We all know there’s money in bricks and mortar but building a successful property portfolio from scratch can be a daunting task.
In this MoneyMagpie exclusive, Gill Fielding, the property expert and star of Channel 4’s The Secret Millionaire, talks about growing a sustainable portfolio that delivers growth for years to come.
By Gill Fielding
When it comes to property investment, there’s no shortage of information about what budding investors should do with their money. Unfortunately, much of what’s out there – largely online – is both confusing and ambiguous. Knowing what advice to follow and what to ignore can mean the difference between climbing to the top of the ladder or becoming another statistic of the property game. I’ve drawn upon my own 40-year career to create a set of proven, practical steps that work. They focus on a simple, five-step acronym that I’ve called ‘Take A RIDE’.
A is for: Actual evidence
You’d be amazed how many first-time investors favour the advice of family and friends (and other helpful ‘experts’ with little or no expertise) over solid, impartial evidence.
Before doing anything else, investors should proactively seek actual evidence about the area(s) they’re looking to invest in. Sources of trustworthy information include but are by no means limited to:
- Land Registry for house prices, local land charges, title deeds and boundary questions
- Local authority websites for approved and pending planning applications
- The Bank of England for information about markets, statistics and interest rates
- Reputable national newspapers to learn about property trends (although bear in mind that no media outlet is impartial and even the most “well-researched” how-to article may have been heavily biased in favour of advertisers)
- Property-focused magazines (such as professional property networking magazine Your Property Network) for trends, tips, new buying and selling regulations, and legislative changes
Wherever in the world you’re looking to invest, an in-person visit could be worth its weight in gold. Take an afternoon to explore the area, speak to residents, and pop into as many local estate agents as possible.
R is for: Ratio
If any given property is affordable relative to local earnings, that property should remain in demand, subject to supply. With this in mind, serious investors – those who want to build a successful, sustainable portfolio – will create what I call an “affordability ratio”. Doing so is (thankfully) straightforward and will provide a clearer picture about whether house prices in any particular area are likely to rise.
You can calculate an “affordability ratio” relatively easily by dividing a property’s asking price by average annual local earnings. For example, if a property’s asking price is £150,000 and the average local salary is £25,000, the affordability ratio will be six.
If earnings in the area started to rise (perhaps through the creation of a major new employer like a supermarket or factory – see ‘E for Economy & employment’, below), the affordability ratio would drop. For example, if a property’s asking price is £150,000 and the average local salary is £50,000, the affordability ratio would now be three. In such a scenario – where there is more money being earned – there would likely be an increase in demand for local property and therefore an associated rise in local house prices.
If a ratio is high (around 10), then property prices are likely to decrease. If the ratio is low (three or less), then property prices are likely to increase.
The average affordability ratio is between 4.5 and 5.5.
You can find regional earnings on the Office of National Statistics.
I is for Interest rates and borrowings
Unless you’re lucky enough to be paying in cash, you’ll need to borrow funds at some point in your investment journey. The big question, then, is when to take out a mortgage?
Interest rates, set by the Bank of England’s Monetary Policy Committee, plummeted following the 2008 crash. As of early August 2018, they rose to the current rate of 0.75 per cent – the highest since 2009 and a sure sign that the UK economy is recovering. At the time, the Bank of England stated that any future increases in the cost of borrowing are likely to come at a “gradual pace and to a limited extent”.
So, what does all this mean to the investor? In simple terms, that now is a good time to invest; the current interest rate means repayments on mortgages and other types of loan will remain low – probably for some considerable time to come.
D is for Demand & supply
The UK is facing its biggest housing shortfall on record, according to reports in May 2018. Some 340,000 homes are needed each year until 2031 to keep up with demand. Factors at play are numerous but variously include our ever-expanding population and social mobility – where people (who are often but not always young) leave rural areas in search of work, thereby pushing-up house prices in towns and cities.
Understanding how demand and supply in any given area can (and should) influence where investors place their funds.
E is for Economy and employment
We’ve nearly completed the RIDE. But the preliminary enquiries wouldn’t be complete without first taking macro and micro economic changes and trends into account.
To make a profitable investment, investors need to keep two eyes open – one on Gross Domestic Product (GDP) and one on employment levels. GDP attempts to capture the overall state of any given country’s economy by measuring its output, expenditure and income. It is used by the Bank of England and its Monetary Policy Committee as one of the key indicators in setting interest rates. If house prices are rising too fast, for example, the Bank would be expected to increase interest rates to try and control them. But the Bank may postpone raising interest rates if GDP growth is sluggish as higher interest rates could damage the country’s recovery. So, by looking into GDP yourself you can predict – to an extent – if there is going to be a change in interest rates and then judge if an investment at that time is right for you.
It stands to reason that if employment levels are low or are set to increase, more people will make property purchases, thereby driving demand and house prices.
By following the Take A RIDE steps, you could do the same. Good luck!
Gill Fielding is a wealth creation expert and appears regularly as a property adviser on TV and radio. She trained as a chartered accountant but made her fortune through property investments in a career spanning more than four decades. She is the co-founder of financial and property training company, Fielding Financial, and featured on Channel 4’s The Secret Millionaire, where she gave away nearly £250,000 to good causes. Her bestselling books, Solving the Financial Success Puzzle, and Solving the Property Puzzle, are both out now on Amazon.