Property Investment: Advanced Principles

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

Posted 18th December 2007

Part Five

The Property Market

Understanding your market in business is paramount to its success. It is no different in the property market. With a sound understanding of what the experts predict for the market you can gain expert quotations to enhance your negotiating powers. Knowledge of what properties are available, at what price and what income they will generate is also paramount to financial forecasts. The majority of the information you will need is available via research and this should be a daily activity to keep actual day hours spent on this discipline to a minimum.

The amount of information you can glean from the Internet will exceed expectations but in order to get a slant on a local markets, traditional methods of communication, which may call for liaison with local agents and scanning the local press.

About The HALIFAX House Price Index

The Halifax House Price Index is the UK's longest running monthly house price series with data covering the whole country going back to January 1983. The Index is based on the largest monthly sample of mortgage data, typically covering around 15,000 house purchases per month. From this data, a “standardised” house price is calculated and property price movements on a like-for-like basis (including seasonal adjustments) are analysed over time.

As you can see from the above information what you are receiving in this manual is the most up to date information of its' kind anywhere.

Whereas most people view their homes as nothing more than a place to live and possibly hand down as an heirloom, you should by now be realising why so many of the world's richest people have property portfolios.

For more than 30 years now property has been increasing by an average of 7%-10% per year - and it is the re-structuring of your portfolio finances periodically which will blow your mind ... quite simply put ... as prices move up every now and again ... you refinance and release the equity ... CASH IN THE BANK!

Work the figures out yourself ... if you had a portfolio worth £500,000 today and it went up by 10% over the next twelve months then the value then would be £550,000 - a £50,000 increase in your net worth.

Many people may say that you cannot take past performance as a guarantee of what may happen in the future, and this is sentiment which we share. However it is past performance upon which professional investors use to risk your hard earned money every time you put it in the bank. The difference however is when you compare how typical investments compare HISTORICALLY with property.

The biggest decline in recent times in the property market has been a little under 20% – which happened in the early Nineties – bear in mind however that it took in total THREE FULL YEARS to lose that amount.

When you compare that with the fact that the world stock markets have lost more than 60% of their TOTAL worth in less time than that then you must come to your own conclusions.

Short extract from “The Practical Guide to Buy to Let.”

Historical Factors:

Stimulating the enthusiasm for UK Property Investment in Buy to let was originally achieved through the Government's introduction of the Housing Act in the early 1980's, this allowed the “right to buy” and introduced the mechanism for landlords to regain possession. As a result, mortgage lenders responded with flexible, competitive and tailored products for private investors needs. As house prices rose in the 1990's, a high proportion of first time buyers became squeezed out and forced into rental accommodation- this “catch 22” created more demand for UK property, pushing prices up further still. Buy to let mortgages are now worth around £10 billion per annum. At the same time, demand for rented UK property rose due to demographic population changes - the old “job for life” analogy disappeared as employment became less secure, (Union power decreased througl7out the 8057) and IT and services growth created well paid, temporary, flexible, geographically mobile, employment contracts.

Affordability Today:

Today, the rental sector is directly linked to house price affordability;- when house prices rise, rents go down (and vice versa). Worryingly, UK property prices have increased 5.8 times the average income (December 2002), (close to the bubble busting peak of the late 1980's) compared with the long-term average of 4.2. During the 1980's, 80% of average net disposable income was made up of mortgage payments - no wonder the housing bubble burst then. In 2003, the proportion is only 25% (but rising). So there is strong consumer confidence despite the growing gap between incomes and property prices - people are knowingly stretching themselves, egged on by low interest, re-mortgage deals and low unemployment. Price increases now mean a lot of first time buyers today cannot afford (or refuse) to get on the housing ladder and so rent instead. Similarly, many prospective buy to let investors feel very nervous about entering the market - fearing short-term market collapse in confidence/ UK property prices resulting in failing rental yields or even negative equity. Media speculation fuels the concerns.

Long Term Outlook:

Despite these short-term worries the Long-Term Future looks more positive. It is probable that long-term UK property price inflation will be sustained (albeit at a much lower growth rate and perhaps with a short term correction) as well as massive growth in rental demand. Private rental properties now account for only 11% of all UK housing (approximately 2.3 million homes) and this is estimated to grow to around 20% over the next 15 to 20 years. This massive growth is due to a combination of reasons.

