Alternative Investments : The Most Original New Investment Concepts
By Peter Jones
I’ve made reference before in this publication about how there are some ‘property experts’ who still write off the North as a wasteland for investors. Comments like “Any property with a yield over 10% is unsellable!” or, “With a double-figure yield it ’ll be in a street of boarded-up properties!” are put forward as fact. Those who know no better continue to search the London and south-east estate agents with a feeling of quiet desperation. In my opinion, they miss out on some excellent investment opportunities.
For years I’ve been building a portfolio in the North-East and have regularly bought properties with yields of 10% or more. During that time, with two exceptions, I purchased good quality property in reasonable areas without any signs of boarding up. However, I’m embarrassed to confess that the two exceptions were the first properties I bought. The first is a pair of flats in a run-down area, which is now a designated regeneration zone. Although they are set to remain standing, many neighbouring properties will be demolished. As part of the preparations, the local authority have been buying property and boarding them up until they are ready to progress. When the council have done their work, the area will be greatly improved, along with the value of these flats. Until then the area remains a bit of an eyesore.
The second of these properties is a terraced house in a reasonable street. Unfortunately the adjoining house is boarded-up and in private ownership. I can’t for the life of me understand why the owner has allowed it to decay. While his house has stood empty, I have had nearly 100% occupancy, at a rent which has produced a yield well in excess of 10%. Even with this eyesore next door, I sold three years later, at getting on for three times the price I paid.
At the time I thought these were good buys, although, looking back, they were really made in ignorance. My judgement was also clouded by a certain amount of prejudice. You see, until then, I’d also written off much of the North as a wasteland of boarded-up terraced houses, so I wasn’t altogether surprised to be buying next door to one. I didn’t realise that decent properties, in areas producing decent returns, could be bought a stone’s throw away without a boarded-up window in sight.
However, my story does highlight the concern I now have about the many investors who are piling up their money in the North. A little bit of knowledge is a truly dangerous thing. A consequence of not taking the North seriously as an investment location meant that I knew very little about it, particularly about how the market worked and which were the best areas to buy in. So my first two purchases were not the best investment I could have made.
With unattractively low yields, particularly in London and the South-east, many Southerners have been looking northwards. Unfortunately, many of them seem to be as clueless as I was when I first started looking around there, becoming ‘easy meat ’ for the local scam merchants and wide boys.
So, based upon my own experiences, here is my list of top 10 tips for anyone thinking of buying ‘up north’.
1. Beware Of Pickpockets And Thieves
It ’s a sad fact that wherever a crowd gathers, you’ll also find pickpockets and thieves. The property market is no exception. Interest in northern property has meant that companies have sprung up, offering sourcing, refurbishing and management services. Many of them, the majority in fact, conduct their business in an ethical and honest manner and strive to deliver all that they have promised. Unfortunately, a small minority of these companies are less than honest and are determined to take as much money off the unwary as they can.
I have to admit that there are advantages to buying through ‘portfolio builders’ and that I have used this route myself. However, if you decide to buy through a firm like this, your first job is to find out who you are dealing with.
The best companies will be the ones you are referred to by someone whose judgement you can trust and who has already had satisfactory dealings with them. I appreciate this isn’t always possible, but other than personal recommendation, there isn’t an easy answer to this.
I will always suggest that you ask the company for a reference; the names and phone numbers of five other customers, who can give you their opinion on the way business is conducted. I would also pick up the phone and talk to the managers of local estate agents. Local knowledge is a very powerful thing and, unless they are part of a wider scam, they should be able to tell you who the rogue traders are.
Similarly, I would advise abandoning your family solicitor in favour of appointing a local one, who should also know who the bad boys are. Even if he or she doesn’t, they will hopefully know who to ask.
2. Never Agree To Buying A Property Without Viewing It First
Before you buy any property, there is a minimal amount of research you must do. If you can do nothing else, you must inspect the property. It doesn’t matter what anybody else tells you, never ever buy a property without seeing it first, even if it ’s just from the outside and via peeking through windows.
Even if you can’t make the time to view it internally, you can at least have a look externally. You will then get a feel for the local area, the street and the property.
