Location is no longer optional

0:02Hey everyone, Rob B here with Rob D and you are listening to The Property Podcast. This week we shatter a belief system and it needs breaking because so many people are investing the wrong way. So many people are costing themselves meaningful returns, life-changing amounts in fact. We go through our beliefs but we go more importantly beyond beliefs. we show you the numbers the difference it will make to you as an investor is dramatic when you look at these numbers this week you can find out if you're investing the right way or are you making a huge financial mistake welcome to the property podcast in case you don't know we run a business that buys more than 100 million pounds worth of property every year you can find out about that at propertyhub.net slash invest.

0:53Obviously, when we're making those investments, a huge consideration is where we invest. It's something we feel very strongly about because we've seen the difference it makes. And today, we're going to lay it all out for you with real numbers. In this week's news story, I'm sad to report a death. The death of flipping. Yes, the practice of buying homes, doing them up and selling them on again that powered so much TV for so long seems to be, well, maybe not dead, but certainly really suffering. That's according to Hampton's data that shows that if you look at the number of homes that were bought and then sold on again quickly afterwards that made up 2.4 percent of transactions in 2016 and only 1.5 percent of all transactions today and there are various reasons why flips have been harder and less popular so building materials and labor over the last few years of course have been a lot more expensive the market in general has not been helpful flipping has always been something that only really works in a rising market you need the market to help you out and that hasn't been happening for pretty much all over the last decade in most of the country.

1:51But a big one that Hampton's put its finger on is stamp duty. So of course now investors are paying 5 % more stamp duty than residential buyers. It was 3 % for a large amount of that period. And that has just made it so hard to make the numbers add up. Because for a flip to be profitable you need to be adding value over and above the cost of your refurbishment but also over and above your transaction costs. And that extra stamp duty has pushed transaction costs right up. And in fact according to this research stamp duty now swallows 43 % of the gross profit from a flip. So half your profit is going to stamp duty before you've even started.

2:26No wonder people are doing it so much less. And the research shows, unsurprisingly, that really it now is something that only works on cheaper properties, where because of how the stamp duty thresholds work, stamp duty takes less of a bite. Therefore, you're seeing the highest share of flips in the Northeast, where property prices are lower. So if you are still doing flips and you're making them work for you, then respect to you. It's not easy and we know people are still making it work. But sadly, based on this data, it seems like we're unlikely to get another series of property ladder anytime soon.

2:52The other week we had someone call in to Property Hub Invest. He was a first-time investor. He'd just received an inheritance and he's trying to figure out where to buy. He knew that he was most interested in capital growth, which is good that he knew what his objective was. But the problem was he lives in West London and he wanted something closer to home. So like many people, he'd started looking in his immediate area, figured out that the numbers didn't really work, so started looking a little bit further afield. But the problem is, when you go a little bit further afield from West London, you are still in very expensive areas where the numbers don't really work.

3:24And when we have conversations like this, we always bang the drum hard for really thinking about location. And we try to break people out of the mindset that you have to be investing close to home. Now, some people are lucky and close to home is the best place for them to be investing. But the reason we push it so hard is that location has always been important, but today where you buy is more important than anything else. And in this episode, we're going to explain why and we're going to give you a worked example showing you how the wrong decision can cost you tens of thousands of pounds. There's something I'd like to make really clear at this point, that when it comes to property investment in the UK, we are area agnostic.

4:04We are not emotionally attached to any particular area. We will go where we feel the best areas are to invest. And we've changed over the years our hotspots, and they're all on record. You can go and listen to them. There are definitely consistencies, but there are places that we've moved into our hotspots and out of our hotspots. And at some point in the future, I'm sure London will be in our hotspots. We added it to our watch list of areas that are interesting potentially for the future. So it's important to understand this is not us championing an area because we love it more than any other.

4:39That's not the case. What we love, what we champion is the best investments. And this is where it's helpful to move away from the debates of where's best and just look at the data because that's where the truth is within the data. And luckily with property, there is lots of data for us to go at. So let's start with capital growth. The land registry in January churned out its numbers and it said that the northwest property had grown by 3.1%, Yorkshire about the same, but the southeast 0.5 % falls and London 1.7 % and that's over the last 12 months. So you've got a massive swing there between top and bottom of 4.8 % in just one year alone.

