The first thing to realise when you are making a property investment is that there are other costs apart from the purchase price. These usually amount to about 8.5 per cent of the purchase price - 6 per cent stamp duty and 2.5 per cent fees for advice from professionals. The exit cost in terms of legal and agents' fees is usually about 3 per cent.
Another major potential liability is VAT, which is levied at 12.50 per cent on any commercial building developed or substantially modified since 1972. If you are buying the property personally, you will be liable for VAT on the purchase price. Talk to your accountant about your ability to register for VAT. The 12.50 per cent VAT and 8.50 per cent fees and stamp duty could add 21 per cent to the price of the investment. It is sometimes overlooked, as in residential property it is always included in the price paid.
You can claim interest relief on commercial property investments but not on most residential developments. Some properties in tax incentive areas yield allowances against all, some on rental income only. Ask yourself: is the price being paid likely to be good value when incentives run out.
It is important to get the right location. Prime locations suffer least when markets are down; but sometimes people overlook distance from home in relation to an ability to look after an investment. If you buy down the country or outside the country, someone will have to look after it. That reduces your yield.
It is the ability to highly gear the purchase price which gives significant added value. A financial institution will normally lend up to 75 per cent of a property's value.
If I look up The Irish Times Business This Week, I can get an overview of the average performance for unit funds. I see that on a five-year basis, out of 28 categories, the only ones to beat the property return of 116.89 per cent are US equities and Irish equities at 127 per cent each and Special Saving Accounts at 118 per cent.
Taking those figures as a guide for market performance, on a £100,000, five-year investment, I would make a profit of £116,000 on property; £118,000 on Special Saving Accounts and £127,000 on US and Irish stocks.
However, that does not allow for the "leveragability" of property. In the first instance, you would have to have put up only 25 per cent of the purchase price and having repaid the loan of £75,000, the £25,000 has in effect made £141,000 - a return of 464 per cent - far more than the return elsewhere.
The figures do not allow for the costs of realisation, mismatch in income and outgoings or the time taken to sell, but illustrate the impact of leverage.
If you want as little trouble as possible with your investment, look for a small office building with a good tenant and full repairing and insuring lease. Most tenants of office buildings maintain them to a high standard, especially if their clients regularly visit the offices. Your yield will be low, to reflect the risk.
Residential tends to require intensive management.
Industrial buildings take more punishment due to the usually intensive nature of their uses. Look out for uses that could contaminate the land or buildings. Be careful about buildings which may involve high initial refurbishment costs. Industrial buildings that have the potential for conversion to offices are worth a look.
Traditionally, many investors bought small suburban buildings with retail at ground level and offices or residential at first floor. As competition in retail intensifies, the small trader in many traditional suburban parades is finding it hard to compete and so it is worthwhile looking closely at the tenant and the nature of the use. Well-positioned units are worth a look.
An old building may require much work and often it is only at opening up stage that this becomes apparent. Unless a traditional Georgian-style office building is in very good condition, a full repairing and insuring lease may be difficult to secure from a tenant. Check the lease documentation to see the respective rights of the landlord and tenant. If the building is in poor condition and the tenant has responsibility to repair, check the financial ability of the tenant to do so. If the tenant cannot afford the expenditure, you may have to repair.
Regarding the covenant, do a thorough check on the tenant. What is the nature of the business? Make sure that there are no registered judgements against the tenant and look for the landlord's record of payments. Delays in payment of rent or other outgoings may suggest trouble - or simply an easygoing relationship.
Check that the rent is at market level and that there are other similar properties in the area. Most rent reviews are to "open market rental value", which should reflect local conditions. If there is no comparable evidence locally, this may cause difficulty.
In addition, it is important to remember that holiday locations tend to have a seasonal income - will that fund the loan? How realistic are the income projections? Is there someone looking after the property and how much does it cost? Yield simply reflects the return for the capital invested. Make sure the return suits your circumstances and takes account of the costs of acquisition.
