The Case for Property, From Someone Paid to Say No

Most of what I publish about property investment concerns things that can go wrong. Properties I’ve rejected, financial projections that don’t survive a proper examination of the costs, buildings that lenders may be reluctant to finance, and investments that only work if prices or rents rise. A reasonable person reading all of that might conclude that I’m pessimistic about property.

I’m not.

I think residential property can be an excellent long-term investment. It can provide income, exposure to capital appreciation and opportunities to build wealth using borrowing. I also think a substantial proportion of the properties marketed to investors are poor purchases at the prices being asked.

I don’t see a contradiction.

It isn’t that I think I can forecast the property market better than everybody else. It’s that I don’t want to need an accurate forecast. That’s how I approach most purchases. I want to understand what an investment can reasonably produce from the day it is purchased, what it will cost to own, and whether the owner can afford to hold it if market conditions become less favourable. Then I want to understand what additional returns might be available if things go well.

Most property investment marketing approaches those questions in the opposite order. It starts with the attractive future, shows the investor what they might make, and works backwards towards justifying the purchase. I prefer to establish whether the purchase makes sense before giving the future any credit.

And that doesn’t make me bearish about property. It gives me more confidence in the investments that survive the assessment.

The assumption isn’t the prediction

When I assess a property, I generally want to establish whether it works without relying on capital appreciation. I want to understand the rental income achievable today, the costs of maintaining and managing the property, the financing obligations and the amount of cash the investor can reasonably expect to retain. I will usually allow for costs being higher than the initial estimates. I don’t need to assume rents will increase every year, and I don’t need to introduce a future selling price substantially above the purchase price to make the numbers attractive.

But there is an important distinction between an underwriting assumption and a prediction. If I produce a ten-year illustration with no capital growth, I am not predicting that the property will be worth exactly the same amount in ten years. I am testing whether the investment depends on appreciation. Zero growth isn’t my forecast. It’s the assumption I use to make sure the investment doesn’t need my forecast to be right.

The same applies to rental growth. I might believe that rents in a particular market are likely to increase over the next decade, and there may be good reasons for that expectation: employment, household demand, constraints on the supply of rental accommodation. But if the property produces an acceptable return at the rent achievable today, I don’t need those increases to justify buying it. Any future improvement can contribute additional returns.

That is a different starting position from an investment that produces disappointing income today but is presented as attractive because rents are projected to increase substantially. It is also different from a property that only produces a satisfactory overall return if it can be sold at a significantly higher price. Those strategies can work. Capital-growth investments are not inherently inferior to income investments. But I want to know what the investor is relying on, how much uncertainty sits behind the projected return, and whether the potential return justifies the risk.

Using conservative figures doesn’t mean I expect the worst. It is a way of separating the return available from the property today from the return we hope the market will provide in the future.

I expect growth. I don’t pay for it.

I don’t include capital appreciation in the minimum return I require from many investments. That doesn’t mean I consider appreciation unlikely. I’ve set out the structural reasons for expecting well-located UK residential property to hold and build value over long periods elsewhere, and I won’t repeat them here.

What matters for this article is narrower. None of those reasons tells me what a particular property will be worth in ten years. Individual markets stagnate. Buildings become less desirable. Local economies change. And there is a difference between a property rising in price and an owner becoming wealthier in real terms.

So I don’t want to pay for appreciation before it has happened. If the purchase makes sense without it, the investor retains exposure to the upside without making it a condition of success.

What borrowing actually does

One of property’s most attractive characteristics is that an investor can receive income from an asset while retaining exposure to changes in its full market value, even when part of the purchase is financed with borrowing. The arithmetic is worth understanding because it works in both directions.

Suppose an investor purchases £500,000 of residential property using £200,000 of their own money and £300,000 of borrowing. For simplicity, we’ll exclude acquisition costs and tax from the example. Assume the investment produces £10,000 a year in cash after operating expenses, maintenance allowances, vacancies and financing costs. That is a 5% annual cash return on the £200,000 invested.

Now suppose the properties increase in value by 2% during the first year. Two per cent of £500,000 is £10,000. The investor has received £10,000 in net rental income and owns properties worth £10,000 more than they were at the beginning of the year. That is a combined first-year economic return of £20,000, equivalent to 10% of the initial £200,000 equity contribution, before the costs and taxes excluded from the illustration.

Half is cash income. Half is unrealised capital appreciation. The distinction matters because the investor cannot spend the appreciation without selling or refinancing, and the value could change again before they do either. It is the same reason a yield figure describes only one part of an investment.

