According to Leaders, “Waterlooville is a quiet and pleasant town set in a convenient location in south-east Hampshire. It is within easy reach of Portsmouth as well as miles of open countryside that creates a green backdrop to the town. The A3(M) runs past Waterlooville providing excellent access to both the north and south. A fantastic location coupled with a smart town centre that includes a leisure centre and pedestrianised shopping precinct has made Waterlooville sought-after among tenants. In turn, this has ensured it is a hit among buy-to-let investors, who can bank on high tenant demand and great value in the local market.”
Obviously a sales pitch – you can see the full spiel here. Whilst not untrue and while much of Waterlooville is very pleasant we did wonder whether ‘smart town centre’ was wholly accurate. Feedback from local member, Allan Wadsworth, on the Leaders blurb was “What a wonderfully Photoshopped image of the high street -not a single empty shop in site, even though there are at least 6 before counting in the temporary usage charity shops.” In support of Leaders, he did add “On the other hand there are good plans afoot to redevelop the shopping centre and lots of new mid-market housing estates.”
This is not a pop at Leaders. A number of our members use them, and whilst you hear good and bad about most letting agents there are many who swear by them. One member recently commented, "Since I started my journey as a landlord, Leaders have held my hand all the way since my previous letting agent ripped me off and I almost lost my first house, and have gone well above their call of duty to help. Now,I have used them for many years to find tenants for me. Their service has been exemplary both in the Waterlooville and North End offices.
I would have been totally lost without them." The point of this article is to highlight the need for vigilance and to separate the hype from the reality. Any of us who are active landlords or developers get daily updates from so many sources and even the best, have a tendency to exaggerate the benefits whilst understating any risks.
Using the Leaders newsletter as an example, the real issue is the claim that property there is affordable, offers huge capital growth and has great potential. It is true that some housing in the area is cheaper than equivalent city centre developments and commuter suburbs, but that is largely because it is not a city centre or commuter suburb – getting to London involves a 20-30 minute drive just to get to the station!
We also dislike claims of ‘huge capital growth’. This is supported by the statement that ‘property values have risen by 38% in the last five years alone’ - sounds good but after the financial crisis and its disastrous effect on house prices between 2008 and 2012, you’d expect some recovery in the past 5 years and that ‘38%’ probably gets your investment back to where it was in real terms before the crash. So to use that as a predictor of how your investment will fare in the future is at best, misleading.
Leaders then go on to talk about return on investment (ROI) dividing the average house value by the average rent to give ‘average yield’ figures between 4.6% and 5.8%. We have discussed the irrelevance of ‘gross yield’ here many times before, yet unfortunately everyone in the industry uses it to entice gullible 'newbies' into the business. If you have finance of any form the numbers are irrelevant as the return on capital invested (ROCE) is what you will be interested in, not the ROI and whichever measure you use, you need to look at the net figure, not the gross.
As an example, if you buy £150,000 worth of Shell shares today you can expect to get 5.6% in dividends. Obviously share prices go up and down and there is debate about whether Shell can sustain this level of dividend for the long term, but there are alternatives in the FTSE 100 which have offered higher dividends in the past year – Shell is simply selected as its yield over the past year almost matched the Leaders claimed yield on 1 and 2 bed flats. The difference is, with Shell shares, your 5.6% dividend on £150,000 equates to roughly £8,400 less tax so it would be fair to promote it with a claim of 5.6% yield.
Your 1 bed flat, will have ‘rent’ of £8,400 but then you have to take off agents commission (lets say 12%), landlord insurance (£400), maintenance and wear and tear (Assume just £1,000 but probably low), service charges and ground rent (probably more buts lets assume £800) and our income is now down to around £5,000 giving a net yield of 3.3%. What is worse is that the taxes we will pay on that income are likely to be much higher than taxes to be paid on FTSE 100 dividends even before you factor in acquisition charges such as SDLT and costs of selling including CGT.
We are not saying the Leaders are any different to any of the other middle men who provide services to those who own houses. What we are saying is Caveat Emptor – as an investor you will meet many people from all professions whose sole objective in life is to get you to spend or invest so they can take their share of the transaction. If the service is good and you benefit from its provision, then all is as it should be, but as the buyer the onus is on you to ensure that the benefit you achieve is at least as large and / or assured as that of those who encourage you to make the purchase.