9roperty 1nvesting by Num3ers

Transcription

9roperty 1nvesting by
Num3ers
Peter Jones B.Sc FRICS
© More than Two Publications
First Edition 2012
All rights reserved. No part of this publication may be reproduced, stored in a
retrieval system, or transmitted in any form or by any means, electronic,
mechanical, photocopying, recording or otherwise without the prior permission of
the copyright owner.
FORE WARNING
THIS PUBLICATION DOES NOT CONSTITUTE ADVICE WITHIN THE TERMS OF THE
FINANCIAL SERVICES ACTS (OR ANY SUBSEQUENT REVISIONS, ADDITIONS, OR AMMENDMENTS).
The contents are a general guide only and are not intended to be financial or investment advice
or to be in substitution for professional advise. All readers are strongly advised to take advice
from their IFA, solicitor, accountant and surveyor before proceeding with any property
purchase.
For books and other resources please visit me at:
www.peterjones-online.com
2
www.peterjones-online.co.uk
Contents
Page 4
Preface
Page 5
About The Author
Page 6
6 Simple Steps to Finding and Buying Property Bargains at Auction
Page 17
7 Ways to Avoid Being a Property loser
Page 23
8 Questions You Need to Ask Before Buying an Investment
Property Abroad
Page 28
9 Questions to Ask When Buying a Holiday Home Abroad
Page 34
10 Steps to Buy to Let Success
Page 52
12 Questions every investor should ask before they start in
property
Bonus Section
Page 59
Why Now is a Great Time to Buy UK Property (even if you can’t get
bank finance)
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Preface
This ebook is essentially a compilation of the most requested and most popular special
reports that I have written for my readers over the last few years.
All have recently been revised and updated and I hope provide quality, up to date
information for anyone who is interested in property. Hopefully, no matter what your interest
or speciality, there will be multiple reports that are of relevance to you.
As I began to put these reports together into this compendium I realised that there was a
theme – the use of numbers i.e 6 simple steps, 7 ways, 8 questions, 10 tips and so on. So
the title to this compendium became obvious …Property Investing by Numbers. Actually
credit goes to my wife who came up with that; it was obvious to her, not so obvious to me.
So thank you for that Sarah.
If you enjoy the information in this ebook then I’d be honoured if you’d come to my website
www.peterjones-online.com and sign up to receive even more! Plus the odd property offer,
fully vetted by myself, of course. Even better, perhaps you’d like to try some of my other
ebooks and media which you’ll also find at my website.
If you have any questions or want to contact me please email me on
peter@vaughanjones.freeserve.co.uk. I will always try and reply if I can.
Here’s to successful property investing. I hope you enjoy the read and find it helpful and
informative.
Kind regards
Peter Jones
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About The Author
Peter Jones is a Chartered Surveyor, an author and a property
investor.
He has been involved in property for over 30 years having
graduated from the College of Estate Management, Reading
University, and then qualifying as an Associate member of the
Royal Institution of Chartered Surveyors in 1983, before
becoming a Fellow in 1992.
He held a number of positions in both the private and public
sectors before going full time into property investment in 1995,
since when he has started and run his own limited company,
specialising in the purchase, refurbishment and letting of
residential property. The company now owns 61 letting units.
In 2006 he added a Czech subsidiary to hold and let residential apartments in Prague.
Peter has written a number of successful property books. The first, An Insider’s Guide to
Successful Property Investing, was first published in 2000 and was one of the first books
available dealing specifically with UK buy to let.
On the back of its success he was invited to be a guest writer for Property Secrets, and
wrote Spanish Property Secrets, French Property Secrets, and Portugal Property Secrets.
He has since written a number of other successful titles dealing with UK investing including
63 Common Defects in Investment Property and How to Spot Them, the highly acclaimed
The Successful Property Investor’s Strategy Workshop and The Property Refurbisher’s
Workshop.
Details of his books can be found at www.peterjones-online.com.
He also writes regularly for Property Auction News and Hot Property Alert, and occasionally
for Property Investor News.
Peter is still actively involved in buying and renovating property.
He is also in close contact with several agents who offer high quality, selected properties
overseas and details of Peter’s choices can be found at www.property4success.com
If you like the information in this compendium please visit my website at
www.peterjones-online.com, or email me direct, peter@vaughanjones.freeserve.co.uk, and
sign up to receive property information and offers.
5
6 Simple Steps to Finding and Buying
Property Bargains at Auction
Many property investors associate auctions with repossessed property. it’s true that because
of the economic downturn Increasing numbers of repossessed properties are being offered
at auction, but repossessions are not the only type of property that are sold at auction.
Auction properties for sale come from a variety of sources, including private sellers,
investment funds, property companies, government agencies (such as the Metropolitan
Police and the Army) as well as banks and others, who need to be seen to have offered the
property for sale openly and widely as possible.
There’s no doubt that amongst all the lots on offer are a large number
of bargains but whether you’ll be able to find them or not will depend
upon the quality of your research and your understanding of how
property auctions work.
Even just a few years ago it was relatively easy to identify which
properties at an auction were repossessed and where you might have
a chance of buying a bargain (assuming they had set a “realistic
reserve” to sell). Often the auction brochure would state next to the photo of the property
words to the effect of “Offered for sale by …” and then give the name of the lender.
Nowadays they are a bit more reticent because repossessions have a reputation for being
sold cheaply, and so they may not want potential bidders to know that this is a repossession
property.
Although the lender is under a duty to get the best possible price and to mitigate, or limit, any
loss to the borrower, they want to make sure the property sells once it is put up for auction.
So they will usually set a “realistic reserve. They certainly don’t want to spend out on the
cost of putting it into auction, which can be a couple of thousand pounds, only to see it not
sell and to then have to continue to keep it on their books as a liability, and to continue to
pay managing agents to look after it.
It’s not just the potential of buying a property at a great price which attracts buyers to
auctions. Another great advantage is speed. It is every investor’s dream to move from
submitting an offer to completion in just 20 or 28 working days. If you are one of the growing
number of people who buy your investments at auction, this is just one of the benefits you
may experience, not least that they are often an ideal place to find competitively priced
properties although many buyers are happy to pay a little more for the convenience and
certainty of the auction room.
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Other benefits of buying property at auction highlighted by the Royal Institution of Chartered
Surveyors (RICS) include:



Auctions are a popular way for many people to move home, find a buy-to-let
investment, undertake DIY projects and to provide for their future pensions and
dependents.
An auction also takes away the hassle and delays associated with home purchase.
i.e. gazumping.
The process is open and not secretive and therefore considered more straightforward
for first-time buyers.
The market, which is open to all, decides the price of the property on the day of the
auction.
The RICS note that most buyers are currently private investors. However, property auctions
are also extremely beneficial to sellers and the RICS identify these benefits of selling
residential property at auction:





Two types of property are best sold via auction – either unique, distinct, difficult to
value properties in high demand or poor properties needing much remedial work and
unsuitable for mortgage purposes.
All the difficult preparation and legal work is done beforehand so that after the
auction the sale is complete.
The contract is signed immediately after the hammer falls.
The buyer has to have finance organised before the auction.
The seller maintains ultimate control by setting a reserve price.
Over the last 18 months approximately 70 percent of residential properties that went under
the hammer achieved an immediate sale with some sales achieving 95%. This is quite an
appealing consideration for people who are looking for a guaranteed quick sale.
According to Richard Auterac, Chairman of the RICS’s Real Estate Auction Group:
“It is easy to see why auctions are becoming more popular. Properties on sale at auctions
are usually available at a competitive price. Auctions provide a platform for open and fair
competition between bidders. Once the hammer comes down, neither the seller nor buyer
can withdraw and the process is completed within a set time - with no danger of any link in
the property chain breaking.
Additionally the RICS has recognized that the whole process is very different from the
normal approach to buying and selling. In an effort to make the legal process more
transparent and easier to understand, we have published a set of guidelines called Common
Auction Conditions. Created by buyers, sellers, solicitors and auctioneers, the conditions
have been designed to improve the auction process for all those involved.”
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The RICS publishes ‘Buying and selling property at auction…’ , a 10-page guide to help
owner-occupiers, developers and investors. This provides inside information on the auction
process from both buyers’ and sellers’ perspectives, from checking guide prices to proxy or
internet bidding, and can be downloaded free from www.rics.org/propertyauctions. The
Common Auction Conditions can be downloaded from www.rics.org/cac
Auctions are thought of as being somewhere where one should be able to find bargain
properties, and in part this is true.
Under current market conditions it is often possible to buy repossessed properties at below
their true market value at an auction.
Of course, arguably the best time to buy at auction will be during a downturn or a slowdown
in the property market when buyers are wary to commit themselves and when they can be
out-numbered by sellers.
But even during a buoyant market bargains are still there to be had.
However, it is equally true that properties at auction can sell at their true open market value,
and sometimes properties at auction will sell for more than their true value because people
can get caught up in the moment and pay over the odds.
So what type of property is sold at auction?
There are 5 principle types of property that are sold through auctions:
The first is “hard to gauge” properties. Where the demand for a property, or an alternative
use, or its price, or any combination of these three factors, are hard to gauge, sale by
auction is often the quickest, easiest and most effective means of marketing.
The second group are specialist properties; those that are not necessarily hard to gauge in
terms of price, but which will be of interest only to a niche market who will most easily be
reached by public auction rather than a sale by private treaty.
An example of this could be residential investment properties subject to regulated tenancies,
freehold ground rent investments or blocks of lock-up garages. It will also apply to larger
commercial properties that will be of interest to property companies and institutional
investors.
And the third type of property is “difficult” or “defective” property, that is property that is
either defective structurally or has defective legal title.
Either of these can make the property difficult or, in some cases, impossible, to mortgage
meaning that the vendor is relying upon a cash buyer.
As most auctions have a number of potentially sub-standard properties does this mean that
you should steer well clear of auction property?
8
Not necessarily, although you might want to pitch your interest to your level of experience
and ability.
For example, if you haven’t had much experience of refurbishing properties then you might
not want to start by bidding for a property with substantial structural defects.
Although “defective properties” can be daunting for the beginner, they can provide excellent
bargains as the number of “cash buyers” with the required “expertise and experience” to take
them on is limited. Often the consequent limited demand means that they sell relatively
cheaply.
The fourth type is property where the vendor needs to be seen to have marketed a property
widely and openly. This applies to banks and building societies selling repossessions and
where they need to be able to show that they have advertised the property to as wide a
market as is possible, and have obtained the best price possible. The fact that repossessed
property can be bought at bargain prices suggests that selling at auction doesn’t necessarily
guarantee getting the best possible price, but current convention is that selling at auction
discharges banks of their duty to get the best price.
The fifth type of property is those where the vendor wants a quick sale. Vendors wanting a
quick sale could include those dealing with probate properties – in other words, properties
that are being sold for the estate of someone who has passed away – banks and building
societies who want empty properties off their hands so they don’t have to manage them, or
even property owners who want to sell before they are repossessed.
For the “average” bargain hunter, properties that fall within the “need to be seen to have
been marketed widely and openly” and “the vendor wants a quick sale” categories are
probably the best to concentrate on.
Many lenders will use an auction to sell repossessed property – this is considered by some
to be the means of selling that is most widely accessible to the market and so discharges
their duty to market the property thoroughly. It’s certainly the most open and transparent
means of selling, with the property, and it’s eventual selling price, being within the public
domain.
Essential Information Group (www.eigroup.co.uk) confirm that the number of repossessed
lots offered at auction has risen substantially over the last couple of years to the point where
repossessions and distressed sales now make up a significant proportion of all residential
lots being offered.
Some auction catalogues now comprise almost 80% repossessed properties, and the
chances are that until liquidity in the financial markets improves, this will continue, despite
that lenders tell us that they are listening to Government pleas and are trying to take a more
socially responsible attitude to repossessions. Unlike the 1990’s, they assure us,
repossession is now seen as a last resort. However, in practice, this doesn’t always seem to
be the case.
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The key to rooting out bargains is thorough research and preparation.
Here’s my 6 step guide on how to prepare for an auction to give
yourself the best chance of finding a bargain.
Step 1 is to review the catalogue to see what is available.
We’ll all have different preferences and reasons for selecting certain properties.
This might be on the basis of location; you might want to look locally at properties you can
manage yourself, or in another geographical area where, perhaps, you already own
properties and are building a portfolio.
Or you might select properties on the basis of type; you might be interested in commercial,
or vacant residential, or residential investments which already have tenants.
However you select your properties, you will need some criteria by which to sort the wheat
from the chaff as even experienced buyers at auction will not have time to do an in depth
analysis of all the lots on offer.
Step 2 is to read the Conditions of Sale and the Special Conditions of Sale relating to any
property that is of interest to you – in effect you are making sure that there is nothing in the
“small print” that would put you off buying.
Having found an interesting property with no obviously adverse conditions attached, step 3
will be to inspect the property, and the area in which it is located. I would never advise
buying “sight unseen” unless there are very special circumstances behind your purchase
and you can afford the time and money to make a mistake.
The main purpose of the inspection is to help you to come to your own conclusions about the
value. To estimate the value you will need to take into account the location of the property
and the asking prices of other similar properties in the locality, assuming there are some.
You can also do an internet search on previous sales prices on websites like
www.rightmove.co.uk, and www.nethousepricest.co.uk and www.zoopla.co.uk.
The second reason for inspecting is to check the layout and condition of the property. Unless
you’re a “professional” I wouldn’t advise you to rely upon your own inspection to establish
physical condition, but even so, at a preliminary inspection, you should be able to get an
idea of whether it is a “structural” disaster or a property worth pursuing.
The third reason is to look for “angles” by which you can increase the value of the property.
Buying a property “cheap” can be an “angle” in itself, but other examples of “an angle” could
be spotting an opportunity to rearrange the layout and so increase the value, or to change
the use, or to split it to provide multiple units of occupation, or to extend it, or to sell it on to a
single occupier at an enhanced value when the tenants have vacated.
10
Step 4 is to use all the information you have collected and to come to your own opinion of
value and decide on the maximum amount you can afford to bid.
During this process there is no point in thinking about the guide price quoted in the
catalogue. Each auction house will have different views on how to set a guide price. Some
set it low, sometimes lower than the reserve, to try to generate interest. Some are more
realistic and might pitch it at or around the reserve.
But, unless you know from experience how that particular auction house sets it’s guide
prices, the guide price might not give any meaningful indication of the value or the reserve
price, or the likely sale price.
In fact, some auctioneers don’t give guide prices any more. Instead they give a “starting bid”.
This is usually much lower than the reserve, and lower than a guide price, and
psychologically gives a potential bidder hope that they may be able to buy very cheaply.
Invariably a winning bid will be much higher than the starting bid, but may well still be a
bargain.
Step 5 is to get hold of a copy of the legal pack to make sure that all is as it seems to be.
The legal pack should have copies of the title deeds, any leases, planning consents and so
on.
For example, if you are thinking of buying to redevelop then you won’t want to unwittingly
buy a property with restrictive covenants that prohibit development.
Nor would you want to buy a property with a defective title if you’ll know you need to raise
finance against it, because a bank won’t lend on a property with a defective title.
If, after all this, the property is still a “runner”, step 6 is to arrange finance in principle, if you
aren’t buying for cash.
If you are buying for cash and think you may want to finance at a later date, at the very least
you will want to have had a full survey, and a valuation for your lender, and an agreement to
lend in principle, before you bid.
You do not want to be the successful bidder if you then find that, for whatever reason, you
can’t get finance.
As you can see there can be a significant amount of work to do before you even get into the
sale room. And you can also pay out a significant amount of money before the sale on
surveys and valuations and legal fees.
And of course, despite all of this, you may not be the successful bidder on the day.
That is why I think it’s a good idea to attend a few auctions and to get the fell of the way they
work, the type and quality of the property being sold, and the prices achieved, before you go
along to bid for real.
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Armed with all this information you are now ready to bid, but only when you have set your
maximum bid in stone. Anyone can buy a property by paying too much but that’s not a
successful business model.
At the auction
First things first. Many auctions now require you to register before you bid, so you need to
get there in plenty of time to do so. Some auctions have hundreds of lots listed and can run
for a whole day or even for several days. If the property you want to buy is one of the later
lots it can be tempting to turn up late, but don’t be too complacent. If multiple lots are
withdrawn prior to the sale, or there are only a limited number of bidders for the lots, an
auctioneer can get through a sale quicker than you might realise. You don’t want to turn up
to find that your lot has already been offered and sold. And you don’t want the stress of
having to register just moments before your lot is due to be offered.
Deciding Your Maximum Bid
The first step is to try to come to some opinion on the value of the property. You could take
professional advice before you bid, and part of that advice could be obtaining a valuation.
Or you might want to do your own research and make up your own mind about the value. I
won’t go into all that here but some simple things you can do is look at asking prices for
similar properties in the locality, talk to friendly estate agents and see what they can tell you
about values and sales prices, and to look up asking prices and sales prices of similar
properties on the internet, including the most recent sale price for the property you are
looking at. The more information you have hopefully the easier it will be to come to an
opinion about what the property is worth.
Next, you need to think about what you are trying to achieve in owning this property.
Regrettably, there has been so much talk about buying BMV or below market value, and so
many investment property brokers offering properties at supposed 25% discounts and the
like, that you’d be forgiven for thinking that getting a discounted price is the be all and end all
of property investing nowadays.
There is no point in buying a property at a discount if it is a poor property that you shouldn’t
be buying at any price. No amount of discount will make an otherwise poor deal good, but a
discount can make a good deal great. I hope you can see what I’m saying. Choose your
property carefully and make sure that it is a property you want to own, regardless of the
price.
In my opinion the main reason for bidding at a discounted price is to make sure the property
is cash flow positive if you are going to keep it to let out. In other words, by buying at a
discount, you can reduce the amount of finance you need, and so can reduce your monthly
mortgage costs and increase your monthly profit, in other words create a positive cash flow.
12
So when you think about where to pitch your bid, do your sums so you know what the effect
will be on your monthly cash flow. Ideally you want a positive cash flow.
Now I understand that some deals are still excellent deals even if there isn’t going to be a
positive cash flow, because you may be able to buy at a genuinely bargain price and sell it
on, or you might be buying the property to renovate it and add value.
If you aren’t buying the property to let it out you’ll still need to do your sums to make sure the
figures stack up. Working out the profitability of a renovation project isn’t always
straightforward and I won’t go into that now, but you need to be sure that you have an
accurate assessment of the end value of the property, and an accurate assessment of all the
costs before you decide how much you can afford to pay.
One thing you may need to think about at the moment is market volatility. Opinion is divided
about whether house prices are stabilising and whether they will fall again in the future. Also,
house prices in some regions of the country may be more volatile than in others. So you may
want to build in a buffer just in case, depending upon how you see the risk of further falls in
the area you are buying in.
When you have done all of these you should be fairly confident about the maximum price
you can afford to pay which makes sense to you, and resolve not to pay more than that
figure. Whatever this figure is, resolve not to bid even one penny more.
Bidding at the auction
Sometimes this is matter of raising you hand to indicate you are bidding, other times the
auctioneer may give you a numbered ‘paddle’ to hold up when you are bidding.
When you start bidding remember you maximum bid.
It can be easy to get carried away in the heat of the moment and, let’s face it, it’s part of the
auctioneers job to whip up the excitement and to push bidders as far as they will go or even
further.
Sometimes they will do this by taking bids “off the wall”. Although at first sight this might
seem a bit underhand, they are only allowed to do this up to and until the reserve is reached.
If you think about it, this makes some sense. After all they were not going to sell “in the
room” at below the reserve anyway.
Less obvious but just as effective at creating the impression of interest in a property is for the
vendor themselves, or their agents, to bid at the auction. Again, the same rules apply, they
can only bid up to the reserve.
13
One of three things will now happen;

