Property Investment: Advanced Principles

On-line content taken from the Provestor eBook presented in periodic serialized weekly format. Terms and conditions - legal disclaimer.

Posted 11th December 2007

Part Four

Theory

I have never been to a casino, never been to a betting office, never bought a lottery ticket. I don’t like gambling, it’s too risky. I don’t intend to gamble with property, I don’t intend to take risks. You need to assess what level of risk is right for you, but my recommendation would be to take as few risks as possible.

The main technique to hedge yourself against risk is to spread your portfolio as much as possible. In practical terms, that won’t happen straight away. Initially, most people will want to buy in their own ‘back yard’. Their argument is that they know their own patch better than anywhere else, which is true. However, most of this argument is to do with confidence and your own comfort zone. We would urge you to move outside that & have the confence to look further afield as soon as practicable. No-one would claim that the best deals are always going to be within a 10 mile radius of where they live.

What “spread” means in practical terms is this:–
Some apartments, and some houses
Some old, some new
Some 2 beds, some 4 beds, some North, some South
Some UK, some abroad

Don’t buy the same as everyone else. 2 bed apartments are the easiest to acquire, but try to think different: 1 bed studios & 6 bed houses are both interesting options. Equally, well-chosen smaller towns are as valid as large city centres.

Don’t use your own house as a model. Properties now are moving towards an en suite for each bedroom, and at least one room to run a business from home.

Another approach to “spread” is from the standpoint of financial input. I would say you want some low-money down deals, but others where you put in a significant deposit. The main difference in these two scenarios is in your return.

Typically, when you buy abroad, you get a 70% mortgage: i.e., you need to put in 30%. Even on a £100,000 property, that’s £30,000, a lot of money.
Why would you want to do that?
ROI is very good. Remember, the rental market is very often holiday-makers, and returns are higher, because the unit is rented by the week, rather than a 6-month basis.
Also ¬– no effort!
You don’t have to find tenants; a management company does that for you.
Often, there’s a guaranteed rental for a number of years.
Often, the price includes all furnishings and an allocation for replacements of breakages – again, you have to do nothing.
Finally, you pay nothing further! Once it’s yours, that’s it, you’re clear.
This is great for cash-flow.
A spin-off benefit is that as owner you get a predetermined use of the place yourself.
If the UK Govt. rules on BTL change, they won’t in the US or NZ, or wherever.

You could achieve a similar thing in the UK by buying, say, a penthouse in Docklands. Inevitably, you’d have to put in a largish cash deposit, but the rent would be significantly larger than the mortgage payments.

On the other hand, it’s completely possible to buy in the Uk for less than £5,000 – all in (Stamp, legals, Res. Fee, mortgage val.). But – I would argue – you shouldn’t expect to make a cash return. Instead, you should look to capital appreciation alone on these types of deal. You will probably need to supplement your rental income on these types of deals (say, by £50–100 pcm), but I would be happy to do this, partly because of the small “in” cost.

2 Alternative strategies

Put in a larger deposit than you need to, e.g., end up with an 80% mortgage instead of an 85%. That way, the deal is always going to stack up; you’ve got a buffer & surplus income.
Buy something guaranteed to generate negative pre-tax income. If your other units are generating a surplus, you might need to offset the tax liability.

Save your money! Always have a “slush fund”, in case of unforeseen expenses. Always have funds available in November, the best time of year to buy.

Please Note: Installments vary in length.

Check back in a week for the next installment - 'The Property Market'