But it demonstrates something important. Growth happens across the full value of the property, not merely the cash the investor contributed. Every 1% increase in the value of that £500,000 portfolio adds £5,000 to the owner’s equity, equivalent to 2.5% of the original £200,000 investment. That is why relatively modest property price growth can make a meaningful contribution to an investor’s overall return.

It is also why borrowing needs to be approached carefully. If the same properties increase in value by 10%, they gain £50,000. With the loan balance unchanged, the investor’s equity rises from £200,000 to £250,000. A 10% increase in property values has produced a 25% increase in equity. If the properties fall by 10%, the reverse happens: their value declines by £50,000 and the investor’s equity falls from £200,000 to £150,000. A 10% fall in property values has reduced the original equity by 25%.

Illustrative. Before selling costs and tax, and assuming the loan balance is unchanged.

The leverage is identical in both directions.

That arithmetic is worth running forward, because the effect of time on it is the part people underestimate. Take the same £500,000 of property, the same £300,000 of borrowing and the same £200,000 of equity. Hold the rent flat for a decade. Hold the costs flat. Leave the loan balance where it is. Then run it twice: once with no price growth at all, and once at 2% a year, which is not a forecast, just a number low enough to be unremarkable.

Illustrative. Assumes £10,000 of annual rental cash flow after operating and financing costs, an unchanged loan balance, and excludes acquisition costs, selling costs and tax. The equity is unrealised.

After ten years the investor holds £309,497 of equity and has received £100,000 in cash along the way. That is £409,497 against the £200,000 they committed. Only about a quarter of that is money in the bank. The rest is equity, which has to be sold or refinanced before anybody can spend it, and selling costs money and may be taxed.

The reason is not the growth rate. Two per cent a year is a modest assumption, not an extraordinary one. The reason is what the two per cent applied to. Had that same 2% been applied only to the £200,000 the investor actually put in, it would have added £43,799 over the decade. Applied across £500,000 of property, it added £109,497. You receive income from the property, while any increase in its value applies to the whole asset rather than just the deposit.

And if I’m wrong about growth altogether? The investor still has £200,000 of property equity and has received £100,000 in rental cash flow over the decade. No appreciation required.

Notice what none of this requires. It doesn’t need rents to rise. It doesn’t need an unusual growth rate. It doesn’t need anybody to time a market or find a bargain. It needs the investment to work on the day it is bought, and the owner to be able to keep hold of it. Which is why I spend so much effort on the first of those and almost none predicting the second.

Borrowing introduces costs and obligations that an unleveraged investor does not face. Interest must be paid, mortgage products expire, refinancing may be required and lenders can change their appetite for particular properties. Borrowing can improve returns when the income and growth justify its cost. It can also turn an otherwise manageable investment into a difficult one. So the amount borrowed, the interest rate, the rental coverage and the cash the investor keeps back all matter enormously.

I am positive about the potential for leveraged property investment. I am not positive about borrowing as much as possible simply because it increases the return in a favourable illustration. The objective is to use financing that improves the investment without making the investor unnecessarily vulnerable to changes in the market.

Surviving the wrong market

Property markets go through difficult periods. Prices fall, mortgage rates increase, lenders tighten their criteria and investors become less willing to commit capital. Those conditions affect everyone who owns property, but they don’t affect every owner in the same way.

Consider two investors who own similar rental properties. The first has affordable borrowing, sufficient rental income to cover the costs and a substantial amount of capital available outside the property. The second has borrowed close to the maximum available, relies on a small monthly surplus and will need to refinance shortly.

If property prices fall by 15%, both investors experience a decline in the value of their assets. The first may be able to continue collecting rent and holding the property. They have suffered an economic loss in the value of their equity, but they are not necessarily required to sell. The second may face a much more immediate problem: a lower valuation could reduce the amount a lender is prepared to advance when the mortgage needs replacing, higher borrowing costs could eliminate the rental surplus, and if the existing loan cannot be refinanced on acceptable terms, the investor may need to contribute additional cash or sell.

The difference is not necessarily the property. It is how the purchase was financed.

Being able to choose when to sell is valuable. A property owner who can withstand a period of weak prices has more flexibility than somebody whose financing or personal circumstances force them to transact. That flexibility does not guarantee that values will recover, and it does not mean the owner has avoided the economic consequences of a downturn. It means they have more options.

The rental income can also help. Rental demand and purchase prices do not always move together. Higher mortgage rates can reduce purchasing power while leaving demand for rented accommodation relatively strong. Some households postpone buying and remain tenants for longer. In some markets, the number of available rental homes may also be constrained.