you will be the successful bidder and the property will be yours

some one else will out bid you

or the property will be withdrawn if it does not meet it’s reserve.
If you bid on a property but it is withdrawn at a higher price than you bid you should not be
disappointed, instead you should be full of anticipation.
If your selected property doesn’t meet the reserve it can be a great opportunity to buy at an
even better price than you first hoped. It’s always worth approaching the auctioneer, or the
clerks, and asking what the reserve price is. At that point there should be no reason for them
not to disclose it to you, but even if they don’t you can make an informed guess by noting the
last bid at which the property was withdrawn.
So why not make an offer and kick off negotiations? Don’t forget that the auctioneer will be
keen to sell to get the property off his or her books and to get their commission. The vendor
may well be disappointed that it didn’t sell and may be open to offers, especially as they
have to pay the auctioneers, and the lawyers who prepared the legal pack, whether the
property sells or not.
When your bid or offer is accepted
If you make a successful bid at auction or if your post auction bid is accepted, you’ll be
expected to pay a deposit there and then, so make sure you have the means to do so.
Check in advance how the auctioneer wants payment, often they’ll want a bankers draft
which you’ll need to organise in advance
Once your bid is accepted there is no going back and you’re committed to purchase. You’ll
need to look at the terms and conditions of the auction to see when completion will take
place, and you’ll need to make sure that you have the money ready to complete your
purchase at that date.
Completion is often set for between 20 and 28 days after the auction so you probably need
to start organising a mortgage even before the auction. There are bridging loan companies
who’ll lend short-term money at high rates which provides the finance to pay whilst you
arrange for a cheaper conventional mortgage. Of course, you’ll need to be satisfied that you
will be able to get a cheaper conventional mortgage before you take on the expensive
bridging loan.
14
Conclusion
This has been a quick look at buying bargain property at auction.
Auctions can be a great way to find bargain property, but you need to do your due diligence,
both physical and legal, before you buy. Never buy sight ‘unseen’, no matter how tempting
the price.
And before you buy, make sure you have done your sums properly so that you know you are
buying a genuine bargain.
Remember that there’s a reason why a property is being sold at an auction and you don’t
want to buy the wrong property, so don’t take short-cuts when doing your due diligence.
Here’s to successful property investing
Peter Jones
For details of Peter’s books, other Special Reports, and Peter’s consultancy services please
go to http://www.peterjones-online.com
For an up to date list of selected holiday homes and overseas investments please go to
www.property4success.com
15
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16
7 Ways To Avoid Being A Property Loser
Quite often, when I talk about my experiences in property, I’ll be asked what the difference is
between a good property investor and a poor property investor. Truthfully, that’s a hard
question to answer. Some people are naturally good at things and some people are just
good at property investing.
Putting natural talent aside, over the years I think I have identified at least seven mistakes
that poor property investors make that the good ones don’t. So, in no particular order, here
are seven things to avoid if you don’t want to be a “property loser”.
Number one - they take too long to get started or to agree a deal
In a word, they procrastinate. Despite good intentions, nothing happens. Many would-be
property investors fall at the first hurdle and after all the talk and wishful thinking, just do
nothing. Perhaps this isn’t that surprising. After all, no property is cheap nowadays, not in
absolute terms. Even a cheap property costs a lot of money, and it takes courage to spend
that much. I was going to say especially if most of the money belongs to the bank who, of
course, can extract a high price for failure. But on reflection perhaps it takes even more
courage to risk your own money. Either way, courage is required.
A way around this is to adopt the “salami principle” and break everything down into bite sized
chunks. This principle can be applied to property purchases.
First, the analysis. I’d recommended using spreadsheets; if you set them up properly they
can take the hard work out of analysing a deal. They are just the job for making sure the
figures stack up. If the figures don’t, then you pull out of the deal.
Second, assuming the figures look good or better than good, you can set your target and
maximum prices. If you can agree terms, fine. If not, you pull out. So far you’ve wasted
nothing but your time.
As and when your offer is accepted at or below your best possible price, you can move onto
the next step, instructing your surveyor or valuer. You might do this as you make your
mortgage application, or you might rely on your lenders surveyor (if you are not taking out
finance, obviously you will need to instruct your own surveyor). In practice it shouldn’t make
any odds to you who instructs them as long as you get a professional second opinion on the
property, its condition and its value. If you find your offer is miles over the top, now’s the time
to pull out or renegotiate.
Assuming that you pass this hurdle, you can move onto the next step (although in practice
most investors run this simultaneously with the last one) which is to instruct your solicitor.
17
Anything adverse in the searches will be drawn to your attention. If you use a local solicitor
you might be able to use their local knowledge. If anything worries you, you have yet another
chance to pull out or renegotiate.
Number two - they are too cautious in their negotiations.
With the odd and often notable exception it’s part of the British psyche not to want to cause
offence. Add to this that we often accept the asking price without questioning it, and the
result is often weak negotiations. Let me explain.
When most investors receive property details and look at the asking price , unless it is
obviously miles over the top, they will automatically accept that it is where negotiations will
start.
Then, in the spirit of “playing the game” they’ll more than likely limit their offer to 5% below
the asking price. Any more than this could trigger fears of rejection – “what if the vendor
says no?” - or of criticism of what “they” might say? As in “you can’t put in an offer that low”.
If you are going to buy properties at 25% to 30% below their true market value you have to
be prepared to ruffle a few feathers and to have a large number of bids rejected. You’ll
probably also need to be firm and stand your ground in negotiations.
Far too many investor’s negotiations are emotion driven and are not financially driven. If you
know the figure at which that property works for you, that’s the maximum price you should be
prepared to pay. If your offer is rejected, so what? Move on to the next property. There’s no
point in having an offer accepted if it means you now own an unsuitable or unprofitable
property.
Number three – they put too much trust in valuations.
Now, don’t get me wrong, as I said in point number one, valuations are a great way of
making sure you aren’t paying over the odds.
But they are not such a good way of confirming you are buying a bargain.
Why do I say that? Because valuers have a tendency to down value. As a generalisation, at
best they will accept the purchase price as being the value, at worst they will knock a bit off
“to cover themselves”.
So it can and does happen that you know you’ve negotiated a bargain at a price below the
true value of the property (there are many reasons why a vendor will sell “below market
value” but I don’t have time to go into this here) but the bank’s valuer adopts the purchase
price.
So, for example, you might purchase a property which is worth £150,000 but, through
effective negotiation, you may only pay £100,000.
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Over the years there’s been a lot of discussion amongst valuers and banks whether a
purchase price agreed between two parties at arm’s length is the real measure of value. But
sometimes, regardless of what price is agreed, you know the property is worth more.
Unfortunately it’s very rare that a valuer will report the value at the higher figure.
So what? Unless they are confident of their own ability to spot a bargain, an inexperienced
investor might conclude, especially if the valuer adopts the purchase price, less a bit, that
this isn’t such a good bargain after all and pull out.
Sometimes you have to trust your own thoroughly researched opinion.
Number four - they get tunnel vision
Perhaps it’s human nature but most investors get this. It might be explained as being a need
for the comfort we get when we stick with what we know. In effect investors will start to
develop a niche. Often it will be that having bought a particular type of investment, or having
bought in a particular area, they will continue to buy that type of property, or to buy in that
area.
You can ask them “What do you invest in?” And they’ll answer something like “ Buy to let. I
buy new terraced houses in my home town”. “What else do you buy?” “Oh, nothing else.
Why?”
And so I patiently explain that there’s more than one way to skin a cat. Buy to let is fine.
Terraced houses are fine, as long as you are careful to buy the right terraced houses.
Buying in their home town is fine. But there are endless opportunities if they’d just widen
their thinking. Why not student lets in another town? Why not buy abroad? Why not buy and
sell?
There might be good reasons why they don’t want to try any of these, and that’s fine as well.
But often the reply is “I’ve never thought about it” and then you have to ask them why not?
They could be making far greater returns by doing something different.
Number five - they do sloppy research.
Sometimes a deal seems so evidently good, that an investor might be tempted to ease off on
the research might become about casual about the due diligence. However, no matter how
good a deal seems to be, I’d still like to reassure myself that it is a good deal and that I
haven’t missed something, obvious or otherwise.
How much research should an investor do? I honestly believe that you can’t do enough
research unless, of course, it pulls you into the trap of mistake number one and it becomes
an excuse for doing nothing.
19
And I also believe that it is something you can do alongside the steps I outlined in mistake
number one. In an ideal world it would be nice to get all your ducks in a row before you
shoot, but that’s not always possible. Sometimes you have to adopt the “ready, fire aim “
principle.
One thing a lot of investors do is to use opinions as facts. A classic example is estimating
the value of a property by reference to estate agent’s asking prices. They might be useful as
an initial guide, but they are just asking prices. They are based on opinion and not on market
results. You might not have any other evidence on which to base your research. That can
happen, but at least look at the asking prices objectively and recognise that is all they are.
Somebody might be asking £250,000 for the house next door but that doesn’t make yours
worth £250,000. Not necessarily. Chances are they won’t get £250,000, so why stick that
figure into your appraisal?
In my experience investors are often over-optimistic when they refurbish properties. They
tend to over estimate how much the finished property will be worth. After all, they are going
to do the best possible job with all mod cons. When they look back at the amount of work
they put in they might feel that they “deserve” to get their price, but that doesn’t cut any ice
with the market. The trouble is, the market won’t know how much work they’ve put in, or how
much they’ve improved the property.
The same is true of rents. Don’t take an asking rent from an advert in the paper as firm
evidence. It’s only an opening bid on behalf of the landlord. And don’t discount the possibility
of voids. All rental properties are empty from time to time. No matter how smart or slick you
are, no matter how well you plan to juggle tenants so one is moving in as one is moving out,
in practice it’s often harder to arrange this than you’d think.
Number six - they let their hearts do the figures.
What do I mean by this? Well, I remember listening to a marketing guru giving a talk to a
bunch of salesmen and telling them that, at a sub conscious level, all decisions to purchase
are based on emotion. Having decided “in their hearts” to buy, purchasers then “find the
facts” to support the purchase.
I think this happens in property all the time. An investor gets “emotionally” attached to a
property and rather than look at it in cold investment terms, they start to fudge their figures a
little to make them stack up, especially if the deal is marginal.
Perhaps they regret the amount of research they did, especially if it doesn’t support their
hunch. So they start to ask themselves these sorts of questions as they punch away on the
calculator. “What if I just knock ¼ % off the yield?” “What if I am able to sell it for an extra
£2500?” “What if I play with the figures a bit until they stack up?”
I’ve done it myself. In fact I did it just the other day. I saw a property that I “wanted” to buy,
but the figures didn’t really support it. So I started to try and justify buying it for other
reasons. I caught myself before I put in an offer and made myself let it go.
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If you find yourself doing this, be careful. You might “want” to buy this property but make
sure it’s because it’s a good investment and for no other reason. As a clever man once said
“Make sure you fall in love with the deal and not with the property”.
Number seven – they listen to people who probably know less than
them!
I once heard Anthony Robbins, the famous American motivation and self-help expert, ask his
audience “If you wanted to get rich would you study poor people?” “No” came the resounding
reply. “That’s right” he retorted “If you want to get rich, you need to study rich people”.
That makes a lot of sense. In a property context, if you want to be successful in property you
need to study successful property investors. If you want to be successful in a particular area
of property, you need to study investors who are already successful in that area; you need to
find out how they did it and what they do. If you want advice, you need to take advice from
other property investors, not the numerous “arm chair” experts who have never even put a
pound of their cash on the line. If you want to be successful in property, you need to take
advice from people who know more than you do about property investing.
But again it’s human nature, and so we listen to the wrong people. Often it’s because they
tell us what we want to hear. If we are nervous and looking for a reason not to act, we are
easily persuaded by someone else’s fears, even if they have no experience in what they are
trying to “mentor” us in. We listen even if, and let’s be blunt about it, they haven’t a clue what
they are talking about.
One of the curious things about property is that almost everyone has an opinion and is
prepared to give it, whether you want to hear it or not.
I was at a party the other day and someone asked me what I do for a living and so I told him,
including some rather guarded details of my property activities. As the conversation
progressed I let him into a little secret; where I was thinking of investing next.
“Oh no” he gasped “you don’t want to do that”. “Why not?, “I asked somewhat surprised.
After all, I have done my research, and thoroughly. I have a strategy, and an exit strategy
and, based on the information available, I’m sure I have a workable and profitable plan.
“Well” came the reply “I have friends who have thought of that and they are very cautious
about it”.
There is no answer to that. I immediately shelved all my plans. Not really, but I went away
and worried. For about two days I ran this comment through my mind again and again,
wondering if I had missed something obvious that these ‘friends of a stranger’ had spotted.
But then I rejected it. Here was someone who had only the slightest inkling of my business
and my aptitude as an investor, anecdotally quoting the prejudices of his acquaintances,
who may or may not be successful property investors. Other people’s opinions are not fact,
but we often take them to be so.
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The truth dawned. I said earlier that most would be property investors do nothing because of
fear. Actually, the sad thing is that in many cases they do nothing because of the fears of
others. And when you think about it (and apparently someone has because this isn’t my
statistic) around 95% of those fears are totally groundless.
So there you are. Seven reasons why many property investors don’t make a decent fist of it,
seven ways you can learn from their mistakes and make sure you are successful.
Peter Jones
22
8 Questions You Need to Ask
Before Buying an Investment
Property Abroad
When thinking about where to buy an investment
property it’s probably natural when we’re first starting out
that we think about the UK. After all, we live here, we
understand the market, the language, the currency and,
to some extent, the law as it applies to property. But
many investors have been looking overseas to property
markets that are new to them so as to diversify or to
increase their returns.
In fact, when property prices in the UK were “booming” a
few years ago many first time investors concluded that some overseas markets provided
better potential returns, and at more affordable prices, than the UK.
So rather than diversify into these markets they jumped straight in and avoided the UK
altogether when buying their first investment property
And conversely as the UK market slowed, overseas returns from capital growth seemed
more attractive to many investors.
The last decade has seen a boom in overseas „buy to let‟ with an ever increasing choice of
locations. New markets and opportunities are constantly emerging as, although in some
circles it may not be politically correct to say this, property investing embraces globalisation.
Now investors can, and many do, invest in almost any location one can think of including as
diverse, and perhaps unlikely, places as Mongolia, Russia, Brazil, The Philippines, and all
points in between. And, unlike the holiday or second home buyer, they will be primarily
looking to enjoy the benefit of letting the property, often to local people, and will be buying
using fundamental investments principles; income and cash flow first, and then capital
growth.
With the current global economic contraction, and a general squeeze on the global property
market, the opportunities for buyers will increase as properties of all types, and in all
locations, become an ever more attractive commodity as prices correct. A very real problem
investors may well have is that they have too much choice.
For that reason it’s advisable for a buyer to remind themselves on a regular basis why they
are buying. Do the homework and stick to the fundamentals and, within reason, nowhere is
out of reach. Buying a pure investment property overseas might seem daunting, and
undoubtedly there is a lot to think about.
It would be foolish to pretend that there are not more risks than buying in the UK, but they
are risks which are relatively easily managed and reduced, and the returns often make it
more than worthwhile.
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Before committing to buy an investment property abroad, there are several key factors I think
an investor should consider and which help clarify whether the opportunity in a particular
country being offered is worth pursuing or not.
Here are 8 questions to ask yourself before buying an investment property abroad:
Number One – What is the rental return (yield) and why?
Most investors realise the importance of cash flow and you’ll want to look for property with
an attractive yield.
However, property with a higher yield tends to be property which is “cheap”, and you‟ll want
to know why it is cheap.
Is it cheap because it’s a poor quality property, or a property in a poor location, or a poor
quality property in a poor location?
Or is it “cheap” because it’s a good property in a good location which happens to be
available at a genuine bargain price, what we might call BMV (below market value) in the
UK?
Also, you’ll need to do some research on the rent and confirm that the rent you are being
quoted is realistic, and you’ll need to know what costs will be needed to be deducted to get
an idea of the true net rent, in other words, the true yield net of costs.
Number Two – what are the medium to long term prospects for
capital growth from that type of property, in that particular
location?
An overall indication of the prospect of capital growth might be how well developed the
economy is. Less well developed economies may look more unattractive now but will have
greater potential to grow and so, in the long run, the prospects for the property market might
be better than for a more mature and established economy.
Secondly, coupled with this, you’ll also need to think about the drivers for demand. These
are some of the questions you should be asking, and your advisors should be providing
answers to:

Is demand, and therefore any price increases, being fuelled purely by foreign
investors? If this is the case you’ll find that eventually the high returns will inevitably
tail off and fall.
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
What is the demand from investors like? What is the demand from owner occupiers?

What is demand for rental property like? Is this long term or short-term? Is it local
demand or foreign ex-pats? What are local earnings like and are these likely to
increase significantly or not? How will this impact on affordability of property, or on
rent levels and property values?
Number Three - how easy is it to get finance?
As part of your initial due diligence, you’ll need to find out:




How well developed is the local mortgage market?
Is local ownership restricted because of the limited availability of mortgages and is
this likely to change?
If mortgages were more widely available to the local population would rates of private
ownership increase, and with it, property prices?
What’s the availability of finance to foreign investors? And what terms?
Needless to say banking systems and loan criteria across the world vary from country to
country and few are like those in the UK. You will no doubt begin to appreciate when you
start researching other areas that the UK mortgage market is relatively mature and
sophisticated whereas in many other places the opposite is true.
One thing you should realise is that few countries have an equivalent of our buy to let. In
fact, few countries even have an equivalent domestic mortgage market.
This is particularly true of Central and Eastern Europe where many UK investors are
attempting to buy into markets using local borrowing when even mortgage products for the
local population are limited. Things are changing as the EU presses for a Europe-wide, cross
border finance system, and as market forces encourage local banks to devise new products
– both for foreign investors and for the local population.
But as many lending products are new and untried, terms are not as favourable as we would
expect at home. Unlike UK buy to lets, generally speaking, no account is taken of the
potential rent receivable from the property and the loan will be based upon the borrower’s
income, often their net disposable income. In many areas interest only loans are not
available and all mortgages are capital repayment only, and granted for only a limited term of
years.
Number Four, how easy is it to buy?
Are there restrictions on foreigners buying in your target location?
For example, in the Czech Republic, until recently, non-Czechs could only buy if they first
took out residency or purchased through the equivalent of a Czech limited company.
Similarly, in Romania at the moment no land can be owned by a foreigner or by a foreign
company.
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So you need to find out whether the local legal system requires you to jump through hoops,
making purchasing a prolonged and expensive project, or is the system relatively simple?
Number Five – how benign is the tax system?
Is the tax system benign and is it likely to remain this way? If it isn’t benign, are there plans
to liberalise the tax regime?
Some purchasers, in their naivety, think that if they are buying abroad, UK tax doesn’t apply.
I’m afraid that isn’t true, the long arm of HM Revenue and Customs reaches everywhere. So
you’ll need to know how local taxes interact with UK taxes – is there a double taxation
treaty? When you own a property abroad you may have additional tax consequences over
and above UK taxes which should be planned for so you can minimise their effect.
Before you buy I strongly recommend that you talk to an accountant who is familiar with the
local tax system and how it interacts with the UK tax system.
Number Six – what is the political situation?
Is this a politically stable country? Is the current administration well disposed to outside
foreign investment and is it likely to stay that way or will public opinion, or a change of
government, alter that position?
One potential market may score heavily on the headline financials but might become more
and more unattractive as an investor looks at all the prevailing negative, political influences
which could impact on property ownership.
Number Seven - what do I need to know about currencies and
exchange rates?
Currency fluctuations can be both a blessing and a curse.
One of the attractions of buying a property using the local currency in a location like Central
& Eastern Europe is the likelihood that over time, as the economy grows, the local currency
will strengthen against the pound. In effect this increases the value in sterling for you even if
prices don’t change locally.
The optimum situation is to borrow in the local currency and to pay the mortgage in the local
currency from locally collected rent. You will then be hedged against adverse fluctuations in
currency that would otherwise make your mortgage payments higher if you had borrowed
locally but were then paying from sterling earned at home.
Alternatively you could borrow in the UK and pay all cash, but if you then use rent from your
investment to pay your UK mortgage there is the possibility of exchange rates going against
you.
It probably goes without saying but ideally you’d want the local currency to strengthen after
you have completed your purchase and not before. I know of investors who have agreed a
price in the local currency only to see the amount they have to pay in sterling increase by 5%
26
or more in the three months to completion because the local currency has strengthened
before they have arranged to change their sterling into the local currency and transfer it over.
Of course, fluctuating exchange rates can also work in an investor’s favour. At the moment
the pound is relatively high against the US dollar. Florida is a traditional favourite with the
British second home market and a strengthening of sterling makes US property that much
more affordable, especially for cash buyers or for those who have raised their finance in the
UK.
To be able to make the most of exchange rates requires research on the part of the investor
and a clear idea of where, long term, they are likely to go. This requires an understanding of
influences on the local and the UK economy. In the meantime an investor needs to be clear
on how they will finance and pay for a property and with which currency and why.
Number Eight – how am I going to manage my property?
Even the best built and best maintained property requires ongoing management and
maintenance. Unless you live close by, it will be impractical for you to manage the property
and so you will appoint a local agent to let and look after your property. This will impact on
your cash flow as managing agents fees can range between 10% and 25% depending upon
the level of service you require and the country you buy in.
Before committing to buy a property abroad I’d like reassurance that there is a choice of
reputable firms to manage the property for me. I would not want to buy a property
thousands, or even hundreds of miles from home, and then wonder who is going to look
after it for me.
This is something I would research even before looking for the property itself. The best way
to find a good managing agent overseas might be by word of mouth but I would also ask
local estate agents and research the internet. You can tell a lot about the way people do
business from their web sites and what they say on them.
Peter Jones
For details of Peter’s book, other Special Reports, and Peter’s consultancy services please
27
9 Questions to Ask When Buying a Holiday Home
Abroad
A decade ago, when I first started investigating, writing
and advising on buying property abroad, there was a
supposition that the purchaser was looking for a holiday
home or a retirement home. Often they wanted the
property to be both – to be available for family holidays
and weekend breaks until such time as they retired, when
they would have the choice of moving there full or part
time.
Most purchasers were also open, initially at least, to the possibility of “sharing” the property
with others by way of holiday lets when they weren’t using it, and so mitigating their costs. I
say initially because, according to my sources at a large estate agency operating mainly in
Spain, most prospective purchasers indicated their intention of offering their property to
holiday lets, but, once having bought their dream home, in practice many became more
reticent. In reality, less than a fifth of all purchasers actually let their property.
Today I think there are 4 main reasons why people buy abroad:

To own a holiday home

To buy now somewhere to which they will retire later

Because they are living & working abroad

For Investment purposes
Many of those buying a property for their own use (as holiday accommodation, for retirement
or because of work) will want to use the property for themselves, naturally, but, when
practical, they will require their property to perform as an asset when they are not in situ.
Whatever your reason for buying abroad, you should always consider the purchase from an
investment perspective.
Nowadays I think buyers are more sophisticated and realise that if they can only live in a
property for short periods at a time, it can be very worthwhile as an investment. People who
would otherwise be worrying about the cost of a second home may be able to justify the
expense in terms of several benefits and opportunities:
• Using it themselves for holidays
• Letting it to friends & acquaintances, or a wider market, and receiving income while they
are not there
• Speculating on the possible capital gains to be made in good locations
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If you are interested in buying a property partly for your own use and partly for investment, I
recommend that you buy not just with your personal use in mind, but also apply investment
criteria, as far as you are able. This will help you to buy not just a home, but also one of your
best performing assets. If you don’t, you may instead end up with a liability.
Remember then, you aren’t just looking for a holiday home, you are also seeking an
investment. So just for a moment set that aside and think about your future property purely
as an investment. What is more important to you: capital growth, rental yield, or a
combination of the two?
The best investment opportunities may not necessarily make the best holiday homes and
visa versa. You should be prepared to compromise in order to achieve the best possible
balance between your planned use, and safely investing your money.
Your preference will depend on your individual circumstances. If you are buying the property
to be your principle home, for example, or if you intend one day to retire there or to relocate
there because of your job, you will probably be more interested in getting maximum capital
growth rather than rental income. After all, if you intend to live in the property, the opportunity
for letting it out will be limited.
If you are looking for a holiday home to use with the kids, your investment strategy might be
to buy a property which is easily lettable and which brings in the most rental income
in your absence.
With longer life expectancy and advances in healthcare, more people are looking to lead a
long and active retirement, and moving overseas, full or part time, has obvious attractions.
With capital gains made on their home in the UK, many may find it feasible to retain a
smaller UK property as well as buying abroad. They will be able to take advantage of the
currently low cost of air travel (which has gone hand in hand with the opening up of many
new routes and destinations and the ready access to the continent by ferry and the channel
tunnel) to make good use of both properties.
If the primary purpose is for use as a holiday or retirement home then the potential for capital
growth may well be more important to a purchaser than the potential for rental income.
Rental income might just be the icing on the cake and a purchaser may want to have the
flexibility of not having to rely on rental income if they wish to be flexible in their own use.
Perhaps for this reason, the appeal of buying off-plan, at significantly discounted prices, was
popular. In effect an investor was buying instant equity, or built-in wealth, in some instances
long before they need to worry about covering the cost of finance. Although buying off plan is
usually assumed to be a bad thing now, there rea rae emerging markets where it still makes
sense.
Although larger numbers of Brits than ever are being tempted into buying pure investment
properties overseas, a greater number are still happily buying properties which combine
investing with the pleasure of their own use. In other words, holiday homes which are also
an investment.
If this is a scenario that appeals to you, you will need to be careful to balance your
requirements with your investment criteria. So I’m going to suggest 9 questions you should
29
ask yourself before you start looking for a property. The answers you give will help you to
decide:

the type of property you should buy, that is, whether it is a property that is geared
towards achieving maximum capital growth, or a property which is easily lettable and
which will make you maximum rental income.; and