I recently heard the story of a young man who bought his first investment property ‘up north’ unseen, through a portfolio packaging company who assured him it was tenanted and producing an income. He didn’t go to have a look at the property until he had completed the purchase. As a proud property investor, he then drove past to see what it was like. Unfortunately for him, the property, along with several others in the street, was boarded-up. Knocking on a neighbour’s door to ask where his tenant had gone, he was told that the property had not been occupied for over two years. Regrettably, I hear stories like that all the time. If he’d only taken the trouble to view the property from the outside before purchase, he would have saved himself a lot of heartache and money.
3. Always Do Your Due Diligence
Inspecting the property before you purchase is the minimum research I would advise. However, I would always strongly recommend that you also do your due diligence. Depending on how and from whom you are buying your property, you should check the price you are paying is fair and not over the odds. If you are being sold a property on the basis of the projected value, following the completion of refurbishment, you should also check the value of refurbished properties in the area.
Finding out the asking prices of other properties nearby is the most basic check. You might then need to make allowance for differences in specification, if, for example, the comparable properties have central heating and yours does not. You should get a good ballpark feel about whether the figures you’ve been told make sense.
If you are buying a property to let, you should also talk to local letting agents, to establish whether there is a letting market. That way you’ll be reassured that there is sufficient demand from potential tenants; that your property won’t just stand vacant once you’ve bought it. Additionally, you should check their opinion of the likely rent you will receive and the possibility of any void periods in the year.
Just to illustrate the point, a couple of years ago I went with a fellow chartered surveyor friend to meet a portfolio packaging company, who were offering what seemed to be good deals on high-yielding northern property. We were shown a number of properties they’d just purchased on behalf of clients and which were waiting to be refurbished. The quality and location of these were impressive: no boarded-up streets, just a quiet, pleasant, tree-lined residential area.
We were then taken to a property that had apparently just been finished and were informed that the tenant was due to move in next week. The quality of the refurbishment was excellent and we came away feeling very impressed, but slightly concerned that it all seemed too good to be true.
My friend was born and raised in this particular town and decided to stay overnight with friends. The next day he retraced the route we were taken on, to review the various properties, but also took time to drive down the side streets. This is where he found the boarded-up houses. It seems that our hosts had carefully devised a route which showed the area to its best advantage, conveniently bypassing the prevalent evidence of social and economic decay. I guess you could say they were being economical with the truth.
My friend also popped into the local estate agents and discovered that the properties we’d been offered for £20,000 in a refurbished state could be bought for between £5,000 and £7,000 un-refurbished. The estate agent was also able to recommend a local builder who could do them up for £5,000.
Lastly, and most sinister of all, we were told that the refurbished property we had been shown was effectively a show house; that it had never been tenanted and nor would it be. It was there purely to show the punters. In reality, many of the purchased properties remained un-refurbished and empty for months. Many investors had lost considerable sums of money, especially the over-eager Southerners who had bought unseen.
So, before you sign any contract, make sure that you understand fully what you are buying. Don’t take anyone’s word for it and do your own research first.
4. Don’t Buy Properties Where The Value Has Been Calculated Using Yields
In my opinion, 99 times out of every 100, the appropriate way to value a residential investment property is to establish its vacant possession value. However, some vendors will try and persuade you to pay a price that was calculated using the investment method. This is a method used to value cash flows. It requires the annual rent achievable from the property to be multiplied by a figure that is based upon the appropriate investment yield. This is a method more appropriately used for commercial property. There are some specific, but rare, instances when it may be suitable for residential investment property, but don’t be blinded by science! The best way to value any residential investment property is to ask the local estate agent how much they would put the vacant property on the market for. Regardless of whether the property is let, don’t forget that the vacant possession value is the only one your lender will be interested in, if you are taking out finance.
5. Be Clear About Your Objectives When Buying Property
Historically, the attraction of northern properties is that the yields can be higher, in some cases considerably higher than the equivalent property in the South.
However, as a general rule, the higher the yield, the less likely that there will be capital growth. If achieving capital growth is an important part of your objective, then buying northern properties, or at least high-yielding northern properties, may not be appropriate for you.
