

You need people to work with - letting agents who can advise you on rental demand for different types of property - financial advisers who can work with you to help determine what is possible and profitable, and what is not - a solicitor or conveyancer who will work with you in the way you need, and a mentor, who will focus on improving your skills as a business owner - a business owner of a property investment business.

This is just the feature article from the April 07 newsletter. Subscribe for market comment, forthcoming events, and more.

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