Property investment tier lists are becoming one of my favourite forms of content. And by favourite, I mean I absolutely hate them.
Partly because I hate a lot of this marketing anyway, but also because property investment might be one of the worst possible things to reduce to an S-to-F tier list. We are talking about people putting £50,000, £100,000, sometimes considerably more, into assets they may own for ten or twenty years. There is leverage involved, tax, financing, liquidity, tenant demand, exit value, development risk, counterparty risk, opportunity cost and a fairly endless list of things that can materially change whether something turns out to be a good investment.
And apparently we have decided the appropriate level of analysis is: off-plan, A-tier. Refurbishment, C-tier. Supported housing, S-tier.
Lovely.
The problem is not just that this is reductive. It is what gets lost in the reduction, and how quickly an entire category of investment can be dismissed or promoted depending on which parts of it you choose to talk about.
I watched one recently where refurbishing and adding value to property was ranked C-tier. The explanation was perfectly reasonable. Refurbishments take work. Builders can disappear. Costs overrun. Projects get delayed. Unexpected problems appear once you start opening walls. Then, after all of that, the valuation might come in £20,000 below the number your spreadsheet needed.
Another video made much the same case against BRRR investing: social media shows you the purchase, the refurbishment and the refinance, but not everything that happens in between. Builders, spiralling costs, months of delays, extra finance costs and the disappointing valuation at the end.
I agree with quite a lot of that.
Plenty of people probably should not do BRRR. If you already work fifty or sixty hours a week, there is a legitimate question over whether you really want property investment to become your second full-time job. A strategy can work perfectly well and still be completely inappropriate for the person considering it.
Then we get onto the alternatives.
Off-plan property? A-tier, because you can spread the payments and potentially benefit from growth while the property is being built.
International property? A-tier, possibly S-tier, because prices can be lower and yields higher.
Specialist supported housing? S-tier, because of government-supported income, assured returns and no management.
Apparently we had used our entire supply of things that can go wrong on the refurbishment.
You can tell the truth and still produce terrible analysis
This is what makes a lot of this content interesting to me. You do not necessarily have to say anything false.
If I wanted to persuade you never to open a restaurant, I could tell you about staffing problems, rising food costs, wastage, rent, energy bills, thin margins and the number of hospitality businesses that fail. Then, if I wanted you to invest in my mate’s software company, I could tell you software is scalable, recurring revenue is attractive, the addressable market is enormous and the upside could be extraordinary.
I might not have lied once. I have simply given the restaurant its downside case and the software company its brochure.
I have written about that mechanism in more depth before in The Most Dangerous Sales Tool Is a True Fact, so I will not re-run the whole argument here. The important point is simply that factual accuracy and good analysis are not the same thing. Which facts you choose to include, and which questions you never ask, matter just as much.
Higher yields and lower prices
Another video explained why investors should look at the North of England. There were apparently two simple reasons: higher yields and lower property prices.
That sounds like two independent advantages until you remember that yield has the property price in the denominator.
There are real regional differences in the relationship between rents and prices, so this is not purely an arithmetic trick. Rents do not simply halve because property prices halve. That is part of the reason regional yield differences genuinely exist.
But presenting “lower prices” and “higher yields” as though they are two completely separate pieces of evidence can still make the argument sound stronger than it is. You may partly be describing the same characteristic twice.
More importantly, there is usually a reason assets are priced differently.
If low prices and high yields were all that mattered, property investment would be remarkably easy. Keep moving down the price curve until you find some of the cheapest housing in the country generating 10%, 12% or 15% gross yields and buy as much of it as possible.
Except nobody serious actually believes that.
Eventually someone says yes, but look at the location. Look at the tenant base. Look at the quality of the stock. Look at owner-occupier demand. Look at capital growth. Look at management intensity. Look at whether a normal buyer is likely to want the thing from you when you eventually sell it.
Exactly.