5:24When that compounds, the numbers, the difference it makes to your investment is staggering and we will look at those numbers shortly. And that's a bit of a common misconception that's still in place. There's lots of things said in property that just simply aren't true. But people just repeat them, like one of them being that, well, you get capital growth in the south and you get yield in the north. But in that case, capital growth has been better for a long time now in the northern regions, Midlands as well, and Yorkshire compared to the southeast. Something else that's often said is yields are better in the north.

5:56Well, actually, Rob, the data says that that is still true now. Very much so. So if you look at Zoopla data, yield in the northeast, the average yield 7.9%. In the northwest, 6.8%. All the way down to London, 5.1%. They also found that the top 17 cities for rental yields are all in the north of England and Scotland. Not a single southern city has made the list. And the gap is widening as well. So those are yields today. But if you look at rental growth, going by ONS figures, the northeast has the highest rental growth at 7.6%. London again the lowest rental growth at 1.7%. So at the moment there's really no compromise to make you buy in the Midlands up you get a better yield your rent grows faster and your capital growth is going to be higher as well.

6:39Now if that was only true for the current year that wouldn't be a lot of use because you're not going to sell up in a year's time and go and buy somewhere else. But in property you tend to get trends that play out for a number of years and according to Savills five-year forecast this is just going to continue. In fact Yorkshire, the northeast, the northwest or going to have double the growth rate of the Southeast and London over the next five years. So this is a trend that's firmly in place and seems set to continue. And like we said, in a minute, we're going to give you a real example of what that could end up meaning based on where you invest.

7:10But I think before we do that, Rob, it's worth asking a pretty obvious question. Why? Why is this happening? And that's such an important question, because it's not just accepting it as a truth. Yes, that is correct data, but that's the first level. When you understand why it's happening, then you become really empowered as an investor. And one of the big reasons is affordability. So when we look at house prices compared to earnings and look at that ratio, it paints a very interesting story very quickly. So you've got the north of England at 3.9%. So the average wage times that by that amount, you have the average price of the property.

7:53For Scotland, 4%. So almost the same. Yorkshire, 4.8%. The Northwest specifically, 5%. And then the list goes on. The UK average is 5.6%. But then when you move to London, it's 8.8%. And when you look at the outer regions of London, it's still 7.6, and the Southwest as a whole is 6.7. So you're going from one extreme to another. In parts of Northern England, it's around 4%, but in London, it's more than double that amount. But it's not just affordability, because affordability alone isn't enough. You need to drive growth and spot the opportunities fundamentals as well, because there are plenty of places in the North that we would not invest in.

8:39you need to have the strong fundamentals as well. But when you have the fundamentals and you have affordability, what that becomes is a mispriced asset. Or it shows at least potential for capital growth. And when it comes to fundamentals, there are plenty of areas in the Midlands and the North that are thriving right now that have brilliant fundamentals already. So things like great transport links, great jobs, great infrastructure. But more is going in as well. Of course, there's the big projects like HS2 going into Birmingham, but many of the major cities, and we talk about this in the hotspots episodes at the beginning of each year, are benefiting from billions of pounds going into them, which is transformational.

9:21So when you have brilliant fundamentals, more investment going in, but affordability levels being really reasonable compared to the rest of the UK, it creates an interesting dynamic that means that not only now is it interesting, but it sets you up nicely for the future because you've got the yield today and that will surely improve over time. But what you also have, because of what we just outlined, is that capital growth potential. And that's been playing out for the last decade. So let's work through an example. Let's say you've got Sarah investing in the southeast and James investing in the northwest.

9:56We really pushed ourselves to go with some original names here. So both of them starting with£100 ,000. Sarah in the southeast with her£100 ,000 she's able to buy a two-bedroom flat in a commuter town like somewhere on the edges of Reading or Guildford and that'll cost her£300 ,000. James in the northwest can get a two-bedroom house in somewhere like Bolton or Warrington and that'll cost him£175 ,000. So when you break down all the money they need to put in including the deposit the stamp duty and everything else Sarah ends up putting in£95 ,000 so she spent almost all of her cash James though is nearly but not quite able to buy two he only needs to put in£53 ,000 so he's potentially only a few years away from being able to invest again and that becomes very important a little bit later on so let's look at a high level one year cash flow I won't go through every single number because people will get lost quickly because there's just too much to look at but if we go top line the annual rent for Sarah and the annual rent for James Sarah at$15 ,600 James at$9 ,900 now what we'll do is we'll take all the costs off so we'll use the same mortgage product we'll do the same rate of management fee we'll add in insurance maintenance and we'll get our net income so the net income for Sarah is just over£3 ,000 and for James it's a bit over£2 ,000.

