If you’re into creating a balanced portfolio then a bit of residential property and commercial property is necessary, but what happens if you’re not? And even if you are, what happens if you later discover that you’re not cut out for residential or commercial, or vice versa?
The thinking for a balanced portfolio is that some properties go up in value, others go down, but never mind provided the entire portfolio grows in value over the period of ownership. The snag with that way of thinking is when you come to sell and/or (re)-mortgage your equity. Generally, it’s a good idea to keep hold of the winners, and dump the losers, but property isn’t like that. What might seem like a loser at some stage might often surprise over the long term. And vice versa, a winner can trail behind as what was previously a good location goes out of favour. Landlords with empty shop properties in unwanted high streets can surely testify to that. In any event, since property is illiquid, why buy something that could go down in value? How would you feel if properties you own haven’t at least kept pace with inflation? (I’m assuming you keep a running check on performance: you do, don’t you?)
I suppose it’s possible for a property to go down in value suddenly, but normally decline is a gradual experience and forewarned. By ‘go down in value’ I don’t mean as a consequence of having over-paid, or because of some crisis that has led to withdrawal of bank lending or tightening of loan criteria. What I mean is that demand for the type of property has slowed for some fundamental reason. For example, a landlord of a shop in today’s prime position that loses its attraction as a consequence of tomorrow’s new shopping centre radically altering the trading position dynamics can only have himself to blame for ignoring the warning signs, the first of which is the developer applying for and obtaining planning permission. With shops, the best time to sell is before most investors realise that the prevailing zone A rental tone has reached its full potential, an achievement that nowadays is often a product of pro-active asset management.
For the management of property, residential and commercial require different mind-sets. In principle, there’s nothing to stop a landlord opting for a quiet life by letting a residential property on a long full repairing lease, but mostly landlords do not. Mostly landlords, particularly those with BTL mortgages, let on short-term tenancies and endure the fun and games that can arise in dealing with residential tenants. From the tenant’s perspective, short term is only attractive when flexibility is required; otherwise it’s a hassle having to relocate at relatively short notice should the landlord not want to renew for a non-revenge reason, so quite possibly it’s only likely to be tenants with psychological problems that cause difficulties for landlords. With commercial property, (whose categories shouldn’t be lumped together under the generic ‘commercial property’ even though necessary to do so for general discussion), the meaning of ‘short term’ is often a longer period of time than with residential so the landlord is more likely to enjoy a quiet life provided the choice of tenant is judicious.
It is not necessary to have a balanced portfolio. Indeed, the knowledge and experience in dealing with an array of issues that can arise through having to manage different types of property can be disproportionately taxing. In my view, it is better to specialise in a particular category of property and develop an understanding for that particular market so to fuel one’s instincts of what to do for the best in any given situation, than to fall into the trap of diversification.
Whether residential or commercial, talk to the wrong people and you’re bound to hear their horror stories and why they wouldn’t touch commercial or residential with a bargepole. But talk to the right people and you’ll hear a different tale. With the right people comes the mind-set, an attitude for dealing with situations in a business-like fashion. For that’s what investment in property is: a business. Whether one property or hundreds, the function of a lease or tenancy agreement is to inject a business-like approach into the relationship between landlord and tenant. Therefore, to be successful it is necessary to think in a business-like way. To adopt a cool, calm and collected approach to decisions and to take and listen to advice from experienced advisers.