Former Boots boss: 'Buy-to-let replaced my salary in four years'
Cathy Colston rents houses in multiple occupation (HMO), where she takes an average 15pc income across nine properties
Homework: Cathy Colston, formerly a successful executive, plans and monitors her property investments meticulously Photo: Christopher Jones
By Richard Dyson
Cathy Colston quit a senior role at Boots, where she was in charge of the group’s pharmacies, with the aim of replacing her large income through property investment.
That was in 2010, when she was in her mid-40s with two teenage sons. Now she owns around a dozen properties, let on average to six sharers, which she claimed was the highest-yielding form of buy-to-let, although “not the easiest”.
She had some property investment experience: in 2005 she inherited a large bedsit above a flat in Cardiff, which she converted into three small ones.
“It was challenging but I learnt a lot, particularly about the importance of the quality of the property, and how much that matters to tenants,” she said.
On leaving her job she took time out “learning, reading and studying the housing market”, she said. “I needed every pound to generate as much income as possible.”
Not only was she looking to replace her previous income almost immediately, but her properties would need to see her through retirement.
Chasing the highest possible returns led her to HMOs – houses in multiple occupation. “HMOs are more complex and involve more input and time,” she said. “I don’t think they are for part-time buy-to-let investors or beginners. But they do offer the best returns. Younger people are looking for quality accommodation, and it’s in short supply. These people are happy to share with their peers, but the property has to be right.”
For Ms Colston yield – the rental return on her investment – is everything. Capital appreciation, if she gets any, is a welcome but secondary consideration. The average buy-to-let yield, across the mainstream market, is variously calculated at between 5pc and 6pc and much less in expensive areas such as London. This isn’t enough for Ms Colston, who cashflow into a loss. She reckons she obtains a yield of 15pc across her nine HMOs, which are in Bath, Cardiff and Bristol. She has several properties let to students, as well as “ordinary” buy-to-lets, which yield less, although still healthily, at 10pc.
“I need to sleep at night,” she said. “I’m mindful of the fact that interest rates will rise. I need a yield north of 10pc on everything I buy.”
Her HMO properties are let to professionals who share. The tenants’ rent includes all bills. “I pay the utility bills and the council tax,” said Ms Colston. The tenants all have separate contracts with her – the advantage being that if one leaves, the rest continue paying the rent. This is different from the situation with student houses, where there is typically one contract and where tenants are responsible for their own bills.
Ms Colston replaces her professional HMO tenants in conjunction with the other sharers in the property, but said “everyone generally gets on extremely well”. “It’s very important to get the age and gender mix of the houses right,” she said. “These are important people to me – my customers. If the person is right as a tenant for me, he or she is probably right for the other tenants, too. It is a little like creating a family.”
She has made mistakes, such as buying a pub that had been converted into six flats and on paper looked like an excellent investment. “But although I’d done a survey I hadn’t unearthed a number of faults with the conversion which created significant ongoing costs. Coupled with some empty periods and defaults it turned out to be a problem. After two years I sold it at a loss, but I was pleased to get shot of it.”
Now she is ultra-selective about the properties she buys. “I generally buy large, family homes and then convert them into six-bedroom properties with an average of four bathrooms.” These could be either Victorian terraces and semis or Thirties properties. She typically spends 10pc of the purchase price converting or updating the properties, and borrows about 75pc of their value. “Whatever I do by way of conversion, I ensure the properties could still be restored to single-family use,” she said. “That way I’m not limiting their future value.”
Although she monitors her portfolio closely, like many investors she has no clear “exit”. She realises there is likely to be a considerable tax bill, whatever she does. Her sons may take on the management of the properties but if she gave them some or all of the houses – which could potentially remove them from her estate for inheritance tax purposes – there would still be capital gains tax to pay. “I’m wanting to involve my sons as soon as it’s practical,” she said. “But I’m facing having to pay either capital gains or inheritance tax, and those are important considerations.”
Ms Colston refers to the HMO route of buying-to-let as an “absolutely fantastic strategy in terms of returns”, although she said it was not for everyone. Whar follows are her key tips to all would-be property investors.
My buy-to-let tips
1 Be clear on your strategy – are you investing to replace an income, for capital growth? Research which buy-to-let model will work best for you. Get educated, and invest time in learning.
2 What funds do you have available and what borrowing can you get? The lending market is a very different place from 10 years ago.
3 What time do you have? Are you looking for hands-off investments or will you be running your own business? Get a good team to work with: mortgage brokers, builders, solicitors and so on. Property can be a very lonely game and is increasingly regulated. Mistakes can be costly.
4 Research your investment location: know your market, your customers (tenants) and any planning and licensing requirements.
5 Pressure-test your investments against higher interest rates. Would you still have a positive cash flow?
6 Identify opportunities to add value to all your investments. Benefits can be realised when and if you refinance.
7 Most importantly, have a plan. What are you going to do, where, how, and what is your key driver? How will you finance your purchases and refurbishments, and what is your exit strategy?