Property investor Shane Diamond shares with us some tips that he practices to keep him out of trouble.
I Am Clear About Whose Side The Seller Is On!
I buy through various sources – finders, letting agents, estate agents, private landlords and clubs. Sometimes the finder and the letting agent is the same person. Here are the questions I ask myself about the source of the property:
- Is the person offering me the property going to let it for me?
- Has the person offering me the property got a long-term relationship with me – does he/she know that I will buy again?
- How important am I to the person offering the property? If I do not buy, can this person easily sell it to someone else? Who has the power in the relationship?
If the answers to the questions are all “yes” and the final answer is that I am very important to the person proposing the property, the more I can trust the information being provided. Obviously in each relationship I intuitively feel my way as to whether I can trust the person or not. This is a less scientific, but important factor. But the answer to the above questions will reveal to you how much temptation there is for the proposer to slightly exaggerate the good points in a property and omit to mention the drawbacks. If the answer is “No”, “No” and “Not very important” then I verify and double verify. And I remind myself that the answer to the third question is not about whether the propsoser makes me “feel” important, but whether I really am. How much does my business matter in money terms to his/her business?
When Buying With Cash I Always Get It Independently Valued
Because a property is cheap does not mean it is a bargain! I have bought properties from £16,000, so I am not against cheap. I am very wary when sellers want cash and a quick deal. I don’t care how cheap a property is, I will always get it valued before I exchange. I will never be pressured into an exchange until I have viewed the report.
Call Around To Find Out About Crime And Rental Demand Often the people offering me property can tell me about the local rates and the demand for rental properties in relation to supply. Depending on the answers to the questions above, I will trust the information accordingly. Say I am offered a property for £35,000 and am told that the rental should be £300 a month, then I will call say two or three letting agents and ask them questions about that area, such as:
- How many rental properties do have on your books in that area?
- How many of them are currently let?
- When was the last property available to rent in that area? l How long did it take for you to rent it?
- What problems do you encounter in the area?
- Are there any reasons why the demand for rentals in this area should go up or down? For example, is a call centre about to close because of jobs going to India etc?
If I am nice to people, it is amazing how helpful they can be.
Be Sure About The State Of The Property And Estimate Of Works
This issue is relevant if you are not a builder, surveyor or someone who is not an expert in estimating works and is buying at a distance.
I know that getting mortgages can be a hassle these days, but one great thing about them is that the valuer always covers himself by detailing works that are needed to be carried out. Sometimes they can be maddening in their conservatism. In some cases the mortgage company may retain £3,000 until the works are carried out. In most cases they just state the works that are advised and may ask you to sign a commitment to carry them out within six months. The point is that an independent person has carried out an inspection and I do ring them on certain properties and ask them to estimate the amount of money that needs to be spent. The original proposer would also have given me an estimate and the two should tie-up, although the valuer’s estimate is usually higher. If it is more than 10% more then I have reason to be nervous about the proposer’s estimate.
Is It A Rental Area Or An Owner Occupier Area Or A Mixture Of Both?
I like to know the proportion of the area that is owner-occupier and the trend – is it moving towards more owner occupancy or the other way? The more the area is a rental area and the less the trend towards ownership, then the more the price increases are dependent on investors chasing yields. My rule for rental properties like this (often DSS tenants) is that 10% gross yield is the very lowest I will buy at. Why? Because at 10% the estimated profit is over £1,000 per year and the risk that interest rates or voids go against me is covered in the yield. If the yield is below 10% then I ask myself why bother to take a risk in an area whose capital growth is dependent on investors only. What happens when the investors run dry and decide not to invest because other areas are better or the stock market is back? If the area is attracting owner- occupiers, then I will look at lower yields because the outlook for rental and capital appreciation is better.
Have The Letting Agent Lined-Up In Advance; Be Sure Of Them And Make Sure They Understand DSS Tenants
Often at the lower end of the market you will get DSS tenants. There is often a stigma attached to this. There is, however, nothing wrong with DSS tenants. It’s like anything else – there are good DSS tenants and bad ones and there are letting agents who know how to handle them and ones that don’t. I double-check that my firm of agents has experience in this area and deals with DSS tenants as part of their bread and butter business. I don’t like buying in DSS tenant areas unless I feel that I have a reliable agent who is well versed in the government paperwork and is streetwise in this market.