Huge population growth of five million people by 2025 - ageing population and asylum seekers.
Chronic supply shortages of new properties (relative to demand) due to Government Policies.
Millions more single or divorced people predicted to be living alone
Low Eurozone interest rated convergence as the UK battles against Global recession
Increased number of student's nationwide demanding short term, off campus accommodation.
A mobile workforce that demands short term housing to meet increasingly flexible needs.

To sum up, the UK economy is currently fragile and sensitive to any drop in consumer confidence. One concern is that if property prices keep rising at such high growth rates, homes will become too expensive beyond the reach of ordinary people. The other obvious concern is that the market is over valued and a rise in unemployment of fall I consumer confidence could lead to a price collapse. However the long-term demand for rental property remains very good. Do not be put off by short-term speculation; when considering your entry into the market as a landlord, letting should be thought of as a medium to long-term investment vehicle while trying to understand and quantify future risks and rewards of Buy to Let.

The rental market

The market in rental properties is especially buoyant around major conurbations such as London, Manchester, Birmingham, Edinburgh and Glasgow. In these cities, many international business visitors are consistently in need of high quality homes for short-to-medium term lets. Typically, these executives represent the computer, banking and financial services sectors, all of which rely on a transient population of senior managers to operate their businesses in and around Europe and the world.

The standard of accommodation available for rent has improved in recent years, not just in the corporate market, but also in the provision of multi-occupational accommodation for students.

Research

Housing market will not crash, says Brown
Monday April 26, 2004 The Guardian

Gordon Brown dismissed fears that Britain's housing market is heading for a repeat of the crash of the early 1990s when he gave an upbeat assessment of the economy in Washington at the weekend.

Speaking at the spring meetings of the International Monetary Fund and World Bank, the chancellor shrugged off gloomy forecasts that higher interest rates would turn the boom to bust.

Mr Brown was responding to analysts such as Roger Bootle and Tony Dye who have argued that homebuyers are becoming dangerously over-stretched by rising prices, and that even modest increases in interest rates would inflict severe financial pain.

Despite warnings from the IMF that “an abrupt correction” in the housing market poses the main risk to the UK economy, Mr Brown rejected comparisons with the boom-bust period of the late 1980s and early 1990s.

“We don't accept the account that is put to us,” he said. The chancellor said that although house prices were high, low interest rates meant that the burden on mortgage payers was much lower than it had been a decade ago.

The IMF acknowledged in its half-yearly health check of the global economy that low interest rates were moderating the effects of higher debt levels, but noted that the popularity of buy-to-let schemes pointed to a “speculative component to house prices”.

Although the IMF said rising house prices in the UK had encouraged homebuyers to finance spending through equity withdrawal, Mr Brown believes the structural changes in the economy mean that households can cope with higher levels of debt.

Between the summer of 1988 and the autumn of 1989, base rates rose from 7.5% to 15% in response to inflation rising to almost 11%, prompting record levels of negative equity and home repossessions as house prices fell. Following two increases in borrowing costs from the Bank of England since November, interest rates still stand at 4%, while inflation is just over 1%.

The Treasury and the Bank of England believe that the housing market is on course for a “soft landing”, with the rate of property inflation gradually declining. Surveys suggest that prices are still rising at an annual rate of between 15% and 20%, which the Bank's governor, Mervyn King, has described as unsustainable.

Mr Brown admitted that the economy had been heavily dependent on consumer and public spending in recent years, with the weakness of the global economy taking its toll of manufacturing and exports. “We are now seeing evidence of more balanced growth. Consumer spending will grow but not at such a fast pace.”

He added: “We remain on track for stronger growth with strengthening business investment and exports and continued low inflation.”

The property market is being tipped to lead the UK, and other economies, out of recession looming over consumers this winter. This is according to the UK-based Old Mutual Asset Management (OMAM) which states in its investment update this month.
That investors in products and services connected to the property market will also benefit.

Another reduction in UK base rates could reasonably flow through over the reducing the already historically low 4,5 per cent level at which they currently stand. Since oil and other raw material prices have fallen sharply, the Bank of England’s Monetary Policy Committee (MPC) can expect inflation to abate and bring interest rates a bit lower, says Nigel Morgan, OMAM economic strategist.

Interestingly, the health of the UK property market stems from its mid-1990s crash. At that time, house prices stood at little over a half their average relationship with wage earnings and mortgage rates. Morgan says houses became more affordable than at least for a generation, a trend helped by the number of wives working financial help from parents, and people receiving non-wage income from savings,

“'With earnings per employee rising by around 5 per cent a year, while the number of employees grows and interest rates fall, affordability has been eroded only slowly”, says Morgan.

