Peter Calls An Expert: Valuable Advice And Support From Those ‘In The Know’
The two questions I’m most often asked by newbie and wannabe property investors is: “how do I start” and “what should my strategy be?” More experienced investors will ask me: “do you think I’m doing this right?” Then they wait expectantly for a one-line answer which will set them on the road to wealth and financial security. If only it were that easy!
Each of these questions deserves a book in itself. However, here are the things I think any investor, new or experienced, needs to think about and review regularly. First, investing in property provides us with a lot of choice. Just think, there are:
- Many locations in which one can buy – international, national, and regional. There are numerous different towns, cities and villages, each with individual suburbs, all with different characteristics. The choice ultimately comes down to specific streets or parts of streets.
- Many different types of property. Even ignoring commercial and concentrating on the classification of residential (which is where most individual investors focus) there are houses – detached, semi’s and terraced - and maisonettes and flats. These can be in good, average or poor condition. They can be vacant, or let on Assured Tenancies, Assured Short- hold Tenancies or Regulated tenancies. l Properties in high, middle, and low value areas.
- Properties let to professional and working tenants, and properties let to tenants on benefits.
- Properties let furnished and unfurnished.
Secondly, there are many different strategies one can adopt when investing in property.
Combining all these influences and factors results in the possibility of being able to pursue many different permutations. So, where should one start?
Well, in the days when I did one-on-one consulting (sadly, something I just don’t have time for at the moment), I always recommended my clients to consider whether they have the right ‘mind set’ or ‘attitude’ to be a property investor. It has to get you out of bed excited in the morning. If you do something you don’t like, inevitably you won’t put so much into it.
And you’ve got to be prepared for the ups and downs of the property business. There are just as many downs as ups, such as: are you prepared for rejection, by vendors who won’t accept your offers, or from the bank who lends you the money? Are you ready to deal with unpaid rent, bad tenants, poor workmanship and sloppy managing agents? Can you cope if the deal-of-a-lifetime somehow slips through your fingers? What are you like with sleepless nights!?
The second stage is to ask yourself: why do you want to be involved in property? What are trying to achieve? Are you sure property is the best way forward, or are you just jumping on the bandwagon? In the UK we tend not to question that property is the ‘best’ investment, but it’s not always the best investment for us .
When you know what you want and why you want it, you need to get educated, and I hope that this book is a good start. Read as much as you can about property, get to
know your area, find other people who invest in property and ask them how they did it, what they feel they got right, what they think they did wrong. All knowledge is useful and you can never get enough. In property, learning is an on-going process.
Then you can decide your strategy. Most investors are after one or more of these three:
- cash as lumps sums
- cash flow as income
- equity from capital growth
Needs and wants change over time and investors may progress from one to another. No strategy needs to be set in stone. If your needs or wants change, then change your strategy.
Strategy will influence the type of property you buy, and why and where you buy. If you need cash and you need it now, you probably won’t have time to build an income stream. Instead, your strategy would be better as ‘buy low, sell high’ and pocket the profit. One way to do this might be to buy at ‘below market’ by doggedly looking for the best deals, or by concentrating on properties which need modernisation and repair. These can be done up and sold on at a premium to the combined cost of the property and the works (you will have done your homework before buying).
As long as the figures stack up, and the properties are in an area where they can be sold on easily, probably middle-value areas, this will be a realistic strategy. If an investor needs cash flow, their strategy might be to sacrifice ‘quality’ for income and buy in lower- value areas where the yield, i.e. the rent expressed as a percentage of the purchase price, is higher but where the prospects of capital growth are lower. They might be looking at smaller properties, such as terraced houses and flats, possibly even HMOs (Houses in Multiple Occupation). And if they want to build their equity, their strategy might be to buy and hold in higher-value areas where the potential for capital growth is greater. The yield will be lower, and so they will be sacrificing positive cash flow.
I recently contributed to a thread on an internet message board where a contributor asked for investors to share their strategies for building a large portfolio.
Here’s my answer, which, incidentally, was the only one posted, which suggests most investors have no clear strategy, or feel it’s too precious to share:
“For what it’s worth, my strategy is very simple. The ideal would be:
(1) identify an area with good prospects of capital growth, and where there is good tenant demand;
(2) buy a property which needs work doing, and buy preferably at below market (or the best deal possible);
(3) get into what the Americans call ‘forced appreciation’, i.e. do it up so the end value is greater than the sum of the purchase price and the repairs/renovations;
(4) re-mortgage to get all or most of my money back out;
(5) let the property;
(6) move onto the next deal.
“Very simple, not rocket science, but so far it’s working well. Steps 4 and 5 are inter-changeable - the initial purchase is financed asap, and if I can buy with finance without upsetting the vendor, I will (sometimes I have to go ‘cash’, if the vendor is insistent on a quick deal - but often by the time the solicitors have messed about with contracts and searches, it’s just as quick to finance). My lender will base the loan on the final ‘improved’ value rather than purchase price, but with a retention. This means I can budget for the minimum amount I will be able to take out when works are completed, and technically I don’t have to re-mortgage - it just requires a valuer ’s re-inspection.
“This is a slow process to start with, but as the number of properties increases and the equity increases, it starts to build a momentum so you can start dealing with two, then three, then four properties at a time etc.
“I’m just refinancing my existing portfolio to take out equity that has grown purely as a result of capital growth over the last year. By gearing up and using finance and keeping the cash released for the 15% the bank won’t lend me, I can double the size of the portfolio if I can find the right properties.“
This emphasises an important point: running parallel with your overall strategy you’ll need to think about how you will finance your purchases.
Your mind might quickly turn to the ‘listening bank’, only to find that you are actually a customer of the ‘hard of hearing’ bank. But there is more than one way to get the finance you need. You could use equity release in your own home, overdraft facilities, loans from family and friends, or Buy-to-Let finance, to name just a few. The buzz phrase of the moment is ‘Nothing Down’ – this doesn’t necessarily mean no money changes hands - although it can with creative financing - but that none of your money is used in the purchase.
And, of course, there’s good old cash. However, even if you can afford to buy a property outright without finance, I suggest you’ll be doing yourself out of large profits if you do, because you’ll lose the benefit of gearing.
Once you are up and running you’ll need to put systems in place to manage the properties, particularly for letting, rent collection and repairs and maintenance.
Vital, but often overlooked by experienced and inexperienced investors, is a system to review your progress.
Property investing is very much a case of “ready, fire, aim”. If you are not careful you can get distracted and lose focus of what you are trying to achieve. The result can be chasing deals which don’t suit the game plan, and which can seriously set you back.
So where should you start? With planning your strategy. And with education. And then, quite simply, you just need to start.