the type of area or location which best suits your needs
Question number one - If you want a second home that doubles as an
investment, how would you like it to perform?
Your answer to this question should help you to clarify whether you are leaning more
towards capital growth, or rental income.
If, on balance, you are more interested in capital growth then location will be a crucial factor
in deciding what to buy. Property prices will inevitably increase quickest in areas where there
is demand from other investors and other second home seekers, as well as local owner
occupiers.
The old saying of “location, location, location‟ has been used so often when advising buyers
that it’s something of a cliché but that doesn’t make it any less true, nor does the fact that
you are buying abroad.
If, on the other hand, you are more interested in rental income you will almost certainly want
to let the property while you are not there. What makes a good letting property? Briefly, you
need to think about accessibility, distance to the sea (or the slopes, in the case of a ski
lodge), shops, restaurants and tourist attractions. Also the facilities the property offers such
as a swimming pool, satellite TV and so on.
Question: number two - How much do you want to pay?
Before you start looking for your property you’ll need to establish your budget. If you are
going to borrow in the local currency you’ll need to know how much you can afford to put
down as a deposit as many foreign banks lend on a lower loan to value ratio than UK banks.
Also you should remember that in many countries banks decide how much they will lend
based on your net disposable income, after allowing for your regular outgoings and not, as in
the UK, upon a percentage of the value of the property or a multiple of your income.
Alternatively you could consider using equity release from your UK property or properties,
which might make it easier to budget how much is available for you to spend.
Question number three - How can you be sure you won’t pay too
much?
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This is a critically important question. The key to buying any property is to buy at the right
price. It doesn’t matter how nice the property or its location, if you pay too much to start with
it will take you longer to recoup your capital.
And depending on how much you have overpaid by, it will take longer before you start
seeing capital growth. It sounds obvious but you need to do your own research before you
buy, and before you make your offer.
It might be possible for you to compare the asking price with asking prices of other, similar
properties nearby. However, particularly in rural areas, properties are individual with different
character and amenities, different layouts and room sizes, and varying plot sizes. This
makes a direct comparison difficult and unreliable.
If you are taking out finance through a local bank, or a British subsidiary, the bank will
usually have a valuation undertaken. However, I recommend that you do not rely on this as
methods, procedures and standards vary from country to country. There is no substitute for
doing your own thorough research, or taking professional advice.
Question number four - What type of property do you want?
The type of property you want to buy will influence where you look.
For example, if you want renovate a country cottage or a farm, you are unlikely to find a
suitable property fronting the beach, farms usually aren’t. The chances are your search will
more than likely take you inland.
Question number five - How long will it take me to get there?
Accessibility could be a key factor in deciding where you buy, and this should reflect your
own requirements.
If you want to use the property for occasional holidays, you can probably afford the time to
travel further, but if you want to let the property out, you need to think about how easy it will
be for your tenants to get there. You might be happy with two days travel but you could
seriously restrict your rental market if that is likely to be predominantly holiday makers on
short breaks.
Number six - What is there to do when you get there?
This is a key question which second home buyers often don’t consider.
Taking an extreme example, there’s probably little point in buying that delightful bargain
cottage as a family holiday home if it’s two hours drive from the coast and the kids have
nothing to do. It certainly won’t assist with renting it out.
Similarly your personal needs and your investment needs may not be met by buying in a
tourist resort which is quiet in the winter, when a major proportion of the shops and facilities
close for the season.
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Question number seven - what type of weather are you after?
If you are after a family holiday home, good weather may be important in which case your
search will probably take you more south than north, in a general geographical sense. The
same applies if you are intending to let the property to holidaymakers.
If weather is less of an issue to you personally, you will have more choice, but remember
that there will be consequences for rent ability and potential capital growth of where you buy.
Question number eight - If you ever have to sell, how easy will it be?
If your budget is limited it may be tempting to snap up a low priced property. But before you
do, it’s worth considering and researching why properties in that area are so cheap.
For example, across much of Europe, there has been steady migration away from the rural
areas to towns and cities, as whole generations have turned their backs on agriculture and
country living. This means that there is plenty of cheap rural property which is tempting to
buy. However, if you ever need to sell, do you know where your buyers will come from?
As well as location, think about the type of property. Will it appeal to the local owner occupier
market. If not, will it appeal to second-home owners or investors?
The key is to remember that when looking for your property, ready saleability is probably
more important than a bargain price.
Question number nine - If you can’t or don’t want to sell, how easy will
it be to let?
You may find that your budget limits your choice of property. Or that the bargain property
you’re looking at is so ideally suited to your needs that you have to have it, even if you think
it might be hard to find a future buyer. Or perhaps you have no intention of selling because
you want to retire to the property at some point in the future.
Or perhaps you want to be sure that even if the resale market slows, you‟ll still be able to let
the property out.
If any of these are true for you, you should consider how easy it will be to let the property.
The key thing is to recognise who your tenants will be.
For a start, will they be short-term tenants, maybe holiday makers, or long-term tenants,
such as retired couples, or local working tenants. You may have a preference for a particular
type of tenant. For example, long-term tenants usually pay less rent, but the management of
the property can be much easier. However, you may find that the market for short-term
lettings is stronger in your preferred location than for long-term lettings, or maybe visa-versa.
So you may need to select your search area accordingly.
You will also need to think about the type of property you are looking for. Your preference
might be for a two bedroomed apartment but research might show that in your chosen
location, most tenants are short-term holiday makers who prefer 3 or 4 bedroom villas.
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So, if you can be flexible, buy with the tenant in mind. Ask yourself what they want and need.
If you ask the right questions, and think more widely than your own needs and requirements,
there is no reason why your second home shouldn’t prove to be one of your best performing
assets in your portfolio.
Peter Jones
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10 Tips For Success in ‘Buy to Let’
With the events of the last few years since the onset of the sub-prime crisis, the collapse of
Lehman Brothers and the ensuing credit crunch and economic recession, it’s probably an
understatement to say that we live in difficult times for investors, for whom all the old
certainties seem to have evaporated overnight.
At first sight, with the property market having taken a spectacular dive between the end of
2007 and mid 2009, and then stagnated albeit with a slight decline, it might seem that
anyone who even thinks about buying property today has completely lost the plot.
However, paraphrasing Napoleon Hill, famous author of Think and Grow Rich, every setback
comes with the seed of an equivalent opportunity and many investors consider this to be one
of the best times in history in which to be involved in property.
In another Special Report of mine “Why now is the best time ever to be a property investor” I
explain why they think that and why I agree.
For now, accepting the premise that property investing does still make sense, there are
things we can do to make sure we do it better.
As a Chartered Surveyor and a property consultant I’ve been able to teach many others not
to make the same mistakes I’ve made, and to do the things which I’ve found work.
Conversely I’ve also been able to learn from the successes and mistakes of other investors,
which is invaluable education. Don’t forget I’ve been in the privileged position of being able
to talk to, and watch, directly or indirectly, the actions of over 1000 investors or would be
investors. Interestingly, and this may give you some comfort, in my experience most serious
mistakes are more often made by ‘experienced’ investors – it’s easy to get complacent, and
bad habits, once established, are hard to shift.
So in this Special Report I am going to give my top ten tips on what investors can do to
make sure that they get the maximum returns from buy to let and also to avoid the pitfalls
that have trapped unwary investors in the past.
Just one thing before we start. To all intents and purposes Buy to Let is actually a brand
name. It was devised by the Association of Residential Letting Agents who teamed up with
various lenders to provide a mortgage product for residential investors. Technically loans
branded as buy to let were only available from that panel of lenders.
But of course, any other lender would also be free to provide a residential investment
product as long as they didn’t brand it as ‘buy to let’
However, just as Hoover has now become a generic term for a vacuum cleaner, buy to let
has become a generic term for residential property investment loans.
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So, although I realise this might sound a bit pedantic, in the remainder of this report, instead
of saying ‘buy to let’ I shall say ‘property investing’, by which I specifically mean residential
property investing, because that is what we are talking about.
Number One “Successful property investors have a clearly defined
objective, and a plan for how to get there”
A common feature of successful property investors is that they have a clear idea of what
they are trying to achieve, they have a strategy and they have a plan.
As the old saying goes “if you don’t have a destination in mind, any road will get you there”
but successful investors know exactly where they are going and how they are going to get
there.
By contrast many unsuccessful investors do not. If you were to ask a random sample of
investors what they are trying to achieve, you’d probably hear answers like “security”,
“income” or “increased net worth”, but if you pressed further and asked for details such as
“how much income or how much net worth” or “by when do you want to achieve that figure”,
the chances are they’d not be able to tell you.
The solution to this fuzziness is simple. Before an investor even starts to look for a property
they need to think about what they want to achieve and why, and by when they want to
achieve it.
Then working backwards from their desired objective, they need to construct a plan to get
them there. In modern self-help talk this is called goal setting and planning.
If you already own properties, this advice still applies. Now is the time to stop and make sure
you’re steering the right course. If you find that you are not, now is the time for corrective
action.
There’s nothing magical about goal setting, but the results can be, and often are, highly
impressive. Self-help and motivation trainers often quote the story of the Harvard graduation
class of 1953, which is illustrative of what can be achieved by being focused with a definite
end in mind.
You might well have heard this before, but even so it's worth thinking on again. The class
were asked when graduating if they had clear, written goals relating to their futures. Only
3% had. 20 years later the surviving members of the class were interviewed and the
researchers found that the ones who had made clear, written goals seemed happier and
more content than the others. But what was even more interesting was that they found that
in financial terms the 3% who had made written goals were worth as much as the other 97%
put together.
So goal setting works.
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How do we go about putting together our property goals? I’ve covered the subject in detail
in other material of mine so I’ll be brief here but, put simply, we need to set targets to be
achieved at specific points in our future, targets which are stretching but achievable, and
which are tangible and measurable.
Using my goals as an example, when I started investing for myself, I set a goal of achieving
a certain amount of passive income from my property investments, specifically a clear goal
for my income at the end of years one, three, five and ten.
Setting financial goals like this requires careful thought. There's no point in just sticking
figures on a piece of paper. However, it's worth bearing in mind that most people tend to
overestimate what they can achieve in a year but seriously underestimate what they can
achieve in five years.
It essential to identify the big goals, but you should also set intermediate targets that can act
like stepping-stones to your ultimate goals. This not only makes achieving the goal easier
but also makes it more believable for you. It's a great feeling to tick them off as you head
towards achieving your goal and very motivational.
To make any goal achievable, we need to make a plan, breaking it down into a number of
steps or processes which if followed, should result in the attainment of our goal. Of course,
things don't always happen as we expect so it is necessary to review the process as we go
along and to fine tune our plan as necessary. Sometimes this might mean ripping up our
original and starting again. That doesn't matter.
Having goals and a clear plan for their attainment is only half the story. You also need to
have the reason to see them through to the end. My reason for seeing my plan through is
quite simple, I want property to be my primary source of income. I need to pay the bills and
support my family. Really it's very basic but a great incentive. After that I want property to
provide the lifestyle I aspire to.
Seeing the plan through to the end until the goal is achieved is where you’ll need
persistence. Being realistic things rarely go to plan. Unless you are extremely lucky, and
extremely well prepared, you will inevitably meet obstacles and difficulties, and many of
them will be totally outside of your control.
For example, you have very little influence on whether the government increases existing
property taxes, or whether they impose new ones. It's not in your control whether the Bank
of England increases interest rates. On a micro level you cannot always control the actions
and attitudes of the individuals you have to deal with. To adapt a well-known colloquial
expression, sometimes you just have to except that “bad things happen”.
Even so you need to keep your eye on your goal, and adapt to your new circumstances and
keep on going. This is well recognised by personal development and business trainers.
They tell us that the definition of an entrepreneur is someone who can solve problems, either
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their own or other people’s. They tell us that a successful person is a failure who picked
themselves back up just one more time, and even “a winner never quits, quitters never win”.
And for goal setting to be effective we all need to read our goals regularly. Some motivation
experts say twice a day; first thing in the morning and the last thing at night. This might
seem like overkill, but it is partly to remind us of what is important and partly to remind us
what we want to achieve.
More than that it is to make our goals and their attainment part of our psyche. Quoting
Napoleon Hill again, “Whatever the mind of man can conceive and believe, it can achieve”.
The key is getting the mind to believe. Once it does it will find ways to attain your goals. I'm
not a psychiatrist and I can't pretend to know how it works but it seems that regularly
reminding our selves of our goals helps them to sink into our psyche and for our brains to
grab hold of the importance of making them happen.
Make it a discipline to review your goals and plans regularly so that you can keep focused
and pick yourself up when you need. It is very easy to become distracted and to do things
which seem urgent and even important, but which are actually interfering with your moving
forward, and which may even be taking you further away from your goals.
Even if you don't want to review your goals as often as twice a day, still try to get in the habit
of doing it regularly.
As well as regularly reviewing our goals we also need to regularly review our progress
towards achieving them. This is an area where I admit I have made mistakes in the past,
and where I know other investors have made mistakes.
Mistake number one is obvious: not reviewing progress at all.
Mistake number two is more subtle but just as damaging. It’s using the wrong measure.
We’ll look at this in more detail a bit later.
As most achievement comes down to belief, building belief in yourself and your abilities is
essential and it is often the difference between success and failure. Regularly reviewing
your goals keeps you focused, and keeps you on track. It reminds you of what is important.
It’s the old management cliche that if we're not careful we will become bogged down in the
urgent and never get around to the important.
Number Two “Successful property investors plan for the medium
term to long term”
Unfortunately, many investors, even when they set their goals and plan for their
achievement, fail to give their plan enough time to work. They fail to appreciate that property
works best when it is treated as a long-term investment.
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This isn’t to say that trading property is a bad thing to do. If your preference is for buying run
down properties, doing them up, and selling them on, that’s fine. That can certainly generate
short term cash.
So can “buying low and selling high”, if you are able to find properties at the right price. But
by my definitions that is trading and not investing.
Property investing is a long term business, and the greatest benefits are obtained in the later
years and not the early years.
With the market today at best stagnant, or at worst, still on the way down, you may doubt the
validity of that statement and I don’t blame you. I don’t have time now to go into all the
arguments why property investing is still sound, you’ll need to look at “Why now is the best
time ever to be a property investor”, but I’ll paraphrase a few of the most pertinent points.
First, it’s a human trait that when things are going well most of us assume that, and act like,
things will always go well. On the other hand, when things are going badly, we assume that,
and act like, things will always go badly. Of course neither is true. Life is series of ups and
downs. In the context of the property market busts are followed by booms and visa versa. I
fully appreciate that ,in a sense, we are now in a new economic age, but I still think it is
highly likely that, once the Eurozone crisis is resolved, we will see recovery in the overall
economy and at some stage recovery in the property market. I can’t say when but I’m sure it
will happen.
Then there’s all the other arguments for property such as the lack of properties being built
will result in a big shortage a few years down the line, especially as the population is
growing, and the number of households being created is increasing.
And don’t forget that although, at the time of writing, it seems that inflation is on the way
down, some commentators suggest that all that Quantitative Easing by the Bank of England
will result in inflation at some stage, and my suspicion is that will have a big, positive impact
on property values, in cash terms at least.
Anyway, just humour me for now and assume with me that at some stage the property
market will recover again, sometime, we just don’t know when.
There’s an old saying that says “problems compound with time”. I’m glad to say that’s
equally true of property values. Over the last 55 years property values in the UK have risen
by about 7.5% every year on average. Over the last 100 years the rate of growth has been
about 10% per annum.
Both of these growth rates take into account the falls in property values during the great
depression of the 1930’s, and the recessions of the 1970’s, the 1980’s and the1990’s.
And they also reflect the falls in value since 2007.
Let me prove it for you.
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If you look at the Nationwide Quarterly figures post 1973 you’ll see that the average price of
a house in Quarter 4 1973 was £9,767, and in Quarter 4 2011 the average price of a house
in the UK was £164,785. Over a period of 38 years the increase represents a rate of growth
of just under 7.5% per annum.
We can also check it against the Nationwide figures from 1953 (all houses). In Quarter
41953 the average price of a house in the UK was £1,891. As we’ve already seen by
Quarter 4 2011 the average price was £164,785, representing compound growth of around
7.75% per annum.
At average annual growth rates of 7.5% property values will double in 10 years.
I stress that these averages, this is not to say that property prices will double in every ten
year period. In some 10 year periods they will not double, and in some 10 year periods they
will more than double.
Prior to the credit crunch in 2007 the annual average was 8%, so the slightly lower figure