“'House prices still stand at a level which is more affordable than at any time in the 20 years before the 1990 crash in the market,” he adds.

Should You Buy To Let?

A sample of frequently asked questions:

Is it the right time to buy more property?

If you are taking a long-term outlook it is always a good time to buy. Property in ten years time will almost certainly be worth more than it is now. Also, if you feel property is about to fall in value, now is the time to re-mortgage and get ready to “gear up”, taking advantage of cheaper prices when purchasing

I've heard about “gearing.” What is it?

If you have equity in a property, you can release it by re-mortgaging and use it as deposits for further properties. For example, a property purchased for £100k with and £85k mortgage increases in value to £160k. It can be re-mortgaged to 85% of its new value releasing £Slk in cash. This can be used to purchase two further properties by using the cash as deposits and arranging new 85% mortgages tripling the size of your portfolio or increasing it should your portfolio stand at more than one prior to taking advantage of this concept.

Can I just re-mortgage for a better rate?

Absolutely! If you have not had your portfolio arranged by a specialist Buy to Let broker, it is probable that there are rates that you were unaware of and therefore quite likely that a better deal can be arranged for you.

What happens if I have no accounts, or they show little profit?

No Problem! Many of the dedicated Buy to Let lenders appreciate that you wish to pay as little tax as possible, and are therefore concerned only that the rent achievable on the property covers the mortgage payment by a certain amount. If yes, then they are happy to accept your own declaration of income, and not ask for certified accounts.

What happens if I have adverse credit?

Again, no problem! There are lenders who appreciate that anyone can go through hard times, and will take a sympathetic view. The rates are also nowhere near as penal as they used to be, with some lenders not loading the rates at all.

What if I have DSS, Students or Asylum Seekers in my properties?

Again, although some lenders perceive these tenants as more of a risk, others appreciate that this market can give excellent returns and are happy to lend.

Are any properties excluded?

No! Although some lenders insist on an unchanged house as their security, many will happily accept houses converted into flats, HMO'S, bedsits, flats above commercial premises, blocks of flats etc. Obviously, any property must be in a suitable condition for mortgage purposes.

What about Commercial Property Investment?

A large number of landlords who have started in the residential sector look to broaden their portfolio as they expand. One way to this is with commercial property. It can be very lucrative, with potentially less risk, as a Corporate Tenant may sign for a 15 to 25 years and will both insure and repair the property themselves, dependant on the terms of the lease.

Current Financial Climate

Buy to let - still a good bet?

There's no doubt that over the last five years, some of the best investment returns have been within the buy-to-let market. Buy-to-let has the potential, unlike many other investment vehicles, to deliver both good income and good growth. With the capital appreciation from recent house price growth over the last few years, together with relatively high rental yields, this is a potential that has largely been fulfilled.

Location is key

Judging by recent buy-to-let figures from the Council of Mortgage Lenders, the balance between supply and demand still remains healthy in many areas. However recent figures from ARLA (the Association of Residential Letting Agents) showed that some areas of London, Manchester and Newcastle, are currently oversupplied.

Most commentators recognise that there are still areas ripe for buy-to-let. Do your research very carefully. Taking heed of the advice given by trade associations such as ARLA and the Royal Institute of Chartered Surveyors (both of whom collate information on the buy-to-let market) is a good starting point. When you are choosing an area, another research tool would be to ask several estate and lettings agents what shape the local rental market is in.

Think long term

To get the most out of buy-to-let, investors must take a long-term view. On this basis, the short to mid term fluctuations of the market, both in terms of rental demand and house prices, can be weathered. While some home owners are privately harbouring concerns that the current house price boom will be followed by an 80s style bust, this remains a remote possibility given our current low inflation, low interest rate, stable economy. But in some respects, whether house prices rise or fall, there is a positive spin to be made on buy to let investment.

If property markets continue to increase, rental demand will be supported by the number of would be first time buyers either reluctant or unable to step onto the property ladder. If house prices fall (however unlikely) many would-be buyers are likely to prefer to ride out the storm and rent rather than enter a market that they fear may not yet have bottomed out, as was the case in the early 1990s.

The effect of gearing will be important to buy-to-let investors. Most people wouldn't think of borrowing specifically to invest in the stock market, but most buy-to-let investors wouldn't invest without gearing up substantially, typically with a mortgage for 75-85% of the property value. This level of gearing has produced excellent returns over the last few years, but of course gearing can work both ways.

