I went to the pub last night with a fellow property investor who is also a good mate of mine.
We often get together to chew the fat. This is part of the mastermind theory of having a supportive team around you. This shouldn’t just be a team of technicians: solicitors, accountants, mortgage brokers, but also like-minded people who encourage each other and who share information and ideas, possibly in a role of reciprocal mentors.
Anyway, as we were chatting, Bob said something that astounded me. “You know,” he said, “when I first started I didn’t have a clue what I was doing. I just bought my first property and hoped for the best. I didn’t even know when I bought it what rent I’d get.”
Now to put this in context, Bob and I are completely different characters, opposites in fact, which is probably why we get on so well. I’ve seen the way he operates his investment business. It’s meticulous in the extreme, with every detail considered and covered.
I sat there with my mouth hanging open as he continued.
“When I finished doing it up I thought that I’d get £300 a month in rent. I figured that would still be better than what I’d get on deposit in the bank and I’d have been happy with that. So I called the letting agent and he came and had a look and said he thought he’d get me £425. I couldn’t believe it! I was delighted, but it brought home to me how little I knew. I had been wrong about the rent because I hadn’t really checked it out. I was wrong in the right direction, if you like, but it could easily have gone the other way.” He took a swig of his beer and then carried on. “The next thing I got wrong was the whole idea of financing. I bought my first three properties for cash and just let them sit there and thought no more about it. I’d run out of money and so I stopped thinking about property investment. I assumed I’d got to the end of the line.
“Anyway, I was talking to my accountant about my business and the properties came up in conversation. He asked me what mortgage rate I was paying on them. ‘I don’t have a mortgage on them,’ I said. ‘Why would I want to go into debt?’ My accountant couldn’t believe I had so much of my own money tied up in these properties and explained to me in detail all about gearing up. He also told me how I could claim tax relief on my mortgage interest. He thought that I should have about ten properties as opposed to three, but at the time I couldn’t really see it. ‘No, no,’ I said, ‘three is fine. Why would I want any more?’”
After a moment’s pause to let all this sink here, I realised that if someone as astute in business as Bob had made such fundamental mistakes when he was starting out, there were probably plenty of others who were also struggling. With Bob’s story in mind, here’s my top 10 checklist for property beginners.
1. Know Your Objective – What are you trying to achieve and why? When I started in property I needed an income. Actually I still do. Bob on the other hand needed somewhere safe to put his savings.
2. Check That Property Is Right For You– In my opinion property is a medium-to-long-term commitment. More experienced and professional property people are good at doing short-term, quick deals and trades and making instant cash lump sums, but you have to know what you’re doing to get this right. For the rest of us it’s probably better to buy and hold, either for the rent - for income, that is - or for capital appreciation. This means that if you need ready access to cash, property might not be right for you. You might be better suited to something more liquid, like stocks and shares instead.
However, whichever way you look at it, property historically has proved a fantastic investment for many, many people. I don’t see that changing any time soon. Don’t forget that what property lacks in liquidity, it always makes up for in security. There is a lot of truth in the saying ‘as safe as bricks and mortar ’.
3. Decide On Your Strategy And Make A Plan Before You Start Buying – You’d be surprised by how many ‘wannabe’ investors get this wrong and do it the other way around, just like my friend Bob.
When you know what you want, you can decide on how to get it. At the basic level, you’ll need to establish what type of property best suits your objective and which areas you should be buying in. For most of us, this means residential property, possibly, although not always, in our locality. In my opinion, commercial property is too specialist and risky for most private investors.
If your goal is capital appreciation, you might decide to target high-value properties in better areas. If your goal is income, you might want to look at lower-value properties, maybe in less well-off locations.
4. Start Thinking About Whether You Are Going To Use Finance To Fund Your Purchases – If you’re going to finance your properties, where will you find the funds? Many banks and building societies will offer you buy-to-let finance, but you might want to consider a private loan from a friend or relative, or maybe a business angel or sleeping partner.
Property is a debt driven business. Firstly, to enjoy the benefits of ‘gearing up’, you will have to take on debt. Secondly, even cheap property is a very expensive commodity. Most of us can only afford (more of) it by going into debt. Unless you have large cash reserves, using debt is the only way that you’ll be able to grow your property business.
Robert Kiyosaki in his ‘Rich Dad Poor Dad’ series of books - and many other property ‘gurus’ besides - rightly draws a distinction between good debt and bad debt. They all define bad debt as borrowing money to buy a depreciating or wasting asset, such as a new car or a TV. On the other hand, good debt is taken on for acquiring an asset. An asset, in turn, can be defined as something that will enhance either your cash-flow or equity, and preferably your cash-flow.
All this goes hand in hand with:
5. Develop The Right Mindset – There is no totally risk- free way of being a successful property entrepreneur. The reward for taking risk is gain. If debt makes you squeamish, you’ll just have to take a deep breath before you start buying property. Otherwise feeling nervous is probably a good thing. After all, you don’t want to take things lightly. Remember that there will be risks with any deal. If you’re really serious about property investing, get focused and start to concentrate on your goals.
6. Learn How To Reduce Your Risks Before You Buy – Proper analysis before you buy will help you to eliminate a lot of unnecessary risk and make you sleep easier at night. My friend Bob took a big risk when he effectively bought his first property ‘blind’. He had the right mindset, because he was prepared to accept risk, but you need to assess the risk so that it is not taken on irresponsibly. In this context, Bob should have analysed the deal and assessed the risk first. He could have done this through prior research. For example, these are the sorts of questions he should have asked himself:
- What are similar properties selling for in this locality?
- What rent do similar properties achieve?
- Is there strong tenant demand? Poor demand could mean the property sits empty more than it is occupied?
- Is there strong owner/occupier or investor demand if I ever need to sell to get my money back out?
- Will the rent cover my mortgage payments, management fees, repairs and other likely costs?
This may all appear a common sense process, but it is essential that you have answers to these questions before you buy. You’d be surprised how many people purchase property with no thought of whether it fits their strategy or not.
7. Start Small – Start with one property and practise for a while. When you feel comfortable with what you’re doing and the idea of being a property entrepreneur, buy another. There is no rush.
If house prices continue their historic trend (with ups and downs, including recessions) and if you use the power of gearing, chances are that, even buying property at the rate of one a year, you could soon become a very successful property entrepreneur.
8. Start To Build Your Team – Property investing is not a ‘solo career ’. You will need help from specialists who have the knowledge and expertise that you don’t have the time to develop personally. Your team should include a good, switched-on solicitor who realises he is there to help you, as opposed to the other way round; an accountant, particularly one who is good at property and business taxation; a mortgage broker to help you get the best finance deals; a team of friendly estate agents to help you source the best deals; finally, a team of like-minded entrepreneurs to encourage you if things get tough from time to time.
9. Improve And Continually Update Your Education – If you are going to be a landlord, you’ll need a basic grasp of tenancy law, plus health and safety regulations. There are plenty of good books about residential property law and property management.
Read books about property investing and how others have become successful property entrepreneurs. If it fits your goals and style, try and emulate what they did. Immerse yourself in the subject. It is said that if you read your subject for just one hour every day, you’ll be an expert within two years; within three you’ll be a world expert!
10. Take Action – As my hero, Robert G Allen, the American self-made property millionaire and ‘guru’, says: “There’s only one good time to buy real estate … and that’s now.” Prepare to take calculated risks, overcome your fear and get out of your comfort zone. Remember, taking action drives out fear, so go for it!