Your buying strategy is the only strategy which really matters.
Over 30 plus years in property the one rule I live by is: “The day you buy is the day you sell”. Anyone can easily learn development, management and refurbishment skills, but buying and valuation skills are key to succeeding in property. We can’t predict the economic cycles or guess when it’s a good or bad time to buy, so the key strategic advantage any investor can gain is to buy at the right price and create equity in every purchase, either through your buying skills or by adding value via refurbishment, planning consent or a reconfiguration.
HOW DO YOU BUY BELOW MARKET VALUE?
Much talked about, but few succeed at this. In order to know if you are purchasing below market value, first you need to know a property’s true market value so you can accurately assess whether there is in fact a discount. The best way to buy below market value is to better understand valuations and also deal directly with vendors to enable you to ‘buy right’ and to succeed with this you need to physically walk the streets yourself and target buildings or land directly via the Land Registry. However, you won’t know if you have a good deal if you can’t accurately understand how to value a property. Getting independent valuation advice is almost impossible unless you pay for it and it’s a challenge for less-experienced investors to value a property. Even RICS valuers will come up with different ways of valuing an asset.
GETTING THE BASIC MATHS RIGHT
It surprises me how many people don’t assess a property deal on yield-based valuations. The yield is a simple way of determining how much cash you’ll receive against your property purchase, or in other words, how much you need to spend to get a certain amount of cash flow from an asset. It’s an easy and accurate method to compare one property against another. Recently, I’ve noticed more sellers using Return on Investment (ROI), but the ROI is often exaggerated because sellers always underestimate the ROI input costs. It’s better to stick to yield-based valuations, excluding any one-off and any completion costs. To calculate, take the annual rental income and divide it by the property value, then multiply this number by 100. Example: property value £600,000 and rent £3,000 per month. So, £3,000 x 12 = £36,000 annual rent, divided by £600,000 x 100 = 6% yield – simple!
ECONOMICS AND HEDGING FOR THE FUTURE
Property is a very cyclical and capital-intensive business. We all invest in pension funds run by hedge fund managers who try and hedge through the cycles of the inevitable downturn. Property is no different and you need to be aware of and prepare for economic decline. Over-gearing and too many interest-only mortgages are the main reasons why many encountered issues over the last two property recessions. Having too much of the same type of property in the same area or targeting the same profile tenants also causes problems during a downturn. Although property hedging isn’t an exact science, you need to assess “worst case scenario” risks and plan for these and for the inevitable economic downturn.
INTEREST-ONLY MORTGAGES ARE COMMON, YET RISKY
Yes, we’ve had price growth over the decades, but this isn’t guaranteed in the future and ideally you want a repayment mortgage to repay your debt. Unfortunately, on a single-let property after all costs and maintenance, on a common 70% mortgage, most struggle to make any profit with a repayment mortgage. Property is no longer easy money, and with plenty of supply of new build apartments and uncertain times ahead with regard to potential Capital Appreciation. If prices fall or if they don’t increase you will need strong cash flows and the best way to achieve this is with a well-located, high-specification House in Multiple Occupation (HMO). This HMO should be very well-located and have decent room sizes of at least 12 sq metres which will attract less-transient tenants and reduce tenant turnover and voids. The right configured HMO, high-specification property in the right location will always rent quickly.
THE COMMON PITFALLS OF PROJECT MANAGEMENT
Inevitably, as an investor completing a small development or refurbishment work, the most common mistakes are cost overruns and falling out with your builder. The easiest and most professional way to project manage is to employ an Architect and a Quantity Surveyor (QS). Do all your due diligence and get a structural survey done before exchange. If refurbishing, get a Quantity Surveyor to do a full cost feasibility study before you even talk to any builders. I engage professionals well before I exchange and do my due diligence as soon as the deal is agreed so I have a clear plan and cost calculations before I’m legally committed. My Quantity Surveyors’ work is key to my deal assessment when I am purchasing property requiring any works.
HOW TO RESEARCH
Qualitative research techniques involves face-to-face meetings in advance of any purchase with the agents who are responsible for managing and finding tenants. How to research the best property product in the right area? In an era of increasing over-supply of rentals in many areas it amazes me how many buy before having detailed discussions with a sales and letting agents in their target area to understand the rental dynamics and demand in any given area. You should understand which postcodes and which types of property rent fastest. Which postcodes are harder to rent? What’s the ideal room size if it’s an HMO? What standard of finish do you need so you don’t suffer from high tenant churn rates? What is the likely profile and working status of your future tenants? How easy will your property be to sell if it’s a flip?
GETTING THE RIGHT PROFESSIONAL TEAM AROUND YOU
Building a business in property is all about building a relationship with the right professionals and mentors, including agents, mortgage brokers, solicitors, architects, accountants, planners and quantity surveyors. The key partner is your solicitor, and lower cost solicitors tend to be overburdened with too many clients. A good solicitor will anticipate issues and be proactive rather than the other way round which often happens. Poor service from a solicitor is very stressful and slows down your ability to make things happen. Getting the right mortgage broker is also key, as is getting a QS in to do a Bill of Quantities, for any works – well before you even speak to any builders.
Given that there is a plentiful supply of apartments in the UK and overseas, buying off-plan is unnecessary and extra high risk. However, if you have to, then you need to ensure the developer is using his funds and not yours to fund the development. Your solicitor should advise you on the best way to protect your deposit. Buying off-plan overseas is even higher risk and you need a UK-based solicitor to work alongside your foreign solicitor to have all the documents translated and check the intimate details of your purchase. Look out for initially low, then escalating monthly management charges and annual ground rent charges.
YOU WON’T ‘GET RICH QUICK’ IN PROPERTY
Despite many property seminars suggesting otherwise, there is no ”get rich quick” in the property game. Training courses run by accredited non-profit making bodies such as the Residential Landlords Association (RLA) or National Landlords Association (NLA) will help you achieve things quicker, but nothing beats on-the-ground experience. This is the only way to learn the business and I recommend starting small and building slowly but surely, with equity-creating deals. Almost all the people I have known to have grown very fast and big in property got into serious trouble in the last two recessions, forgetting that property is a high-risk, cyclical capital-intensive business – and were at the mercy of lenders’ mortgage terms and conditions.