6. Be Prepared To Have A Robust Attitude To Your Investment Property
Similarly, higher yields imply a lower quality tenant. If you are buying cheaper properties, then implicitly you will be dealing with the lower end of the rental market. You may well have tenants on benefits or from the lower socio-economic groups in society. In my experience I have seen little evidence that tenants on benefit are any worse than working or professional tenants. However, when you let your property to a tenant claiming benefit, you are held hostage to red tape; it will probably take three or four months before you receive your first rent payment from the local housing office. In this situation, you need to know that you can cover interim costs.
If I do have a criticism of tenants in lower value properties it is this: you can expect to pay out more on repairs between tenancies when you have a void. This is because the lower the value of the property, the less care a tenant will generally take of it.
7. If You Aren’t Paying Cash For Your Property, But You Know That You Will Want To Refinance Later, Make Sure It Is Mortgageable Before You Complete
Not all lenders are equally keen to finance properties at the cheaper end of the market. Although you might be purchasing an otherwise sound property, in an otherwise sound area, it doesn’t necessarily follow that you will be able to obtain a mortgage. My lender has recently announced that they are introducing a minimum value criteria of £40,000 before they will consider lending. This is a considerable jump on the previous minimum value of £25,000. By definition, this will now exclude a large number of properties which would otherwise have been mortgageable before the change in policy.
Before you complete, check the details of lending criteria with your lender. If you still think your property complies, I would strongly recommend that you commission your own independent valuation, using a valuer from your lender’s panel. This will save you a lot of time and grief later on, if, for any reason, they don’t recommend that your lender proceeds, or if they down-value the property.
8. Never Take Anything At Face Value
If you’re unfamiliar with the area in which are buying, it ’s easy to be taken in by the sight of neat little Edwardian or Victorian terraced houses in tree-lined streets, especially on a sunny day. However, an area and its reputation are made by its residents, not by the quality of housing. Interestingly, one doesn’t always reflect the other.
The acid test is not what an area looks like, but what the local crime statistics are. I recommend you ring the crime prevention officer at the local police station. They will usually be more than happy to tell you whether an area has a good or bad reputation, or what the specific problems in that area are.
It ’s not unknown for investors to drive through an area during the daytime and to base a decision entirely on that. However, come evening, this area could be crawling with drug dealers and general lowlife.
9. Consider Your Exit Strategy
If your intention is to buy the property, hold it for the medium to long-term and benefit from the income stream, don’t forget to have plan B in place first, just in case you need to sell up quickly and get your money out.
Personally, I will never buy a property if I’m not convinced that there is a ready market to buy it, should I ever need to get out. It doesn’t matter to me whether the market is made up of local owner-occupiers, or whether it is fellow investors. However, I would be deeply troubled if I thought that it would prove problematic, or even impossible, to sell on.
I am regrettably aware of many investors who are buying properties that could prove difficult to sell, if they ever need to get out. I have heard of new investors paying well over the odds for properties that have no clear market. Having found themselves in financial difficulty, they’ve then had to sell the properties and they’ve been lucky to get half of what they originally paid.
10. Don’t Forget That This Can Be One Of The Best Buys You Ever Make
So far, my list of top 10 tips have been warnings about what can go wrong for the unwary. However, if you follow my advice and treat the purchase with common sense; if you do your due diligence and take the time to look properly, buying a property in the North can be one of the best investment decisions you ever make.
Although it has become harder to find good quality properties producing double-digit yields, it ’s not impossible.
If you’re serious about looking at the North and have time to research contacts and contractors, I would recommend you consider buying properties that need some work. These can still be bought at bargain prices, but the end value, following refurbishment, should guarantee an increase in your equity and will often ensure double figure yields on the money you put in. There are now also signs that rental values in the North are beginning to increase. When I first started buying, the standard rent was £70 per week for a two or three-bed unit. Largely, the rental market was driven by benefits and this was the figure, more or less, that was being awarded by the local rent officers. Although increases in rent tend to lag behind hikes in capital value by about two to three years, we are just beginning to see signs that rents are going up. All other things being equal, once these levels become established, we will see yields in the North increasing from their current reduced level.
If you take the time to do your research and buy wisely, then I have no reason to expect you will ever regret buying a property in the North, but doing your research is absolutely the key to success.