But rents are not immune to recessions. Employment losses, affordability pressures and changes in household demand can affect rental income too. That is why I want the rent to cover the property’s obligations with sufficient headroom, rather than assuming that rental growth will compensate for higher costs. I also want to understand the mortgage arrangements well before the investor reaches a refinancing date.

A property that can be held comfortably through a difficult period is a very different proposition from one that requires favourable market conditions to remain financially manageable. Nobody can eliminate the possibility of needing to sell — personal circumstances change, buildings develop problems, unexpected expenditure can arise — but an investor can reduce the risk of being forced to sell, through sensible borrowing, realistic income assumptions and keeping enough cash back. For a long-term investor, that is a substantial advantage.

The top of the bottom, or the bottom of the middle

When I assess a property, I spend a lot of time thinking about who will want to occupy it and who will eventually want to buy it. That leads to a positioning principle I find useful: own the top of the bottom, or the bottom of the middle. The better-quality stock in a relatively affordable segment of a market, or the more affordable stock within a stronger, established segment.

There are two slightly different opportunities here. The first is to buy a property that stands out positively among the affordable alternatives available to tenants and purchasers. Imagine an area where a typical two-bedroom rental property achieves £850 per month. For £950, a tenant might be able to rent a house in noticeably better condition, with a more practical layout, lower running costs, better outdoor space or a more convenient position within the neighbourhood. That £100 difference may be relatively small compared with the improvement in the accommodation.

For an investor, a property that offers that combination can appeal to a broad group of tenants. It isn’t competing purely on being the cheapest available. It represents good accommodation at a price that remains accessible to a substantial part of the local market. The same applies when the property is eventually sold: a well-maintained house with a sensible layout, conventional construction and broad mortgage availability can appeal to first-time buyers, owner-occupiers and landlords. Those are useful characteristics when the market becomes more difficult.

The second opportunity is to buy at the more affordable end of a fundamentally stronger market. That might mean a smaller house, an older property or a less fashionable street within an area supported by good employment, transport, amenities and established owner-occupier demand. You may not be buying the best property in the neighbourhood, but you are buying access to the characteristics that make the wider location desirable, at a price that more households can afford.

Both approaches are concerned with the same thing: finding a property that represents an attractive choice relative to the alternatives available at its price. This becomes particularly relevant when household budgets are under pressure. Some tenants who previously rented more expensive accommodation will consider cheaper alternatives. Some buyers will reduce their budgets rather than abandon the idea of purchasing altogether. I want to own properties that those people would be pleased to move into, rather than properties they would only consider because nothing else was available.

That doesn’t mean the cheapest markets are always the strongest. A £70,000 house in an area with weak employment, poor housing quality and limited resale demand can be a worse investment than a £200,000 house in an established market. Nor does it mean the middle of every market is vulnerable: good family housing in a strong location can have extremely durable demand. The principle is about relative quality and affordability within a market that has sound underlying demand.

And I apply it to the eventual resale as well as the rental income. A property can let easily and still be difficult to sell. A flat in an investor-heavy building may produce a reasonable rent but have a restricted mortgage market. A property with unusual construction or problematic lease terms may appeal to tenants while presenting difficulties for purchasers. If the next buyer needs mortgage finance, those issues become relevant regardless of how the current owner funded the purchase.

I want to know there will be buyers for it when the time comes to sell. Ideally, the property should appeal to more than one type of buyer and be suitable security for a reasonable range of lenders. Mortgageability, construction, ownership structure and the eventual exit matter alongside the rental yield.

The best investment isn’t necessarily the one offering the highest income relative to its asking price. It is the one where the income, the quality of the asset, the price and the number of people who would want to rent or buy it combine to produce a return worth taking the risk for.

The price decides the starting position

I can believe that UK residential property will perform well over the next twenty years and still reject a property being offered for sale today.

The price matters too much.

Consider two investors buying essentially identical properties. One pays £150,000. The other pays £180,000. They receive the same rent and incur similar costs. Their properties are exposed to the same local market conditions. But their investment returns are not the same.

The first investor has committed less capital to obtain the same income and the same underlying asset. Unless there is a genuine difference between the properties, the lower purchase price gives that investor an advantage from the beginning. That advantage doesn’t depend on forecasting the market. It was established when the purchase was agreed.

The same principle applies to financing, management costs, maintenance requirements and the amount of capital retained outside the investment. I cannot decide what interest rates will be in five years, but I can decide whether the borrowing I accept today leaves sufficient room for them to be higher. I cannot control future rental demand, but I can investigate the market, verify achievable rents and avoid buying something that requires substantial rental growth to produce an acceptable return. I cannot control the price a future buyer will pay, but I can assess the current resale market, understand the property’s mortgageability and avoid paying more than the available evidence supports.