A high yield can be a fantastic opportunity. It can also be the return the market requires for accepting weaker demand, worse liquidity, more management, lower expected growth, a poorer location, more difficult stock or a narrower exit market.
The interesting question is not simply whether the yield is high. It is why the yield is high.
Cheap is not an investment thesis. Neither is yield without understanding why the yield exists.
The fact can be true while the conclusion is doing cartwheels
Sheffield gave me another version of the same thing.
I saw an advert aimed at people with around £25,000 to invest. Sheffield was apparently going seriously under the radar: regeneration, thousands of new homes, tens of thousands of jobs, advanced manufacturing, clean energy and a transformation spanning decades. Now was the opportunity to get involved ahead of the growth curve.
Then came the property being sold, complete with projected yields approaching 18%.
There may be absolutely nothing wrong with Sheffield. Major regeneration matters. New jobs matter. Infrastructure matters. I am not arguing otherwise.
But we have skipped quite a lot between “Sheffield is receiving investment” and “therefore this particular property, at this particular price, is a good investment.”
How much am I paying compared with completed stock nearby? What rents are actually being achieved in comparable buildings? How long are those properties taking to let? How much competing stock is being delivered? Who is likely to buy mine from me later? Is it straightforward to mortgage? How much of the regeneration story is already reflected in the price I am being asked to pay?
Those are the boring questions.
“Thirty-year regeneration” is better marketing.
This move appears constantly in property content: take something large, credible and difficult to argue with, then allow the individual property being sold to inherit its credibility.
A city has major regeneration, therefore this development is a good investment. A major employer has an office nearby, therefore rental demand for this flat will be strong. A huge infrastructure project is coming, therefore this apartment will appreciate. A city is forecast to grow, therefore the unit on the screen will grow with it.
Maybe.
But show me the bit in the middle.
Goldman Sachs is not a rental comparable
Major employers are one of my favourites.
Goldman Sachs. HSBC. Universities. Hospitals. Government departments. Put enough recognisable names on a development brochure and the investment starts to feel almost inevitable.
I am not saying employers do not matter. Of course they do. Sometimes you can see demand being created almost in front of you.
Take a major company opening a new office in a specific part of a city and bringing hundreds of new jobs with it. Residential developments complete nearby at roughly the same time. Then you start to see people who actually work in that office renting in those buildings.
Now we are getting somewhere.
There is a chain you can interrogate. New jobs are genuinely being created here. These are the types of people taking them. This is roughly what they earn. This is where they appear to want to live. This type of property suits them. Comparable properties are letting at these rents. The competing supply nearby looks like this.
That is quite different from putting a recognisable corporate logo underneath a photograph of an apartment and assuming the rest of the argument has been made.
“Goldman Sachs is nearby” is a useful fact. It is not a rental comparable.
Demand does not need a huge corporate relocation behind it either.
I remember Pearl Chambers in Leeds for almost the opposite reason. It is a conversion of an older building on East Parade, right in LS1. As an asset in isolation, it is not something I would automatically get particularly excited about. There are plenty of properties I would rather own.
But I remember the tenant demand.
At one point there were effectively queues of people wanting to live there, with a particularly noticeable number of international students. That interests me considerably more than somebody telling me Leeds has however many students in total.
Why were they choosing that building?
Probably some combination of being right in the centre of LS1, the character of the building, its proximity to everything, and a tendency for that particular tenant group to like that kind of central conversion.
I do not actually need to know the precise psychological reason before the observation becomes useful. I can see a particular tenant group repeatedly choosing a particular type of property in a particular micro-location.
That is evidence.
It also does not magically make the property a great investment. The next questions still matter. Does that demand persist? What rents are people actually agreeing? How quickly do the units let? What is the service charge? What competing stock exists? What am I paying to access that demand? And does the strength of the tenant market compensate me for whatever I may dislike about the property from an ownership and eventual exit perspective?
That is the difference between baked-in demand you can actually observe and a generic demand story borrowed from the city around the property.
One starts with the asset and works outward.
The other starts with the city and hopes the asset inherits the story.