Use flexibility to iron out the ups and downs

The most pressing concern for many buy-to-let investors will be the prospect of failing rental returns. However, investors can comfort themselves with the knowledge that a buy-to-let mortgage has been designed to withstand the short to mid term fluctuations of the rental market.

Most mortgage lenders require the rent to be at least 125 - 130% of the mortgage payments to allow for void periods (i.e. times between tenants) and other costs such as service charges and letting agent fees. To weather any time in between tenants when there is no rental income coming in, investors with a flexible mortgage should be taking advantage of current low interest rates and overpaying on their monthly mortgage payments where possible. This will earn them the right to take a payment holiday, perhaps to be taken during a month where no rent is coming in.

Flexible features can be a great way of ironing out the feast and famine and many new mortgages are now issued with flexible terms such as the ability to overpay and payment holidays as standard. Eligibility criteria for payment holidays do vary and so borrowers need to check with their lender or broker what their entitlement is from any particular mortgage, preferably before signing up to it.

A balanced portfolio

It isn't difficult to see why buy-to-let has grown in popularity in recent years. Increasing dissatisfaction with low rates of interest on bank and building society deposits and failing returns on other investments - coupled with the continuing growth in property prices have provided fertile ground for this market. However the experienced investor knows that ideal conditions don't tend to last indefinitely and are subject, like the vast majority of investments, to the ups and downs of the wider economic cycle. The golden rule of not putting all your eggs in one basket is always worth adhering to.

Other Property Types

Property Renovation

A speciality that you can develop with a little forethought and preparation. The key to this topic is in finding properties, which require modernisation.

Doing 15% pre-negotiated deals on properties like this is probably just about the easiest money that you will make.

Let's look at what generally 'may' require doing on a renovation property

New Kitchen
New Bathroom
Re-decorating
New Carpets
Re-wiring

If you have never taken on a project such as this then at the outset it may appear extremely daunting, and it is, if you plan on doing the work yourself.

Property renovation is about working smarter, not harder, to make money. Property renovation, once you know what you are doing, is probably one of the simplest niches you will ever be involved in.

Example of property renovation.... and the cash it can bring...

We purchased a 3 bedroom terraced house which was in need of a little tender loving care. We managed to agree a purchase price of just £39,000.

We knew that there was a house in the same cul-de-sac on the market for a staggering £56,000. A quick viewing of the higher priced property revealed a house that had been well cared for - but not a Palace, by any stretch of the imagination.

Without doing any of the manual work ourselves, within ten days the project had been completed and the property rented out.

Let's have a look at the work involved in this particular example -

New kitchen £470
Kitchen Fitter £490
New Carpets £510
Decoration £2500

Total £3970

There is now none of our own money tied up in the property and the monthly mortgage is currently £187.50 - or £2,250 per year. The rent on the property has been set weekly as previously discussed - at £4,940 per year - or £95.00 per week ... that is nearly £2,700 profit on just one property.

Since completing this project there has been another property again in the same cul-de-sac come on the market for £67,000.

It is now fair to say that we have equity in our house in excess of £20,000.

The ups and the downs of property renovation

There are many books - as well as TV programmes which discuss in great detail the good and the bad about property renovation, however probably the best information that you can find is from people who actually do it for a living.

We have found that one of the hardest things about renovation is in locating the properties in the first place. Recent TV programmes that have documented how much money can be made out of the business have made the opportunity very appealing to opportunity seekers and Entrepreneurs.

The knack is in finding these opportunities before the competition do. Having access to properties as they come on to the market is like a horse clearing the Chair in The Grand National before the other horses have left their starting gates. This is invaluable and with a little bit of extra work you can regularly have your pick of newly advertised properties every week.

It cannot be guaranteed that they will all have £20,000 potential in them, as some areas are just not as attractive as others. Equally said however, it can be said that some properties may well offer the opportunity of making a lot more than £20,000.

This can be achieved by tapping into Estate Agents websites all over the country, and when searching for properties use key words such as: -

Renovation
Modernisation
Repair
Upgrades

Once sourced the details on these relevant properties are then automatically compiled and sent to you. Registering you details with the agent online and telling them you are interested in renovation properties will ensure that you are contacted each time they have a particular property to sell.

Repossessions

In a time when we are seeing the lowest ever mortgage rates you would think that re-possessions are a thing of the past, well they are not. Although monthly mortgage repayments are at an all time low there will always be those that for some reason or another can not manage their finances and end up being forced out of their home, by the Bank or Building Society who gave them the mortgage. Again some good opportunities are going to come from situations such as this, however the trick is in knowing how and where to find them.