Those decisions won’t determine what happens next, but they will determine how well prepared the investor is for it. And that is where I think much of the work in property investment should be concentrated.

A good asset bought at the wrong price can be a poor investment. A sensible purchase price can provide protection against some adverse outcomes and create opportunities for stronger returns when conditions improve. The objective is not to eliminate uncertainty. It is to avoid paying for favourable outcomes before they occur.

Why negative sentiment interests me

There is another reason I remain interested in property when the prevailing commentary is negative. Market sentiment affects the decisions people make, including the prices at which they are prepared to sell.

Higher interest rates, regulation, taxation and increasing management costs have caused some landlords to reconsider their investments. Some are approaching retirement. Others want to release capital or reduce the time they spend managing property. Some have borrowing arrangements that no longer make financial sense. Those can all be perfectly rational reasons to sell.

But an investment that no longer suits one owner may be attractive to another. A landlord with expensive borrowing and high management costs may receive an inadequate return from a property that would work well for a cash purchaser or an investor with different financing arrangements. An owner who wants to release capital quickly may accept a price that provides a more attractive return to somebody willing to hold the property for another fifteen years.

That is where opportunities can appear. Not because negative headlines automatically make property cheap, but because the circumstances of individual sellers can create differences between the price they are prepared to accept and the value of the asset to a suitable purchaser.

Sometimes the seller’s concerns are entirely justified. The property may need substantial expenditure, the rent may be insufficient or the local market may have deteriorated.

A motivated seller is not automatically offering a bargain.

The opportunity exists when the price is low enough to justify the risks and still leave the new owner an acceptable return. That is why I am interested in negative sentiment, but not dependent on it. I don’t need the market to collapse to find good investments. I need to find situations where the price, income and quality of the asset make sense together.

And sometimes the best decision is to wait. There is a persistent message in property investment marketing that capital sitting in a bank account is being wasted and that an investor must act immediately to avoid missing out. But buying an unsuitable property does not become a good decision simply because the alternative is temporarily holding cash. Cash provides liquidity and flexibility. It allows an investor to respond when a better opportunity becomes available.

There is an opportunity cost to waiting. Prices may rise, rents may increase and a good purchase may be missed. There is also an opportunity cost to committing capital to an investment that subsequently underperforms or proves difficult to sell.

Both matter.

If the available properties cannot justify their asking prices, waiting is a legitimate investment decision. I would rather retain a client’s capital than recommend something simply because they are ready to spend it.

Being paid to say no

My business is structured around that approach. I am paid directly by clients for property analysis, advice and decision support. I don’t receive developer commissions, sales commissions or referral payments for recommending particular properties. My remuneration does not depend on a purchase completing.

So the title of this article is slightly wrong. I’m not paid to say no. I’m paid the same whichever answer the evidence supports, which is a different thing and a more useful one. That does not mean my assessments are always correct, and it doesn’t mean that everybody working on commission gives poor advice. It means I have no commercial requirement to turn an assessment into a transaction. I can recommend a property when the evidence supports it, renegotiate when the price is wrong, or advise somebody to buy nothing if the available opportunities are unsuitable.

Before this, I sold property for a living, off-plan distribution included. I understand why sales businesses focus on the positive case for the properties they market. They need transactions to happen. Their properties aren’t automatically poor investments, but the incentive runs towards the reasons a buyer should proceed.

My job is different.

I want to know whether the purchase is a sensible use of the client’s capital, given their objectives, financing position, alternative opportunities and tolerance for risk. That means examining the reasons not to proceed just as carefully as the reasons to buy. And it is entirely possible to do that while believing property is an excellent long-term asset class. In fact, the stronger the long-term case for property, the less reason there is to rush into an unsuitable purchase.

There will be other properties. There will be other sellers. There will be other opportunities to deploy capital. I don’t need to persuade somebody that every available property is worth buying to make a positive case for investing in property. I need to identify the ones that are.

I remain positive about residential property because of the income it can produce, the demand for the accommodation it provides and the potential for long-term appreciation. Those are good reasons to invest. They aren’t reasons to accept the wrong price, unsuitable borrowing or an asset that will be difficult to sell.

I don’t need to be right about where the property market goes next year. I need to be right about what I’m buying, what I’m paying, and whether I can afford to own it if things don’t go to plan.

That’s why I reject so many properties.

And it’s why I remain positive about buying the right ones.