11:12Importantly the return on the money deployed for Sarah is 3.3 % but for James it's 4.4%. Now Sarah's top level rent was more but Sarah has put a lot more money in to get that rent so that's why the return on investment, the amount of return you'll get on your cash deployed is better for James because whereas Sarah's used all her cash James still has 46 ,500 in reserve. So so far as you'd expect yields higher in the north we knew that but over a year not life-changing not a dramatic difference. Let's see though where they end up after 10 years so let's assume that Savills are absolutely spot on with their regional projections and Sarah in the southeast gets annual growth of 3.2 % and James in the northwest gets 5%.

12:00If that happens and you work out their property values after 10 years and you see how much equity they've gained over that time they actually end up with almost exactly the same equity gain. Sarah ends up making$111 ,000 James ends up making$110 ,000. Again though James put in far less money to achieve that and because he put in far less money that is actually not the picture after 10 years because James is able to buy again in year three. So because he had so much cash left over all he needed to do was save up three years of his net rental income and that allows him to buy a second property. So for seven out of those 10 years James owns two properties rather than one and that means that the final difference at the end of 10 years is massive.

12:40They both started with£100 ,000. At the end of 10 years Sarah's got one property, James has got two and on an annual basis James is bringing in more money. If rental growth is run at 3 % for the 10 years Sarah is making£21 ,000 off her one property, James is making£25 ,500 off his two properties. but the really striking number here is how much equity they've got after 10 years sarah has got equity of 186 000 james has got equity of 269 000 that means that after 10 years james has 83 000 pounds more equity and he's making more per year in rent despite having started out with the same amount of funds rob this is such a powerful example because if you look at the annual growth rate you go yeah there's a difference but it's not loads it's a couple of percent per year but here you really see that compounding effect especially by the time you've used a mortgage that means over 10 years which isn't even a long time in property the difference is absolutely massive it really is so it begs the question why do people still invest locally or one maybe they've not looked at the data so that's fair and hopefully you listening if you need to share this with other people who think this way then please do but i think for a lot of people it's just a mental barrier it feels safer right I understand it people when they're starting especially just want to play it safe but safe can hurt you financially you know we hear all the time people saying they want something close by and if you live in the north that's amazing because you'll probably find something but if you live in the south it's a lot harder and you're going to struggle now at some point in the future the south may be interesting again but right now it's hurting you financially.

14:19The first investment away from home is absolutely the hardest. Your first investment in general, but your first one away from home is the hardest. But once you've done it, once you've made that purchase and you've set it up correctly, you've got a good management agent in place, you've bought a property in a good area and of good quality, so it's not going to have loads of maintenance issues. If you just follow some basic steps, you'll then start to quickly realize like why did I ever worry about this? For busy professionals you don't want to be hands-on anyway. Yes of course if you've got lots of free time and you're pretty handy then fair enough but for the majority of people who listen to this podcast they don't fall into that bucket.

14:58They're busy people who may romanticize about the idea of being a hands-on landlord and maybe one day they can be but in the short term that's not going to happen and actually many people decide that that's not for them. They don't want to be doing that because the idea of it and the reality are two very different things. Yeah. And to prove that we practice what we preach on this, I still own properties in London, which I've had for a long time. And earlier this week, there was a leak in one of those properties. And if I walked at pace, I could get there in 15 minutes. Not once, not for a second, did it cross my mind to go to that property in person, even though it was 15 minutes away.

15:37Because for a start, I don't want to. I've got things I'd rather be doing. And also, like what would i do when i'm there i have no idea how to deal with anything so it made no practical difference to me whether this property was in a leak in my property 15 minutes away or one that's 300 miles away now of course the first time i made an investment away from where i lived it was a bit scary and i did have to put the work in to go and research that area and get to know it and had to put more hours in to making sure i was investing in the right place in the area that i didn't know because I didn't have all that accumulated local knowledge more locally that I built up over years.