Public Offer

Most times that an Estate Agent is instructed to sell a re-possession property on behalf of a Bank or a Building Society they will be given a set time in which to achieve the best possible price.

The property would then be advertised in the usual way, with a For Sale sign outside of the property and a window card being placed at the office of the relevant Agent. Under a Private Treaty sale, once a mutually acceptable price has been reached Solicitors on both parties would be instructed and the deal would move towards exchange of contracts.

This is not however the case with most re-possessions. After an initial marketing period the Estate Agents will be instructed by the lender to place an advertisement in a local newspaper informing the locality that the property in question is being sold and that it has so far attracted an offer of £x thousands of pounds.

The public are then put on public notice that they have a further 14-21 days (depending on the lender) to make a higher offer than the only already submitted.

To a certain extent this is unfair on the person who has made the offer at that point in time, however to the switched on, this is like taking candy off a baby. Armed with the knowledge of what the highest offer is you are then free to view the property and make a higher offer.

Of course with re-possession properties you do not have the option of negotiating a gift on completion and you will have to either pay cash or put a mortgage on the property. However you must ignore the fact that re-possessions offer the highest return on investment in the short term.

What the Council of Mortgage Lenders say.

Sale of Properties in Possession

When selling properties which have been taken into possession lenders are under a duty to obtain the best price reasonably obtainable. A lender is not bound to postpone the sale in the hope of obtaining a better price at some future date; however, the lender should allow sufficient time to permit, for example, proper advertising so that the best price obtainable may be achieved. Mortgage lenders generally use the following administrative procedures for selling properties that have been taken into possession -

Administration

(a) The sale may be dealt with either via a lender's in-house department or through a separate property management company employed by the mortgage lender. Dedicated staff are responsible for co-ordinating the sale of properties in possession which will include reviewing the offers received from potential purchasers as well as monitoring the condition of these properties and their valuation.

Valuation

(b) A valuation of the property is obtained from either one or two qualified surveyors and another from the appointed estate agent. Prices are usually reviewed every three to four months and more often when the circumstances justify a revaluation.

Estate Agents

(c) Properties are usually marketed through an estate agent in the immediate locality of the property being sold. Agents may advertise properties in the local press, with such advertisements being repeated as and when necessary. Mail shots and national advertising may also be carried out in some cases. In general, lenders do not market these properties as “repossessed properties”; in many cases estate agents are specifically instructed not to do so.

Report on Activity

(d) Estate agents are usually required to report on activity every four to six weeks if a property remains unsold. The estate agent will notify a mortgage lender of any offers received. Only when satisfied that the best price has been obtained, would the estate agent recommend this offer for acceptance. If the offer is substantially below the asking price, the agent must provide supporting evidence to suggest that this would be the best offer obtained. In practice, all offers are accepted or declined promptly. Where there are a number of very close offers on a property, a sealed bid procedure may be carried out whereby the person putting forward the best offer would be the successful purchaser.

Visits to the Property

(e)The agent will usually visit the property on a regular basis and ensure that any repairs and maintenance to the property are carried out and that the property is secure. When properties are first put up for sale, mortgage lenders will usually arrange that essential repairs, cleaning and tidying of the garden are carried out. Whilst the estate agent will take care of minor repairs, which are identified on the regular visits, other repairs usually require the approval of the mortgage lender. Where this work is carried out, estate agents will be required to obtain competitive estimates. The agent when viewing a property will normally accompany prospective purchasers.

Auction

(f) Properties in possession may be sold via auction. These properties are reviewed relative to sales experience and the length of time on the market. There are occasions when properties may be sold by auction because either the auction is specifically targeted at the type of property in question, eg a period type of residence, or the property will generally appeal to the speculator market because of its condition. Such properties are referred to an appropriate auctioneer. A catalogue would be issued and the properties are available for viewing. A reserve price is usually based on information relating to the number of viewings and general level of interest. A reserve price is set several days before the auction following consultation with a surveyor on the valuation of the property.

Pro-active Marketing

In a short space of time local estate agents will get to know you, and become aware of the fact that you are a serious property investor. You will soon find that your phone will ring when they have re-possessions or public offers going through. However, in the early days it is vital that you make yourself known to them. You should periodically call all local agents and ask them if they have either any re-possessions on their books, or coming on their books, as well as whether they have any re-possessions currently at Public Offer stage. Even letting them know that you understand the correct jargon will stand you in good stead for the future.