reflects the falls of the last few years. No one can predict the future but is entirely possible
that when recovery picks up in the wider economy the housing market could catch up with
previous trends and average growth will again hit 8% per annum.
I again want to stress that I am not saying that the market will go up by 8% every year. This
is an average so in some years it will go up by less than 8% and in other years it will go up
by more than 8%.
Now no one can ever be sure what the future holds and as Independent Financial Advisors
have to say “past performance is no guarantee of future performance”. But most experts
agree that short of some terrible unforeseen disaster the trend of increasing property values
will continue, albeit with short-term blips like the one we are experiencing at the moment.
This makes property an ideal medium through which to catch all the benefits of
compounding. It is said that Baron Rothschild described compound interest as the 8th
wonder of the world, and Albert Einstein alluded to it as being the most powerful invention of
man. Both statements have some truth to them and we can see that when we hold property
for the long term.
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Look at this graph which shows the value of a property purchased today for £150,000 and
growing in value at 8% per annum – let’s assume that at some point growth in the UK
property reverts to trend growth rates of 8% per annum.
You’ll see that the growth is exponential and not linear. In other words the growth
accelerates over time. For example, by the end of year 10, the value has grown to about
£324,000 an increase of £174,000.
By year 20 the value has grown to £699,000, an increase of £375,000 between years 11 and
20. In other words the growth in the second ten year period is more than double the increase
during the first ten year period.
But by year 30 the value of the property has increased to £1.5 million and during the last ten
year period the growth is more than the growth in the first 20 years combined.
A mistake often made by investors is to sell too early and before they have benefited from
this compounding effect. The question investors need to ask themselves is “why sell at all?”
The answer is usually “I need the money” and sometimes circumstances makes that
unavoidable. But an alternative, and often better way to release equity from a property, is to
refinance it. In a way this is having your cake and eating it. You can have the net worth out
of the property now, and still retain the benefit of the compounding growth in capital value.
There is another saying in property that “no one ever regretted buying a property, only
selling it”. I’m not sure that I’d always agree with this, but I understand the sentiment behind
it.
The solution, yet again, is simple. Don’t buy any property without first considering the longterm implications. When setting your goals, look at least ten years ahead. And resolve never
to sell unless there is no other option. Instead, if you need to take your equity out, think
about refinancing instead.
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Number Three “Successful Investors measure their progress”
Having a plan and a long-term approach to property investing is only part of what
distinguishes successful investors from unsuccessful investors. To be successful you need
to know whether your plan for achieving your goals is working and on track, and so you need
to be able to apply some kind of ‘measurement’ to your property activities.
Many investors do not know whether they are on course to achieve their goals because they
either aren’t measuring their progress or they are applying the wrong type of measurement.
Often this goes hand in hand with setting the wrong types of goal.
For example, an investor may set a goal of owning 15 investment properties. But this in itself
is meaningless. It tells you nothing of the properties value, the rent they’ll be producing or
the likely cash flow.
A better goal would be to add financial value to it and a time limit for it’s achievement, such
as “within 10 years I will own 15 investment properties with a total capital value of not less
than £xm”.
However, I suggest that a much more useful measure would be to combine the concepts of
gearing and compounding, and set a goal for achieving a certain level of equity. Equity in
this context is the balance left when the amount of any outstanding loan is deducted from the
capital value of the property. This is in effect the net worth to the investor.
We’ve already seen the powerful effect of compounding and property values. This is why
gearing is so powerful when you split your available cash as deposits on multiple property
purchases. You can own multiple properties, each of which is growing in value exponentially.
Say you have £100,000 to invest and you buy 5 properties each worth £100,000 using Buyto-Let mortgages. So after purchase you will have properties worth £500,000 a loan of
£400,000 assuming an 80% LTV and equity of £100,000. To keep things simple, I haven’t
allowed for purchase, legal and mortgage costs.
Now your goal might be to achieve millionaire status. At the moment you might think this
seems a bit fanciful, but with property, because of the effects of steady and compounding
growth, it isn’t. Especially when you give the compounding enough time to work on your
behalf.
So, the question isn’t “If I become a millionaire?” but “When will I become a millionaire?” In
fact £100,000 will compound to just over £1m in around 10½ years at 25% annual growth.
You might think that a return of 25% on your money is unrealistic but I can assure you it isn’t.
Remember we are compounding the equity, not the capital value of the properties, and we
can use gearing to do it.
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So, if we have 5 properties each worth £100,000 and they increase in value by just 5% per
annum the total value will increase to £525,000 in the first year.
This extra £25,000 is all yours and your equity will now be £125,000, an increase of 25%. So
far, in the first year at least, we are bang on target. And that’s using a relatively conservative
growth rate of just 5%. The figures could be different depending on whether you’ve opted for
a repayment mortgage, or an interest only mortgage. We’ll look at that again later.
The bad news is that in year two the figures aren’t so good. Again allowing for only a
conservative growth rate of 5% the value of the five properties will now total £551,250, an
increase of £26,250. However, as the equity at the beginning of year two was £125,000, this
extra £26,250 represents an increase of only 21% on the equity. And each successive year
the return on the equity will decrease.
However, don’t panic, this doesn’t mean that the goal is unachievable, we just need to help
the growth rate along a bit. There is a simple solution. At the end of year two all we need to
do is refinance, and take 80% to 85% of the increase in the equity as a deposit for our next
property purchases. To keep things simple, I’ve assumed we will continue to buy properties
each worth £100,000, you should have funds to use as deposits to buy three more.
So from the beginning of year three you will have 8 properties with a total capital value of
£851,250, each compounding at 5%. At the end of year three the total value will be
£893,812, an increase of £42,562. As the equity at the beginning of the year was £151,250,
the return on equity will be 28% and so we are now ahead of target.
Of course, 5% capital growth is a rate I used purely to illustrate the point. In reality property
values don’t grow consistently, some years are better than others, and in some years they
don’t grow at all, or they can even go down.
The key to achieving your goal is to keep in mind that the important statistic to study is the
Average Return on Equity. In this example, every time it dips below your required growth
rate the portfolio should be refinanced and more property purchased. In reality, using actual
historic growth rates, the chances are that this goal will be achieved quicker than 10½ years.
So make sure that from the start you know how you are going to measure your progress,
and just as importantly, decide how you will know when you’ve arrived at achieving your
property goals.
This is still only part of the story as increases in capital value are only one way by which your
equity can grow.
Another way to increase your equity is to progressively pay off your loans during the
mortgage term. This is a natural consequence of financing using a repayment mortgage.
However, there is a school of thought that taking out a repayment mortgage isn’t always the
right way to fund property purchases. Which brings me to my next tip.
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Number Four Successful investors don’t rely on capital growth and
equity.
There are two main ways serious investors can protect themselves from unexpected, or
unexpectedly greater, falls in the market, and ensure that their investment shows a positive
return.
The first is by buying “Below Market Value” or, put another way, by buying at a bargain price.
In today’s market many buyers are typically targeting prices that are genuinely 25%-30%
below the actual market value (and not just above what could be an artificially inflated, or
unrealistically set, asking price).
Buying BMV property is a big subject in itself and not one I have time to go into detail about
now but suffice it to say if you buy cheaply you will already have a ‘profit’ on paper.
It also means that if you are buying using finance, you will borrow less (because you are
paying less) and this has a positive impact on the second way investors protect themselves
and benefit from an investment and that’s by buying property which is cash flow positive.
I use the term somewhat loosely because this will also apply to property which is breaking
even on the cash-flow.
The thinking behind this is, if the rent generated by the property is sufficient to cover all
holding costs, the serious property investor can keep the property indefinitely, without any
financial hardship, whatever is happening in the property market. So, if prices fell, or fell by
more than the investor anticipated, he or she can just sit it out and wait for the market to
recover.
In any case, some serious investors claim that the value of the property is never a concern
to them because they buy only for cash-flow.
In theory this all sounds very simple but the key to this approach is accuracy in the detail and
the projections.
I have to confess that I am regularly offended by emails I receive offering me properties
which purport to be ‘cash flow’ positive. When you look closely what this usually means is
that the rent exceeds the mortgage payment. But that is only the start.
What about the cost of future repairs?
What about an allowance for voids (periods when the property is empty) which are
inevitable?
What about the costs of the compulsory annual gas check?
What about the managing agents fees? And letting fees?
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I think you get the idea. These emails never say that the monthly rent covers these as well.
My suspicion is that, far from being ‘cash flow’ positive, many of these advertised properties
will cost their new owners money.
Buying a cash flow positive property does provide a buffer from the market for serious
investors, but before they buy they do their sums to make sure that the property really is
cash flow positive.
Number Five “Successful investors search out the financing option
that is best for them”
Many unsuccessful investors do not take the time to shop around for the best loan to value
ratio or the best interest rate. After all, ½ % over 20 years makes a lot of difference to how
much interest you will actually pay. And when they look for the best interest rate they get so
focused they often forget to check the other terms. You will often find that an attractive
interest is offered hand in hand with higher admin and set up fees, and/or higher redemption
charges if you pay the loan off early.
Inexperienced investors will also often assume that a bank is the only viable source of
finance.
As always it comes back to goal setting. When you set your goals, carefully consider which
financing package best fits what you are trying to achieve. If you already have property, think
about switching either the type of loan, or the lender, or both, until you have the combination
and terms that are best for you. If you aren’t sure what you need, consider using a good
mortgage broker, they can be well worth their fee.
Number Six “Successful investors do not allow emotion to
influence their purchasing decisions”
A lot of investors fall into the trap of buying only those properties that they, the investor,
would like to live in. As a general rule, we are conditioned into wanting to move up the
property ladder into bigger and better properties, and many investors apply this yardstick to
their investment purchases.
When they do so, they often end up with properties that are unsuitable for letting. By
definition, these will be the more expensive properties in their chosen areas, and will
inevitably produce a lower return than could otherwise be achieved from a smaller and
cheaper property. As a result they overlook many decent properties which are extremely
rentable, and which would be extremely profitable.
The solution is to take your time and do your market research before you buy. Talk to as
many letting agents as you can, and find out what tenants are looking for in your chosen
area.
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Remember that you are not buying for yourself – you are buying for your tenants. So don’t
allow your personal tastes to influence what you buy.
Property investing is a financial process and as we’ll see in minute, the important factors that
should influence your buying decisions are the figures.
Which brings me to tip number seven.
Number Seven “Successful Investors thoroughly research where
prospective tenants want to live, and the type of property they want
to live in, before they buy.”
As we’ve just seen, to maximise your returns you will need to find out what types of property
are in greatest demand from tenants, and in shortest supply, before you buy. You may fancy
a 4 bedroom house as a chunky investment, but you’ll possibly find there are ten times as
many tenants looking for two bedroom flats.
Time for a real life case study.
Along the banks of the River Thames in suburban London, in areas such as Kingston,
Thames Ditton and Barnes, you’ll find many high quality, new build 3 and 4 bed houses.
They all have two things in common; first, a few years ago many of them were empty, and
second, many of them were for sale.
Many of these houses were purchased direct from the developer by ‘Buy to Let’ investors but
many were never let. Quite simply, there were too few prospective tenants looking for 3 and
4 bed houses; and of those tenants that were looking for this type of accommodation, even
fewer were prepared to pay rent at the level required by the owner.
Just to break even and to cover the monthly mortgage, the owners needed to net between
£1,500 and £2,000 a month after costs.
When the owners realised they could not find a tenant, or a tenant who would pay the rent
they needed, they had no option but to sell. As a result, many of these properties were sold
on without having once been occupied, and the owners were fortunate if they got all their
money out after allowing for stamp duty, legal fees and mortgage costs.
The truth is, that under most market conditions, there are many more tenants for lower value
properties than for high value properties.
This trap of aspiring too high is easy to fall into. When prices are increasing at 10% or 20%
or even 30% a year, there is a logic to buy bigger and better properties. Buy a property for
£300,000 and watch it grow in value by £60,000 in a year. Very nice.
But if you can’t find a tenant, and you have no rent to cover the mortgage payments, then
you will end up in the classic “asset rich, cash poor” nightmare as your dream investment
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eats up any surplus income or savings you have. If you have none, then you will soon be
financially ruined if you can’t resell quickly enough.
At this end of the market tenant demand is limited and as tenants are harder to find, the risks
of vacancies, and of not being able to cover the mortgages, are greater. Not properly
assessing these risks is why some investors go broke.
Instead of buying one or two high value properties why not ‘gear up’ the same money to buy
a small portfolio of lower value properties. The risk of a lower rate of capital growth is more
than outweighed by the security of knowing that there is a greater opportunity to keep the
properties let and producing a positive cash flow.
If you have already put your money into high value property and are finding it difficult to keep
them tenanted and cover your costs, the only solution may be to cut your losses and sell,
and reinvest your capital in something more suitable.
This leads us nicely to my tip number eight.
Number Eight “Successful investors do not over estimate how
much of the rent received they’ll retain as income.”
New investors often assume that the more expensive property they buy, the more income
they’ll make. I guess you can understand the logic even if it is skewed.
However, the rents achieved for residential property do not show a linear relativity in line with
capital values. For example, the rent achieved from a £300,000 property is unlikely to be 3
times the rent of the £100,000 property.
In a study I made a few years ago of rents for two bedroom, new build flats in city centre
locations, I found that flats with sales prices of £300,000 plus achieved rents of only twice
those of cheaper 2 bedroom flats costing £100,000 or less.
Unless the investor understands this, and has a clear idea of the likely rent, this can come as
a nasty shock. In effect the investor will get less income for his money (in relative terms,
anyway).
This means that pro rata, the mortgage will represent a larger percentage of the rent
received. In relative terms there is less rent to pay the mortgage. This also applies to the
other costs as well. So there is less left over as ‘profit’ for the investor.
This reinforces my opinion that more investors will get further, quicker, if they just lower their
sights and start with less expensive properties. Let’s look at this idea from a different angle
in tip number 8.
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Number Nine “Successful investors don’t under estimate the costs
associated with an investment property.”
I never cease to be amazed when I realise that an investor had genuinely expected to keep
50% or more of the rent, after allowing for mortgage costs. That just isn’t going to happen.
If the property is managed by agents they’ll want between 10% and 15% of the rent, plus
VAT. Then there are repairs and insurance. Voids do occur when the property is vacant, and
tenants can default on the rent. Then there are incidentals like the cost of the annual gas
check and certificate, the five yearly electrical check and, if you own a house in multiple
occupation, the cost of a licence from the local authority.
With apologies to Tyler G Hicks, author of the excellent “ How to Make Million$ in Real
Estate in 3 Years Starting With No Cash ”
“a pound of income from a less expensive property is the same as a pound of income from a
high value house. And what’s more, the income pound from a lower value property will
probably be a much more profitable pound to you because less of it will go for paying various
expenses. By this I mean you’ll be able to spend on yourself 20 pence to 30 pence of the
pound you get from a lower value income property. But you’ll be able to spend only 3 pence
to 6 pence of the pound you get from high value newer properties”.
In my experience, his figures work out about right.
So never buy a property without undertaking a full analysis of the likely cash flow so you
know what ‘profit’ you can achieve.
If income is more important to you than capital growth you should really be thinking of lower
value properties with higher yields.
If you already have property, and they are not providing the cash flow you need, you may
have no alternative but to cut your losses and sell, and reinvest in something more suitable.
Number Ten “Successful investors never rely on the judgement,
advice and efforts of others”
They may listen to it, but ultimately successful investors make up their own minds and take
responsibility for their own decisions.
Nowadays there are many providers of ‘bespoke Buy-to-Let’ investment properties including
a large number who specialise in sourcing off-plan developments.
Many provide an excellent service, whilst some exist purely to line their own pockets.
Amazingly, a large number of otherwise intelligent investors part with large sums of money
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without knowing very much at all about their chosen ‘property provider’ or even about the
property.
But first, what do these companies offer? The main service, with some variations, is this.
They will offer to source, renovate, and let a property for you, after which they will maintain it
and manage it for you, or they will sell you an off-plan property at an apparently discounted
price. Often you will be shown that the end value after refurbishment, or after completion of
the development, depending on the type of property you are looking at, will be high enough
for you to be able to refinance and recoup both the original purchase price and the cost of
the refurbishment, meaning you can then get all your money back out and use it to purchase
another property.
In theory, as long as you have the cash for the first purchase, you should be able to go on
refinancing and gearing up until you have a sizeable portfolio.
Typically, you will be expected to pay a single sum, an ‘all inclusive price’ which includes the
property purchase price, your legal fees, and the cost of the refurbishment. The
refurbishment price will also include the agents ‘project management fee’ (well, you wouldn’t
expect them to do it for nothing, would you?) and if they propose letting furnished, the cost of
the furniture. Sometimes they’ll also throw in the first years property insurance.
For your peace of mind the payment will be to their solicitors client account and usually you’ll
be invited to use this solicitor for the conveyance, but you can use your own solicitor if you
want.
The appeal of these packages to investors is that:

They promise relatively high yields

That by re-mortgaging once the refurbishment is completed you should be able to get
back most, or even all, of the money you have invested, and use this money to buy
more properties and so build a sizeable portfolio

Prices are cheap; you can usually buy a two or three bedroom house or flat for under
£100,000 meaning property investing is no longer just for ‘the rich’

Convenience – you have to do very little, they do all the work. I have heard numerous
stories of investors buying ‘unseen’, literally just sending the cheque and never
inspecting the property
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However, there are also disadvantages

The properties are in low value areas where traditionally capital growth has been
slow, or in some extreme cases, negative

Arranging finance at the lower end of the market isn’t always straight forward

Although the gross yield is very attractive many buyers do not have realistic
expectations of the real return they will achieve.

A large proportion of potential buyers are geographically distant from the areas in
which properties are located and as a result the buyers often know little about the
areas in which they are buying, and frequently buy in unsuitable locations.

Although some of these firms offer a reasonable and competent service, some do
not, and buyers have little chance of obtaining the returns promised. The worst of
these companies have been known not to refurbish or let the properties despite
charging for it

Once the property is purchased the buyer can find that the management is lack
lustre, or virtually non-existent.
Unfortunately you cannot tell from the glossy company brochure what type of service you
can expect. My advice would be to take your time doing thorough research before you part
with your money. Don’t take anything at face value. Question everything and always ask for
documentary proof of all ‘facts’ and figures.
I’d also always take time to research the different suburbs in which you are offered property.
My advice is to speak to everyone:
speak to the planners in the town hall to see if there are any specific proposals for that area
such as regeneration or improvement schemes;
and speak to the police – the local crime prevention officer will be able to tell you whether it’s
a problem area or not (you can’t always tell by looking);
and of course speak to local estate agents – chances are they’ll know of who you are
dealing with and their reputation.
I’m sometimes asked if I would I buy from one of these firms? Well, yes I would but I would
make sure they were reputable and I would never buy a property blind without seeing it. I
would always do my homework first.
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However, before you delegate finding property to a firm like that why not have a go at finding
your own properties? I’d start by making a detailed study of your own area, up to a distance
equivalent to 20 to 30 minutes driving time. Look around and see if there are any properties
fitting your investment criteria. If there are, you can consider sourcing and managing them
yourself. If you don’t fancy undertaking the day-to-day management, you can at least source
them yourself, and perhaps organise the refurbishment before putting them in the hands of a
managing agent.
If you are already the owner of one of these ‘bespoke packages’ and it’s not performing as
you’d hoped, the answer might be switch to an accredited firm of managing agents. If things
have deteriorated so that you doubt that even a new managing agent could sort things out,
your only recourse might be ‘shaming’ them into buying the property back from you. Often
they will, but on terms that suit them. If you can persuade them to buy it back don’t expect to
make a profit. If you get your original cash back out, you’ve probably done well.
Bonus Tip: Number Eleven “Successful investors continually
upgrade their education.”
Continuous education is essential. We live in a changing world, a world that’s not always
changing for the better, and we must learn and adapt to it. If we don’t we’ll be left behind.
What was true 20, 10 or even 5 years ago is not true today.
Just look at the impact of the internet. A few years ago I couldn’t really see the point of it.
Now I do transactions by email, and I source properties direct from estate agents web sites.
In the future more and more property investing will be web based.
And it’s not just technology that’s changing. Property investors also have to be aware of
other changes such as changes in fashion and demographics – we’re seeing significant
changes to the way that people live, which is impacting directly upon the type of the property
they want to live in.
Then there are changes to laws and regulations. These are constantly being introduced,
updated or amended, and can have a significant impact on our activities and our investment
returns.
Even if you ignore all these changes, the truth is none of us know all there is to know about
property investing.
There’s an old saying that goes “the man who doesn’t read is no better off than the man who
can’t read”. We have a tendency in this country to think we know it all when it comes to
property; everyone is an instant expert and has an opinion.
I have been in the business over 20 years but still read as much as I can on the subject. I
listen to CD’s, watch videos and DVD’s, and trawl the net looking for things which will make
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me a more educated and efficient investor. I am still coming across new ideas and
techniques, almost weekly.
It’s true that books, DVD’s and seminars all cost money. But as the self-help experts remind
us, education isn’t a cost it’s an investment. So make one of your goals to be to learn as
much as you can. They say that if you read for an hour a day for two years you’ll become an
expert. If you read an hour a day for three years, you’ll become a world expert. So Why not
become an expert in property investing?
Peter Jones
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12 Questions every investor should
ask before they start in property
In my opinion there are 12 questions that an investor needs to ask themselves before they
start in property.
Spending time at the beginning to think and to plan will help you to get off on the right track.
For those who are already investors, these are the questions they should ask themselves on
a regular basis to review progress, and to ensure that they are maximising their returns and
their business potential to the full.
So, as we start our journey to property success together, I’d like you to think about these
questions.
Number one - Why do I want to buy property and what am I trying to
achieve?
Before they even start looking for property all investors need to consider exactly why they
want to be property investors. It sounds obvious but in order to achieve, we need to know
what we are trying to achieve before we start! And human nature being as it is we are far
more likely to keep on purpose and on track if we set ourselves specific targets to aim for. In
other words we need to set goals, in this instance property related goals. In my experience
these are usually related to financial needs.
However, setting goals is only half of story. Tony Robbins, the famous motivational expert,
tells us that in order to achieve our goals we also need to have a “why”. In other words we
need to know why we want to achieve those goals, or even better, why we need to achieve
our goals. Our why can be related to financial need, particularly in obviating financial
hardship, but equally can be related to non-financial needs. These may be needs of
lifestyle, or practical needs, such as the need of a parent of a sick child or a child of a sick
parent to generate an alternative source of income that allows them the time to be carers.
My experience is that most investors’ needs can be categorised under two headings: a need
for income or a need for equity. In practice many of us have a need for both. To be as
successful as possible in property, all investors should identify and quantify their particular
needs and set a time limit for their achievement. They should then resolve to accomplish
their goals no matter what.
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If you would like more information about how to set your property goals please email me at
peter@vaughanjones.freeserve.co.uk and I’ll send you a free special report which walks you
through the steps.
Number two – Which strategy best fits my needs?
Devising a suitable strategy to accomplish their goals is a step that many new investors
often overlook. Instead they aimlessly start to buy property without any consideration as to
whether the property is the right property to achieve their goals or not. In my opinion
devising a strategy should be relatively simple. In essence, there are three principal
property strategies and these largely relate to the basic needs that we identified in the first
question. These strategies can be summarised as