16:12But imagine you're in that same position today. You are in London, like the person I mentioned at the beginning who called in, and you're faced with having to spend time going and doing this research on other areas. Well, based on the example that we just worked through, which is not pulling numbers out of the air, this is a real worked example based on the best projections of what's going to happen. What's the hourly rate on that bit of research going to be? It's going to be absolutely astronomical. It will be. Financially, logically, this all makes sense. But if you're still struggling with this emotionally, imagine you had somebody talking to you and they were saying that they wanted to invest in an area that was going to return them less money year on year free rent.

16:48And also capital growth is going to be worse as well. You wouldn't let that person make that investment. But where people struggle is the emotions part. Imagine yourself talking to somebody else, giving them advice. You wouldn't let them do it. So don't let yourself do it. Get over your fears. There are things that can set you up for success. Choosing the right property in the right area. The great thing is there's lots of good areas. Listen to the Hotspot episodes. And there's lots of good properties as well. Just follow good fundamentals. Get yourself a good property in this market. Get yourself a good price.

17:23And over the long term, you will be very grateful to that person who got over their fears and made a great investment. When you do this, the numbers are massive. In the example we showed you, just in capital growth alone, even though it was a very small percentage amount each year, it was over£80 ,000 difference. That's a significant amount of money. And remember, that was just a little bit of difference. If your area was really bad for buy to let in terms of return, then those numbers can be much, much bigger. But even when we played it safe and just showed you some conservative numbers, so when you go forward are you going to invest with emotion or are you going to invest with logic once you absorb the numbers logic's going to win every time you just need to get over your emotions but i'm sure if you listen to this podcast you're the type of person that will so you can always share this with others as well if they're not quite getting it yet but always remember in every type of investment logic outperforms emotion every time okay so before we wrap up let's just squeeze in a quick hub extra the part of the show where we try to bring you something else to add some value to your life and shock horror rub we've got another ai tip this week because i know for myself i know for speaking to you we're not doing much else at the moment so what have you got this week no i have no idea what the weather's like outside so this week's episode if you're not a geek you'll be happy because it's a completely non-geeky use of ai it's really practical and it's using Gemini, which is Google's AI platform, as a search platform.

19:00There are many different AI platforms out there. We talk about Claude a lot at the moment, loving Claude, great for work. So if you're looking for an AI platform to help you with your day-to-day work, then Claude is great. But what I really like about Gemini is its power of search. And it makes sense, right? It's created by Google. And I can give you a real-life example of how I've used it in the last couple of weeks because I wanted a podcast on a specific subject and yes, Shalcora, it was on AI. I prompted Gemini to say, give me podcasts that specialize in AI implementation. I don't want high-level stuff.

19:36I don't want it about implementation. Specifically, I want it about AI implementation into businesses. I want real-life examples. I don't want it to be focused on multinational businesses because that doesn't apply to me more fast-growing smes podcasts like that please send them my way and it did and it was great and and how else would you find a podcast like that by a recommendation yes you could wait till somebody recommended one but podcast search is awful i've also used it for youtube videos i know rob you've not had as much success with youtube so maybe i'm getting lucky with Gemini there but for searching for content whether it's blogs podcasts maybe YouTube videos a bit hit and miss on that subject but it's only going to get better Gemini is fantastic and really niched down you know if you've got a particular topic you want the more detail you get with Gemini the better it I found at least it seems to do word of warning though just if you find yourself using Gemini a lot take everything with a pinch of salt I found it and I know you have as well Rob that it just makes things up rather than just saying I don't know or I can't so Gemini's a little bit dodgy there at the moment but I'm sure that will improve in time as well yeah a quick side tip if your interests are super niche and it can't find you a podcast on that subject then you can create your own podcast get it to do some deep research into that topic stick it into notebook LM which is another google product and then it will generate a podcast for you with two people chatting about that research so if you like taking in information in audio form which you do if you're listening to a podcast and you want to do more of that then that can work really well.

21:12You're no longer limited by what humans have produced. But these two humans are going to keep on cranking out the podcast anyway. We will be back with the property podcast again next week. We'll see you then. Bye-bye. Bye-bye.