Buy-to-let has become all the rage in recent years for the private investor. With a shaky stock market, it has been seen as an alternative way to secure both income and capital growth. But is this an opportunity that community and voluntary organisations can or should take? The Oasis Centre in east Belfast certainly thinks so.

Oasis Housing is a relative newcomer to the buy-to-let housing market, buying its first house in September 2003, but already its portfolio has grown to six houses with a further four ready to be added in coming months

According to Oasis Director, Cliff Kennedy, it all started with a gift of £80,000 from a church in the USA that heard of the work Oasis was doing in a disadvantaged area of east Belfast and the plans they had for creating employment and developing income through social economy activity.

Oasis was running a number of successful employment related training programmes and already had a café and associated catering service operating as a going concern on a social economy model. As it explored a number of ideas for establishing new businesses, it was also looking at how best to utilise the gift of £80,000. While a very generous gift, £80,000 could disappear very quickly funding a project addressing social needs, but the Oasis board wanted this significant gift to have a more lasting effect.

The board of directors were also acutely aware of the poor state of much housing in inner east Belfast and the demand for good quality and good value rental housing. Bringing these two thoughts together, using the capital to purchase houses for renting seemed the perfect answer.

Oasis’s first steps into the market were understandably somewhat tentative. It bought a terrace house needing some minor refurbishment for £36,000, spending a further £4,000 to bring it up to the required standard for letting. This was let quite quickly and suddenly the business was up and running.

In a rapidly rising property market, it was then able to remortgage its first property, releasing the total cost of buying and repairing the first house, and then began buying a number of other properties. To do so Oasis formed a new company, called simply Oasis Housing. It then approached an experienced buy-to-let mortgage provider, and used its start-up capital to contribute the 15% required to obtain 85% mortgages on further properties.

Oasis Housing has now added a further five houses to its original purchase and has found tenants for all virtually as soon as they were available for renting. All the houses are in inner east Belfast although that will not necessarily always be the case in future. Some of the houses bought have required some updating, such as new windows or a new kitchen, while others have been ready to move into virtually immediately, perhaps with a little redecoration.

So far the remortgaging based on rising property value has worked well as the current six houses and the proposed four additional houses are all being financed using the initial £80,000 investment. The £80,000, together with the capital released by remortgaging as property values have risen, covers the 15% required as a deposit with the other 85% being provided by the mortgage lender.

The only requirement is that the proposed rental income be equal to or greater than 125% of the interest due on the loan. To date this has not been a problem, although as house prices rise more than rental levels it may become an issue for future purchases.

The main reason for the 125% requirement is to ensure that interest payments can be met when void periods and repairs are taken into account, although to date Oasis has been very fortunate in that voids have been kept to a minimum and no major repairs have been required. The mortgages are also on an ‘interest only’ basis to ensure adequate cashflow and enable the portfolio to grow.

Difficulties

To date Oasis Housing has faced very little difficulty in setting up and managing its business. Whether this is more down to ‘beginner’s luck’ or good planning and management, time will tell. Certainly the directors are aware of some of the potential problems which can, and at some stage probably will, arise.

Finding tenants does not appear to have been a problem although obviously if this did become a problem in the future it would raise some financial difficulties. However, according to Cliff Kennedy, they are working hard to make sure this does not arise: “We are confident that there is long term demand for rental property in this area. We are also being careful about what kind of property we buy and then making sure we provide an excellent quality of service to all our tenants. We are also aware that we might get some ‘bad tenants’ although hopefully we can manage that situation carefully and sensitively if it does arise. We will always try to work with tenants to resolve any issues, although at the end of the day we cannot afford to rent out property for nothing.”

Oasis has also considered the implications of a collapse in the property market in Belfast, although all the advice they are getting is that this is unlikely to happen. “Even if it does,” adds Cliff, “it would only affect us if we needed to sell which we don’t think will be the case. We don’t expect a drop in property values would decrease the demand for rental property in this area.”

One other difficulty, faced by many social enterprises, is that of work overload, as the Oasis Housing project was simply added to the workload of existing staff. However, with support from Invest NI it has now been able to appoint a part time person working solely on the housing which is viewed as critical if the project is to develop and be effectively managed.

Plans for the future

While the business has grown relatively quickly since starting just over two years ago, Oasis hopes that it will continue to grow steadily in years to come. It is already completing the purchase of four new houses to add to the existing six it is managing now and it hopes to continue to add to these on a regular basis, especially if property prices continue to rise and they can release more capital to fund new purchases.

In addition, as their own property portfolio grows, Oasis Housing is also looking at the possibility of taking over all the processes involved with renting the property and offering this service to other landlords. In conjunction with other organisations, it is also looking at the possibility of establishing a property maintenance company.

Lessons learned

Think long term. When it initially received its gift of £80,000 Oasis would have had no difficulty spending it on one of its existing projects and no doubt a number of additional needs would have been met. However, as Cliff pointed out, this may have lasted for a year or two and then the money would have been gone. The approach Oasis has taken has not produced any immediate financial return, although of course it has provided a number of houses in the area. However, in the longer term, as the business grows and develops, Oasis is confident that it has the potential to provide a steady income stream and, if necessary, access to capital, that will enable them to continue to do what they were established for in the first place – meeting needs of local people – regardless of the availability of short term government funding.

Manage the detail. Early on in the process Oasis learned the importance of ‘managing the detail’ and not just ‘looking at the big picture’ of rising house prices and rental demand.

“Making sure that you don’t have houses vacant for too long is critical,” says Cliff Kennedy. “Otherwise you end up with not enough income to meet your outgoings. Also being careful about what you spend on refurbishment is important as you may spend much more than can be reflected in the potential rental income for that particular house.”

Keep a clear business focus. Although it is very clearly focused on delivering its programmes to meet social needs and it recognises that for many of its clients Oasis Housing is itself meeting a need, Oasis has also realised that it is running a business and if it does not do that effectively then serious difficulties will arise.

“A good business plan is important, with accurate financial information,” says Cliff. “We want to be good landlords, but we also want to make sure we are still here in 10 or 20 years time and to do that we need to make the business profitable.”