buy and hold for equity growth

buy and hold for income

buy and sell for quick cash
So, for example, if your goal is to provide long term for your pension then developing a short
term income from your property might not be an important consideration. Instead, you might
choose a buy and hold strategy through which you take advantage of increasing property
values to build your equity and wealth with a view to “cashing in” in the future.
OK, I accept that at the moment, for many of us, increasing property prices seem a distant
prospect, unless you happen to live in London or the south east. So an alternative way to
create equity is to use the rent to pay down the mortgage.
On the other hand, if you have a need for income, either to supplement your current income,
or to replace your current income and to allow you to spend your time doing other things,
then you may consider a buy and hold for income strategy to be more appropriate.
Or perhaps you have need for immediate cash. Perhaps you have debts that need paying
off, or perhaps you want to make a large cash purchase. In that instance, buying and selling
property for quick profits could release the cash you need.
Allied to these strategies are various tools that an investor can use to increase their returns.
For example, an investor may combine buying and selling for short term cash with
refurbishing property; buying rundown properties to do up and sell on is an extremely
popular strategy with many investors and can be far more profitable, if done properly, than
merely trading in property.
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However, refurbishing can also be combined with a buy and hold strategy. Many investors
will buy rundown property and do it up, and then hold the property. By doing so they will
have added value, and therefore equity, and they should be able to let the property out at an
enhanced rent and so enjoy an enhanced return.
My Special Report “10 Tips for Profitable Property Renovating” is available on Kindle or
from www.peterjones-online.com
Number three - How much time can I spend on developing my
property business?
Again this is a question many investors fail to ask themselves before they
start and before they rather aimlessly start looking around for property. The
answer to this question should, and can, affect their overall strategy and plan.
For example, if you have very little time to devote to your property business
it's unlikely that you will be able to undertake a thorough search for suitable
properties and you may have to rely on the efforts of others to source them
for you. Similarly, if you have little time to put into your business it could be that refurbishing
properties is unrealistic as well. Even if you delegate the work, you may not have the time to
project manage.
So you will need to set goals and choose a strategy which fits with the amount of time you
are able to put into it.
Number Four - How much money do I have available to put into my
property business?
This is a crucial question as it can impact significantly upon the type of property that you buy,
as well as the amount of time that it will take to achieve your goals.
As a general rule, the more time and more money that an investor can put into their property
business, the quicker the business will grow and the more properties they will own.
If you literally have no money to put into your property business then inevitably you are going
to have to be more creative in putting property deals together. This may require you to find
alternative forms of finance, such as funding from a friend or an acquaintance or a relative,
or by taking on partners, whether active or sleeping, or by using other forms of nonconventional finance such as money from property angels or even by using credit cards.
For whatever reason, many would-be investors often overlook the fact that they have equity
in their own homes that they can easily draw down and use to kick-start their property
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business. When I first started, many lenders were averse to investors using borrowed funds
to pay the balance between the purchase price and a mortgage. However, things have
changed, and as long as a lender can see where the deposit, for want of a better description,
has come from (so they can satisfy themselves it’s not laundered cash) they’re usually
happy to accept borrowed funds.
Number Five - What type of property best fits my strategy?
Again a simple question but the answer can have profound implications for an investor’s
business.
If they have found themselves steered towards a buy and hold strategy for long-term equity
growth chances are that an investor will be looking for higher value, lower yielding properties
in a decent area and which provide the best prospects for future capital growth.
Conversely, if they have been steered towards a buy and hold for income strategy, it may
well be that high yielding, lower value properties in less prosperous locations make more
sense for their strategy as they will receive a greater proportion of income for their money
spent, and a greater cash-flow.
If they are buying to renovate and then sell for quick cash profits, then they’ll be looking for
properties in areas which appeal predominantly to owner occupiers, and not for properties
which appeal mainly to tenants.
Number Six - Where are those properties located?
Having thought about the type of property that an investor needs to buy, they then need to
consider where they are most likely to find them.
It goes without saying that if you live in a relatively prosperous area with a few cheap
properties then you may have to look outside of your area if your strategy is to find high
yielding property which produces a good cash flow.
However, how far you can go in your search will, of course, depend on how much time you
have to put into your business. This is where an investor can find that they have conflicting
needs and it's better to identify them from the outset. It may be, if they have little time to put
into the business, they have no option but to delegate the task of finding suitable properties
to a third-party, either an agent or by using the services of an investment company.
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Number Seven - Have I a clear plan to find my properties?
Having identified what type of property we’re looking for, and having thought about where we
are most likely to find them, we now need to think about how we will find them. There are
many ways that investors can find property and now is not the time or place to go into detail.
However, they can use estate agents, bespoke property investment providers, auctions,
newspaper adverts and many other ways to find properties. Whichever way or ways they
choose, it’s imperative that an investor will answer the “what, where and how” questions
before they actually start putting time into looking.
Number Eight - How am I going to finance my properties?
To some extent the mystique that used to surround financing investment property is now a
thing of the past. For most would-be investors, obtaining investment finance is now
relatively straightforward since the introduction of buy to let finance. Even so, in these postcredit crunch days, it can be useful to apply for finance in principle before identifying a
property. If nothing else this will give the investor confidence knowing that their efforts in
finding a suitable property will not prove to be a waste of time, and it can also be helpful
during negotiations to be able to show that they are a serious buyer who can act quickly.
If conventional bank or buy to let finance is hard to come by, using finance provided by a
joint venture partner is always a possibility; you’d be surprised how many people are looking
to get a decent return on their money.
Number Nine - Which business entity best fits my needs?
Before buying a property investors should consider how they are going to hold the property,
in other words, are they going to purchase in their own name, jointly with a partner (whether
their business partner or soul mate) in a limited company, through their pension (although
largely this is limited to commercial property) or in another entity.
It's important to consider this before exchanging contracts. And I recommend that would-be
investors talk to their accountant and solicitor and take their advice from the outset. If you
find that you have made a mistake later it may not be the end of the world, but there can be
costs involved in changing ownership between the different entities.
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Number Ten – What should my exit strategy be?
Even if an investor is intending to hold property for the long-term, ideally they should think
about their exit strategy before they start looking for their first property. It may be that you
don't intend to exit at all, for example you may want to leave your properties to your children.
Even so, you will need to talk to your solicitor and accountant as to the best and most tax
efficient way to do that.
Or it may be that you know that you want to wind up your property holdings in 10 years time
and take your profit and retire to the Caribbean. Fair enough but again you will need to think
about how you are going to achieve that. What will be the most tax efficient and cost
efficient way of disposing of your property assets at that time?
Perhaps you should arrange a phased disposal of your portfolio over a number of years so
as to make maximum use of your CGT allowances? Or perhaps it would be better to hold
your properties within a limited company and sell the company? These are questions you
should answer before you decide on the type of entity within which you will hold your
properties, and certainly before you buy your first property.
Number Eleven- How will your property ownership affect your
current tax position?
Again, this is a question that will need to be answered before you buy your first property.
How you choose to hold your properties may well have tax implications during the period of
ownership, and not just upon disposal. Again this is something you will need to consider
having taken advice from your accountant and solicitor.
Number Twelve - How active or passive do you want to be in your
property business?
This question is related to question number 3 about how much time you have available to
put into the business. If you have little time to put into the business then the chances are that
you will want to be more passive than active. However, many investors, even those with
time on their hands, might want to choose to be less active in their business, particularly
when it comes to managing their properties. There are definitely pros and cons to managing
properties oneself. Sometimes this comes down to personality type. Some people feel
comfortable attending to minor repairs, dealing direct with tenants and chasing up rent
payments. On the other hand, some personality types do not.
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There again the answer to this question may be financially related. To maximise the returns
from the business an investor might choose to manage their properties. After all, some
managing agents can charge as much as 15% plus VAT, which will be a substantial amount
of money for a sizeable portfolio.
When answering this question you'll need to consider your position carefully in the light of
the other questions. If you need to be more active than passive for financial reasons then
this would imply that you are looking for properties that are nearer to home rather than out of
your area. Conversely, if you wish to be more passive than active, your choice of properties,
and your choice of areas in which to look for them, will be greater as there will not be the
need to buy property within relatively easy travelling distance of your home.
So these, in my opinion, are the twelve questions which any would be investor should think
about and answer for themselves before they even think about looking for a property.
The underlying theme is that thinking of the basics, and undertaking proper planning and
preparation is advance, is the difference between the haphazard generation of average to
poor returns, and a successful, properly organised, high yielding, tax efficient business.
Peter Jones
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Why Now is a Great Time to Buy UK
Property
(even if you can’t get bank finance)
“Why would anyone in their right minds want to invest in the UK Property Market Right
Now?”
I am asked this question regularly in various different forms.
The reason why this question is asked is self evident.
At the moment the financial world is lurching from one crisis to another.
Sadly, 4 years on from the onset of the credit crunch and 3 years since the demise of
Lehman Brothers, we seem to be little further forward on the road to recovery.
It’s true that, at the time of writing, we are out of recession but the risk of a double dip has
not disappeared. And even if there is no double dip the economy is so fragile, and growth so
weak, that it seems to be little more than stagnant. As a result the Bank of England have
started on QE2, a new burst of Quantitative Easing.
Unemployment had been stubbornly stuck at around 2.5m for some time but has recently
increased again, and the Government austerity plan and cuts to public spending continue to
suppress the economy.
This isn’t helped by what we see internationally. The US economy is still weak with poor
growth and fears of a double dip; the Sovereign debt crisis continues with fears of Greek
default; Portugal and Ireland have been bailed out and are not out of the woods; and
questions are being raised about Spain and Italy. Consequentially talk is of the inevitable
break-up of the Eurozone, and the possibility of another credit crunch as banks take flight.
At home property prices in the UK are still down on their 2007 peak, and bank finance (i.e.
mortgages) are hard to secure and this is keeping first time buyers out of the market. With
regular monotony a think tank or expert is reported as predicting the continued demise of the
UK property market, and that prices will fall, and possibly crash.
In most parts of the UK capital growth is non-existent and even optimists are saying it’ll be 5
years before we see property prices increase again. Pessimists say they’ll never rise again
but, when pressed, may begrudgingly admit we might see some limited growth in 10 years or
more.
Against this backdrop it’s not surprising that the question being asked is “Why would
anyone want to invest in the UK property Market?”
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Well, it surprises many people but the answer is “Because this is one of the best times we’ll
ever experience for buying property”. And if you’ll continue reading I’ll show you why.
But before I do I want to look at why so few people are taking advantage of the
circumstances we now find ourselves in.
Why don’t the masses believe the answer?
If this is true, why aren’t more people out there doing property deals?
The simple answer is that they are scared to, but let’s look at this in a little more depth.
It’s a natural human tendency but most of us dislike uncertainty. Put another way most of us
crave certainty.
Most of us spend our lives creating, and trying to maintain, comfort zones which give
security and predictability. Predictability is safe, with predictability you know exactly where
you are. No unpleasant shocks, no nasty surprises. Quite often the flip side of that is that it
means no excitement and only a limited number of pleasant surprises as well. But many of
us consider that to be a price worth paying.
There’s absolutely nothing wrong with that, some would argue that it’s natures way of
making sure the human race continues. After all, if we were all adrenaline pumped daredevils, looking for the next high risk, potentially fatal, extreme activity to feed our addition to
‘the buzz’, our numbers would decline quite quickly.
But as I intimated earlier the urge to keep things safe can mean retreating ‘into our shell’ and
letting life pass us by instead.
Of course, there is a balance, and being at either extreme can be harmful. In truth, if we
were to measure this on a scale, we’d all be at different points somewhere between these
two extremes.
So what has this got to do with property and specifically property investing?
It’s an obvious point but we are now living in economically and financially uncertain times.
How we respond to this will determine our financial security, earning power, and activity,
over the years ahead.
If our initial inclination is to preserve our comfort zone, we can react in one, or several, of a
number of different ways.
We can go into denial, pretend things haven’t really changed that much for us, personally,
inwardly hope that is the case, and wait for everything to go back to ‘normal’. The trouble is,
in my opinion, there never was any such thing as normal, and we cannot hope or expect that
things will go back to how they were before the financial crisis. More on that later.
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Or we can accept that things have changed but will assume there is nothing we can do
about it. Basically we choose to hunker down with the aim of preserving as much of our
comfort zone as we can. We may lose bits but if we can keep most of it intact, then that’s all
we can hope to do.
Another response is to blame others for what has happened and to wait for them, or to
demand for them, to put things right. Often the ‘others’ will be the Government, ‘the
authorities’ and more recently ‘the banks’.
Of course, I’m sure you already know that the best response would be to accept that change
has occurred, to appraise how it has affected you, and to put in process plans and
procedures to adapt.
Most people do not choose this response despite that this is the only response over which
they have some control and which will benefit them long term.
So what has all of this got to do with property?
The financial crisis of 2008 resulted in the ongoing economic problems we now see in the
developed world, and has had a consequential knock-on effect on property markets and
property investing.
That change has not finished. We live in unprecedented times and it seems that instability is
the order of the day.
If and when the dust settles and we finally enjoy some stability, it will not be a return to how
things were, what some may call ‘the good old days’. Things will never be the same again.
Will things be better or worse? Who can say? Anyway, how you see it will be highly
subjective and will depend on what and when you are comparing to. Whichever way you see
it, things will be different.
So what point am I making? The world is now a very different place from how it was just a
few years ago, and so is the property market, both global and domestic.
What worked well prior to the financial crisis might not work so well now, and some things
don’t work at all.
Now is the time to understand that to succeed in the future you will need to move on and
adapt, and do things differently.
New times require new thinking, new strategies, new methods, and new processes.
Unfortunately for the masses, they only know about the old way of doing things. If you don’t
know how to invest in the current conditions it would be easy to assume that you can’t invest
under the current conditions.
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And even if you try and show them how to invest under the current conditions the need for
security and familiarity will kick-in and they will reject the new ways of doing things. They’ll
say it’s too risky.
The new techniques ideas and strategies require them to come out of their comfort zone or,
put another way, create a new comfort zone.
What they may not realise and understand is that it’s always been possible to make money
in a rising or a falling market, or even a stagnant market for that matter. That hasn’t changed
although perhaps the ways that we make money from property may have changed.
I think it’s worth taking a look at the current state of the property market, partly to understand
how it has changed, and also so we can understand the context in which it’s possible to still
be a successful property investor.
The State of the Market Today
To understand where we are we need to understand where we have come from and, to
some extent, where we are going.
From the late 1990’s property prices increased, particularly between 2003 and 2007, fuelled
by easy credit and what is now described as loose, or even reckless, bank lending. Some
economists warned that the good times couldn’t last forever but most, unaware of what was
about to happen, assumed that the good times would continue indefinitely. Even those who
realised it couldn’t go on forever were assured that we were heading for a ‘soft landing’ and
not a bust.
By the end of 2007 things were not quite so rosy, property prices started to fall in the UK
roughly coinciding with the beginning of the troubles at Northern Rock , the first sign of how
bad the contagion from the ‘sub-prime’ crisis in the USA would later prove to be.
During 2007 and 2008, quietly, behind the scenes, banks were already reigning in their
lending, and prices continued to fall steadily, albeit gradually, giving some hope to the softlanding theory. But the collapse of Lehman Brothers in September 2008 killed any prospect
of that stone dead. The world’s financial markets went into freefall and panic, and only
massive Government intervention saved some of the USA’s and UK’s biggest banks from
total collapse.
In the UK property prices fell sharply between September 2008 and Easter 2009. You might
remember that at that time the media were telling us that property prices had another 30% to
50% to fall, that buy to let was finished, and that city centres were destined to become
ghettos as the numerous apartments which had been built and sold off-plan during the boom
would never be occupied.
By that time average prices were some 20% down on the 2007 peak levels.
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Then a strange thing happened which seemed to take everyone by surprise and confound
the experts; prices started to increase again. This first started around Easter 2009 and
continued erratically until the beginning of 2010, and prices regained about half of the loss.
Since then the market has ‘gone sideways’ or stagnated; up a bit one month, down a bit the
next and is roughly, at the time of writing, more or less where it was at the beginning of
2010.
There are probably several reasons which explain this partial recovery and subsequent
levelling off.
First, interest rates have been at a record low of ½% since March 2009 and are likely to stay
that way for a long time to come, despite concerns about inflation. This has helped to reduce
the number of repossessions that would otherwise have happened and which would have
depressed the market even more as lenders ‘panic sold’ large numbers of properties into an
already struggling market.
Second, home owners who don’t have to sell, haven’t put their properties on the market. The
effect of this has been to reduce supply and so, although demand has reduced (more on this
in a moment) the effect has been to keep supply and demand broadly in balance, and prices
roughly static.
And finally, despite fears that unemployment may exceed 3 million or even 4 million, so far,
at least, it has peaked at around 2.5 million, again helping to minimise the number of
potential repossessions and helping to maintain what little demand there is from buyers.
The big question is ‘what happens next?’ If we knew that, then my comments about certainty
would be irrelevant but, of course, no one knows. Those who make predictions are usually
wrong, and predictions are often contradictory. For example, just a few weeks ago, on
consecutive days, the press ran articles reporting the views of two different ‘expert’
organisations, one predicting a further fall in prices of 40%, other predicting a rise over the
next few years of 21%. So take your pick.
Those who argue that prices will rise again within the medium to long term can draw on the
usual arguments about lack of supply, and increased demand as the UK population
increases.
Let’s have a think about both of these.
The argument about limited supply is a recognition that not enough homes are being built in
the UK. This has been true for many years and resulted in the Labour Government stating
back in 2003 that they were targeting 2 million new homes by 2020. Even in the years
running up to 2007 developers were nowhere close to achieving this target, and then came
the credit crunch. Developers stopped building and ‘building starts’ fell to their lowest ever
levels. Things are a bit better now, but still way behind what is needed to catch up.
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At the same time the population of the UK is growing, mainly through increased immigration.
This, along with a change of life styles away from nuclear families to single parent families
and many more singles living alone, means that the number of households is also
increasing.
So the number of households is increasing at a faster rate than the number of homes being
built. The result, we are told, is that the UK faces a major housing crisis in the near future.
Others take the argument further and state that not only will there be a chronic shortage of
homes but that inevitably, as demand will exceed supply, prices will be driven up making
property even less affordable to first time buyers.
Let’s just think about this for a moment because I think there are two potential major flaws in
this argument.
First, experience seems to show that first time buyers are a significant driver of the property
market. First time buyers coming into the market allow second time buyers to move up the
chain, and in return allow third time buyers to move on, and so it goes on. If first time buyers
were priced out of the market indefinitely this ‘virtuous circle’, which we can perhaps
describe more accurately as a ‘virtuous chain’, would not exist. In a perfect market the result
would be that the whole market would slow, sales would decrease, and prices would
inevitably fall to a point where first time buyers could afford to participate again. In other
words the market would find its own level again.
The second problem with this argument is that ‘want’ is being confused with ‘demand’. Many
people may want their own home but that does not mean that this correlates with demand, in
economic terms. The reason why the market is stagnant today is mainly because banks are
reluctant to lend. Perfectly credit worthy, potential buyers are denied finance because the
banks have imposed much stricter lending criteria than they were using a few years ago.
No matter how much someone wants to buy a property, the chances are that they cannot
unless they have access to finance. So wanting to buy isn’t enough on its own. In effect the
formula for demand is:
Desire plus Finance = Demand.
Until the banks start lending again, especially to first time buyers, it is almost irrelevant how
many single people, or single parent families, want to form a ‘household’ in a property of
their own. The simple fact is they cannot, and they will have to continue to rent or continue to
live with their parents.
As lending levels are generally still well below the long term average, and lending to first
time buyers is still well below where it could be, this situation isn’t likely to change any time
soon.
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For these reasons I don’t agree with the view that the imbalance between supply and
demand will inevitably push up prices over the next few years, although, I do agree that if,
and when, lending comes back on tap, we could then see a surge in prices.
If the outlook for the property market in general looks subdued things couldn’t be more
different for the investment market, or as it is colloquially known, ‘buy to let’.
So What’s Happening in The Buy to Let Market?
Here’s what we can see happening.
Firstly, many of those who want to buy their own home but who can’t, are renting instead.
Rental demand is at a level not seen for years. In fact, predictions are that if things continue
the way they are at the moment, the proportions of households who own their own homes
will fall significantly, whilst the numbers of properties in the rental sector will increase
significantly.
Do you remember that I said earlier that back in 2008 the media were telling us that buy to
let was dead? Nothing could be further from the truth.
Back in 2008 we were told that large numbers of buy to let investors were in danger of
experiencing negative equity, rent arrears and being repossessed. Buy to let, we were told,
was now a high risk activity and large numbers of investors were expected to default on their
mortgages and would put some banks out of business.
Of course, none of this was true. It was true that some investors found themselves in arrears
as some tenants were unable to pay their rent, and it is true that, sadly, some investors did
default and were repossessed. However, the numbers in arrears and being repossessed
were relatively small and it quickly became apparent that buy to let borrowers were actually
coping extremely well. A combination of massively reduced costs of borrowing along with
tracker mortgages were helping many who would otherwise not have survived the first
shocks of the credit crunch. Despite the speculation to the contrary buy to let borrowers were
a better bet for the lenders than an ordinary owner occupier.
At the moment, one thing we can see happening is that lenders are quietly favouring buy to
let borrowers over first time buyers. How do we see the evidence for this? Quite simply the
number of buy to let products available has increased considerably since the trough of the
credit crunch in 2009, and in many respects it’s easier to get a buy to let mortgage as an
investor than it is to get a domestic mortgage as a first time buyer. First time buyers are still
jumping through hoops trying to get credit, and even then are being turned down, but criteria
are loosening and terms improving on buy to let on an almost daily basis.
Also, more lenders are now offering buy to let loans than at any time since the trough of
2009. Some are those who stopped lending but who have come back in to the market,
others are lenders who are new to buy to let. Why are they doing this? Because they can
see the potential and, most importantly, they see buy to let as being relatively low risk.
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I just want to emphasise that point. They see buy to let as being a relatively low risk lending
activity. In other words, they have confidence in the UK property investment market. Bankers
are by nature a cautious breed and so if they see buy to let as being relatively low risk, then
we can assume that it is low risk.
Interestingly I’d suggest that this implies that the banks don’t agree with the predictions that
the property market is due another substantial fall.
One problem buy to let investors did encounter early on was an increase in the number of
‘reluctant landlords’, primarily home owners who wanted to sell but, finding they couldn’t,
rented their home out instead. This increased the supply of rental properties during 2009 and
rents fell in many areas. This didn’t last too long and the market again found its own level.
Since the beginning of 2010 rents have been rising steadily in many areas of the country
resulting in increased yields for buy to let investors. Rents in the private rented sector are
now higher than they have ever been.
It has been suggested that we are at the start of a ten year rental boom and that rents could
well double over the next decade.
That would have profound implications for the UK property market. Just think of this.
If rents were to double, and if property prices were to remain the same, then the yield or
return an investor received from their property would also double. This is an obvious
conclusion. If we assume an average gross yield on a typical buy to let property is currently
6%-7% that would mean yields would increase to around 12%-14%.
In practice I don’t think that would happen. Here’s why. If yields increased on property that
dramatically buy to let lenders, who are already seeing buy to let as a safe bet, would
increase the amount of money available for borrowers and would bring back much more
favourable terms, such as 85% LTVs (loan to value ratios) and reduced rental covers (the
amount by which the monthly rent has to exceed the monthly mortgage payment).
This would encourage many existing investors to buy more properties and to increase the
size of their portfolios. We can already see the beginning of this virtuous circle developing as
many existing investors have said they want to buy more properties.
At the same time potential investors, such as those with cash in the bank earning very little
by way of interest, would be tempted to buy property and benefit from the higher returns.
Also some of those who have put their faith in other types of investment, such as the stock
market, only to have to endure massive volatility, would look at property as a safer and
better performing alternative.
Tangentially It seems we are often told that the stock market out performs property but let’s
look at the facts.
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On 1st January 2000 the stock market (FTSE 100) stood at 7000 and, according to the
Nationwide, the average price of a home in the UK was £74,638.
Today, as I write in autumn 2011, the stock market (FTSE 100) now stands at 5041, 28%
down on where it stood at the beginning of 2000, whilst the average price of a home in the
UK, according to Nationwide is £165,914, that’s 122% up since the beginning of year 2000.
The numbers speak for themselves.
Anyway, getting back to my point, as yields increase so would demand for property, and as
demand increased prices would also increase. As prices increase yields would come back
down. In other words, as I’ve said before, the market would find its own level, probably at an
average gross yield of somewhere around 6% to 7%, but at prices which are in excess of the
previous level.
In simple terms if rents doubled the consequent effect would be that sooner or later, prices
would double and eventually yields would revert to the trend. This wouldn’t necessarily be a
quick process but over a long enough period of time I think it would be inevitable.
Another factor which I think is largely being overlooked at the moment is the influence of
inflation. Inflation has been above the Bank of England’s 2% target rate for most of the last 3
years, and although, as I write, officially it’s currently running at a little over 5%, many
suspect that ‘unofficially’ the actual rate is higher.
That means that although average house prices are around 10% below the 2007 peak in
money terms, we can probably discount by around another 10%-15% or so in real terms,
after allowing for inflation.
There is a proviso to this. Historically property has been an excellent hedge against inflation
as prices have risen in line with, or in excess of, the rate of inflation. However, what made
this possible was that wages and salaries were also rising in line with, or in excess of,
inflation. That is not happening today. So far wages and salaries have been pegged and are
rising at less than the rate of inflation, another factor which is subduing the property market.
No one can say how long this situation can last but, I’d suggest that it is inevitable that at
some stage, particularly when economic recovery speeds up, wages will jump to catch up.
Logic would suggest that this will have a positive impact on property prices although it is also
true that at that stage of the economic recovery we will also see interest rates rising quickly
to keep a lid on the economy and the property market.
Even so, in real terms, property is now potentially very cheap by historic measures.
When you look at all of the potentially positive influences there is certainly a case that the
future of the property market, and property investing, is rosy, even if we are looking to the
medium to long term.
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Of course, this all presupposes a recovery in the economy as a whole. As economic activity
follows a natural cycle we can assume that recovery will take place at some point, although
at the moment it is hard to judge when.
Let’s just summarise where the market currently is:





Prices are still around 10% below the 2007 peak but are largely stable or static.
Looked at another way we could describe the market as stagnant.
Mortgages for owner occupiers, especially first time buyers are hard to obtain.
Many more people are renting and not buying
Rents are rising and are set to continue rising, possibly for another ten years
Buy to let mortgages are becoming easier to obtain and new buy to let lenders are
coming into the market.
If there are any underlying trends I’d suggest they can be summarised as:



A move away from buying to renting
A likely prolonged weakness in the owner occupier market
A likely prolonged strengthening of the property investment market
Existing investors face Some Difficulties
When you look at all of this the obvious conclusion would be to assume that the way forward
for investors is ‘more of the same’. But it may not be that easy for existing investors.
Despite all the positive news coming out of the buy to let market, buying with buy to let
finance might not be all plain sailing for investors.
Why not? Because many lenders have imposed limits on the number of properties an
investor can own or, instead, others have put a limit on the amount of borrowed money an
investor can have tied up in their portfolio.
It’s obvious why the lenders have done this, they want to limit their exposure and don’t want
to put all their eggs in a single investor’s basket. The trouble is that although they may be
‘putting less eggs’ in an investor’s basket, they are putting their eggs in the baskets of
inexperienced investors. Experienced investors, who have ridden the storm of the credit
crunch and who have survived, are being denied access to finance, or least finding access is
limited.
So what can they do? If you find yourself in this position, you may be asking yourself the
same question. There are solutions and we’ll look at these in a moment.
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Is traditional property investing even still relevant?
From what we have seen so far we can conclude that in the medium to long term property
investing still makes sense, and that there is the potential for significant capital gains in the
future. As we identified earlier this is subject to the proviso that the economy recovers, and
also that bank finance becomes more freely available.
Until that time we have to work within the circumstances in which we find ourselves, and so
it’s natural to ask “Is traditional property investing still relevant?”
Before I answer that question it’s worth just taking some time to look at what property
investing is all about. In other words, why do investors put their money into property?
Clearly, there are a number of reasons why people invest in property:






To enjoy capital gains
To receive income
For tax breaks
For security
As a hedge against inflation
Property is a great vehicle for leveraging limited funds
All of these are still valid for property investing as a whole, so in a general sense property
investing is valid and, with the erratic performance of other types of investment, perhaps
even more valid.
By traditional investing, I mean buying a property by putting down a 25%, 30% or 40%
deposit, and refinancing the rest by way of a buy to let loan. Then letting the property out
and collecting the income.
Clearly, doing it the traditional way still works to some extent. As we’ve already seen, the
buy to let lending sector is active at the moment and is showing signs of having recovered
far more quickly from the credit crunch than the owner occupier mortgage sector.
However, a big shift has occurred in that there has been a reversal of roles between capital
gains and income. Prior to 2007 many investors were buying for capital gain, and cash flow
was just icing on the cake. Now many investors are buying for cash flow with the view that
capital growth is a long way off and will be icing on the cake if and when it happens.
This doesn’t mean they aren’t buying for equity and many investors are still buying BMV,
below market value or, put another way, at bargain prices. By buying at 25% or 30% below
market value, they are instantly locking in equity or ‘profit’.
But as we’ve seen, there are some fundamental issues with buy to let which means that it
isn’t ideal for all investors:
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



Lenders still expect a borrower to put down a relatively large deposit, and better
terms (especially interest rates charged) are available in the case of larger deposits,
meaning that buy to let lenders are still favouring those borrowers who have more
cash available.
Lenders are restricting the number of properties per borrower, or the amount
borrowed overall by a single borrower, which disadvantages experienced investors.
Few buy to let lenders are offering finance for properties requiring more than just the
minimum of renovation work.
Most lenders have imposed the ‘6 month’ rule meaning they won’t consider
refinancing a property within 6 months of purchase (or of a previous application to
refinance).
All of these limitations mean that buy to let in its current form works best for cash rich
individuals who want to put together a limited portfolio.
How can property investing work when bank finance is so hard to
get?
One thing which may put people off starting in property is the thought that they don't have
any money. This is understandable and for the reasons that we've already thought about, if
you adopt the old-fashioned mindset, you could assume
(a) that you need money and
(b) that money can be hard to find.
Most investors understand that it’s not about having your own money, it’s knowing how to
get money. But if the banks are not lending, how do you get it?
Don’t worry, there is hope and there are ways for everyone to participate even if they find
raising conventional finance difficult.
For those of us who are not cash-rich, or who already have a substantial portfolio, we need
to find a different way of doing things.
Non conventional finance
If you are not eligible for (more) buy to let finance you can instead use finance lent on
unconventional terms. If we consider buy to let lending to be ‘conventional finance’, that is
lending which is offered on conventional terms, then the answer for many investors lies with
finding unconventional or non-conventional finance. Strictly speaking the definition of ‘nonconventional finance’ is finance lent on non-conventional terms but we could widen this to
include finance secured from non-conventional sources.
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This could include credit cards, bank overdrafts and so on, as well as bridging loans.
Bridging loans are available from specialist lenders, who can be much more flexible and can
act much more quickly than conventional lenders, although that comes at a price, with
interest rates typically 1% to 1.5% per month.
Today many investors are using private sources of finance such as finance from friends and
family, and finance from other investors who are effectively Joint Venturing with the investor.
They have found that it’s probably easier to raise private finance today than it’s ever been.
How is that possible?
People with cash are waking up today to the reality that there is no point in leaving it in the
bank. Although the Bank of England is officially targeting a 2% inflation rate, it's been evident
that the official rate of inflation has been running at around about 4-5% over the last couple
of years, and is probably even higher now. This doesn't surprise me. Without becoming
conspiratorial, it's not hard to imagine that, unofficially, the Bank of England and the
Government will be quite happy to let the brakes off inflation for a while in order to cut the
national debt in real terms. Of course, they’re never going to admit that, but if they have a
few years of inflation of 5% it’ll be worth billions to the economy.
The upshot is, with interest rates at record lows and set to stay low for the foreseeable
future, and with inflation, the real rate of inflation, significantly above that, every day you
leave you money in the bank you are losing out. The value of your cash in real terms is
diminishing.
People with cash can see that the solution is to find other things to do with their money, and
that includes participating in property deals and ventures.
There are many ways of structuring deals but the basic principle is that an investor who is
cash poor, but time rich, and who has time to find deals, will be financed by an investor who
is cash rich but time poor.
Finance may be lent in return for an attractive rate of interest, or the lender may share in the
profits or, perhaps, receive both interest and profit share. It will be up to the parties to agree
terms between them.
I mentioned earlier that cash-rich individuals are only too aware that their money is earning
very little from other types of investment and so many, if offered the right deal, will be happy
to participate.
As long as it is genuinely a good deal this is a win-win for both parties.
There are numerous ways to find a financial backer or JV partner including networking, for
example at property meets, advertising on property forums, word of mouth amongst friends,
relatives and acquaintances, small classified adverts in financial newspapers and so on.
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It may be true that you don't have the money to fund the deal now, but if the deal is good
enough you will find the money somewhere, from someone.
No Money Down, or Little Money Down, is Still Alive!
Here’s something which may surprise you. If you are relieved that you don’t need your own
money, you may be excited to know that it’s possible to do deals where you don’t actually
need any money or, at least, not much money.
This is one of the exciting and positive consequences of the credit crunch. Faced with
difficulties adaptable people innovate and find new ways of doing things. The great thing for
us is that we can learn from them and copy their techniques.
Reports of the death of No Money Down were greatly exaggerated. No Money Down, or
more accurately ‘Little Money In’ is doing very well although the processes and strategies
are completely different from those used just 4 or 5 years ago.
Back then the favourite way of doing a NMD was to buy ‘below market value’ using a
bridging loan and then to refinance immediately upon purchase (same day refinancing). The
second loan would be calculated against the full market value meaning that the bridging
could be paid off in full, and often provide a surplus which the purchaser could have as a
cash-back.
Today the process is even simpler although not necessarily easier to organise.
So how is it still possible to do NMD or Little Money In (LMI) deals.
Let’s think again about the owner occupier market, you’ll see why in a moment. In the owner
occupier market there are relatively few buyers. This is partly because many potential buyers
are nervous of the market and do not want to buy until they are sure that the market really is
recovering and it’s safe for them to buy, but more so it’s because they can’t get the finance
to buy even if they wanted to.
The lack of buyers means that there are many frustrated potential sellers who know that
selling is likely to be difficult or, in some cases, almost impossible. That is subject to one
proviso, unless they are willing to price the property for a quick sale.
As I said at the beginning of this report, generally speaking people dislike uncertainty and
crave certainty. We live in uncertain times and this is as true of the property market as the
general economy. Faced with uncertainty as to whether they can sell or not, many sellers will
create certainty by agreeing to a buyer’s terms to ensure they get a sale.
And crucially this can include agree to provide vendor finance.
The purchaser controls the property by means of an option agreement which gives them the
right, but not the obligation, to buy the property at an agreed price at any time over an
agreed time period. At the same time they agree to pay the sellers existing mortgage which
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will be discharged as and when they buy. This is vendor finance of a form although often the
real finance is provided by the seller’s bank through the existing mortgage. The seller moves
out and the buyer can then let the property like a conventional buy to let or, even better, find
a tenant buyer to come in and agree to buy on an option at a premium price. This is known
as a ‘sandwich option’ because the investor will stand between the seller and the tenant
buyer, and will have a contract (option) with each –one to buy and one to sell.
These are the basic steps of putting together a NMD or LMI deal. The principles are simple
although in practice there is a lot of detail required to produce the right paperwork and legal
documents, so ‘simple’ doesn’t necessarily mean ‘easy’.
Ten years ago options were primarily used by developers tying up development land or were
used in commercial transactions. Now they are being increasingly used in the residential
market to get around the lack of new finance available from the banks. The solution is to
‘recycle’ the old finance. Genius!
So there is still life in UK property investment!
As you can see, far from being a bad time to invest, there are many exciting opportunities.
The lack of bank finance has meant that both buyers, particularly investors, and sellers, have
had to become more flexible and this has encouraged the development, refinement and use
of creative deal structuring.
If the property market remains subdued for any length of time, which is likely, we will almost
certainly see the increased use of creative deal structuring through the use of options and
other instruments, possibly to the point where they may receive mainstream recognition.
So in many ways we are at a point of fundamental change in the UK property market and the
way property is transacted.
Going forward, so long as there is no cataclysmic collapse in the market, I think we will also
see increased interest in property from those who have perhaps had their money invested
elsewhere. As a consequence we could see a good number of cash rich individuals putting
their money into property, either directly through purchase, or indirectly by way of funding
short term joint ventures with cash poor but time rich property investors.
All indications are that, alongside all of this, buy to let will continue to flourish with more
lenders providing more products, and on increasingly more favourable terms. Coupled with
that we’ll also see a continued trend towards renting over home ownership, at least while
bank finance for owner occupiers remains relatively hard to obtain.
As rents and the underlying value of property are inextricably linked, steadily increasing
rents will, in the long term, give a measure of support to the market and to property values.
Add to all of that we are still a small Island. The UK population is predicted to grow from just
over 62.3 million today to 67.2 million in 2020 and to 73.2 million by 2035. At the same time
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development of new property is destined to continue to lag well behind unless there is
substantial political intervention.
Against that backdrop I’d suggest that property investing is alive and well and, if you have a
clear strategy and plan, and know exactly how you want to invest, what you want to buy, and
why, property investing can make perfect sense.
Some would say that there has never been a better time to jump into UK property.
Peter Jones
go to http://www.peterjones-online.com For an up to date list of selected holiday homes and
overseas investments please go to www.property4success.com
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9roperty 1nvesting by Num3ers

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