You buy the asset. You do not buy the PowerPoint slide about the city around it.
Guarantees are another good example
The same problem appears with words such as “guaranteed”, “assured”, “government-backed” and “forecast”.
Property marketing loves nouns. Analysis needs the sentence after the noun.
Guaranteed by whom? Assured by whom? Government-backed in what sense? What legal obligation actually exists, between which parties, and for how long?
A guarantee from a substantial counterparty is not the same thing as a guarantee from a thin company with very little on its balance sheet. A lease does not become magically safe because the word “government” exists somewhere further up the payment chain. “No management” does not tell me what happens if the operator responsible for all that management disappears.
Forecasts deserve exactly the same treatment.
Give somebody a large enough percentage with the word “forecast” next to it and the number very quickly starts behaving like a return.
“24% growth.”
Fine. Over what period?
Forecast by whom? Measuring what? How much confidence should I place in it? Does a citywide forecast apply equally to houses, suburban flats and £200,000 city-centre new builds?
Even if the forecast turns out to be exactly right at city level, some properties will outperform it and some will underperform it.
The interesting information usually begins exactly where the headline ends.
“10% deposit.” What do I need later?
“24% growth.” Over what period?
“80,000 jobs.” Existing or new? Direct or indirect? Where? When?
“Assured rent.” By whom?
“Government-backed.” What, precisely, is backed by the government?
The more reassuring the headline sounds, the more interested I become in the sentence underneath it.
I do not actually hate off-plan property
This is usually the point where a discussion like this gets dragged somewhere much less interesting.
“He hates off-plan.”
“He hates supported housing.”
“He only likes boring buy-to-let houses.”
No.
I like good investments.
There are off-plan developers I quite like. There are projects I would be perfectly comfortable putting money into because I understand who is behind them, how construction is funded, how much of my capital is exposed, what protection sits around that money, what I am paying relative to the underlying market and what I am being compensated for by taking the risk.
There are also completed properties I would not touch.
“Off-plan” tells me nowhere near enough to make a decision. Neither does “BRRR”. Neither does “HMO”. Neither does “supported housing”. Neither does “international”.
That is why giving entire investment structures a letter grade is so ridiculous.
Take two off-plan developments. One might be sensibly priced against existing stock, backed by an experienced and well-capitalised developer, independently funded, with relatively little purchaser capital exposed during construction and a strong local market underneath it.
Another might be priced at an enormous premium, dependent on heroic growth assumptions, difficult to finance and built by an inexperienced development company with very little behind it if things go wrong.
They are both off-plan.
Putting “off-plan” in A-tier tells me almost nothing.
The category did not make the investment good. The details did.
Apply the same standard to everything
There is no investment strategy that deserves only its brochure. There is no investment strategy that deserves only its horror stories either.
BRRR can work. Off-plan can work. HMOs can work. International property can work. Supported housing can work. Boring little houses rented to boring little families can work.
They can all also go badly wrong.
The useful questions are remarkably similar whatever label somebody has put on the investment. What am I actually buying? What am I paying compared with the alternatives? Why does this return exist? What assumptions have to come true? What happens if they do not? How much of my capital is exposed? Who owes me money? What happens if they stop paying? How broad is the market when I want to sell? Can a normal buyer finance it? What happens if the valuation comes in below what I expected?
Most of the examples I have written about here do not require anybody to lie, which is exactly why I find them interesting.
Builders really can disappear. Sheffield really can regenerate. International property really can offer higher yields. Off-plan really can expose less capital initially. A major employer really can support local rental demand. Some buildings genuinely can have far stronger tenant demand than the property next door.
Every one of those statements can be true.
The problem starts when we choose every inconvenient truth about one investment and every convenient truth about another, then pretend we have compared them.
You can make almost any property investment look brilliant that way. You can make almost any property investment look terrible too.
The hard part is applying exactly the same standard to both.
Which, unfortunately, does not fit quite as neatly into an S-to-F tier list.