Property Investment Techniques
There are several ways to approach property investment and the
starting point should always be a decision on whether you are a cautious,
adventurous or speculative investor. According to this decision you would adopt
one of the following strategies, or a mix of them in order to create a balanced
portfolio.
Cautious :
- Buy resale, completed new-build or near completed new-build properties from reputable builders in sound areas with a genuine discount and/ or substantially greater rental income than current mortgage rates cost - a 150%+ gross interest cover is preferable, not just 130% requested by banks. Assetz for Investors has offered properties with 200%+ interest cover in the past.
- Ideally seek properties with both a discount and high return but at least a high rental income to provide safety in case of interest rises or future rental rate reductions. Genuine discounts are often accompanied by high interest cover in any case and will always be provable against other local properties.
- Purchase distressed properties with significant discounts to market value.
- Obtain fixed rate longer term mortgages to minimise short term risk.
- Buy in carefully-researched areas with high rental demand using specialists such as Assetz for Investors.
- Take a long term view and do not sell into short term downturns.
- Adopt repayment mortgages as soon as you can or even pay cash or at least high deposits for the properties if you can afford to.
BENEFITS - insulation
from interest rate rises, strong cashflow from the properties, capital
paid off in years to come so all rent can be taken as income, good chance
of leveraged capital gain.
RISKS - significant interest
rate rises, significant rental value reductions, oversupply of rental property
in your area, significant price drops at a time you must sell.
WHO FOR? - older or risk-averse investors, those with limited investment capital and little or
no risk capital.
Moderate Risk :
- Buy off-plan or completed properties with a genuine discount and ideally greater rental income than current mortgage rates cost - a 150%+ gross interest cover is preferable, not just 130% requested by banks. Ensure that low interest cover now is likely to become good interest cover in the near future if an area is being redeveloped.
- Genuine discounts are often accompanied by high interest cover in any case but in areas undergoing significant redevelopment you could get great capital gains in the coming years as development is undergoing but have poor rental indications and interest cover in the short term.
- Obtain fixed rate longer term mortgages to minimise short term risk if you are worried about affordability of properties in the event of interest rate rises, otherwise obtain the best rates with minimum redemptions if you are positive about the future of interest rates or can easily cover any rises in rates.
- Buy in carefully-researched areas with high rental demand currently or forecast using specialists such as Assetz for Investors.
- Take a long term view and do not sell into short term downturns.
- Consider buying some properties off-plan in order to resell prior to or shortly after completion but only where the discounts are significant against current provable market value. This will increase your investment equity if this speculative component is successful and this profit can be used to fund future deposits (after tax!).
BENEFITS - modest insulation
from interest rate rises, probable/ modest positive net cashflow's from
the property that will get greater over the years, good chance of strong, leveraged capital gain.
RISKS - moderate interest
rate rises, moderate rental value reductions, oversupply of rental property
in your area, moderate price drops at a time you must sell.
WHO FOR? - younger and less
risk-averse investors, those with reasonable investment capital and
some
risk capital.
Speculative :
- Buy off-plan properties with a genuine and provable discount to current or forecast future market value with around 5% exchange deposit and in an area that will probably have either strong rental demand, strong buy to live demand or both in the future.
- Genuine discounts are often accompanied by high interest cover in any case but in areas undergoing significant redevelopment you could get great capital gains in the coming years as development is undergoing but have poor rental indications and interest cover in the short term.
- Buy in carefully-researched areas using specialists such as Assetz for Investors.
- Ensure the contract is assignable and sell before completion to another buyer or shortly after completion.
BENEFITS - no need to
apply for a mortgage, no management of the property, no stamp duty on
sales before
completion (at present), good chance of strong, leveraged capital gains
possible of 10%-100%'s in a short time.
RISKS -
strong interest rate rises, mis-quoted property discounts leading to leveraged
capital loss rather than gain, strong price drops or forecast price rises
that do not occur at the time you sell, builders pulling out of development
sales pre-exchange due to strong demand and market price rises.
WHO FOR? - very young and
and/or risk-friendly investors, those with reasonable access to capital
and willing to put it at risk in return for large possible returns.
Finally some guidance and advice from experienced professionals :
- Always seek guidance from other investors and experienced professionals such as those who attend our seminars and training courses.
- Always check discounts against actual market value of comparable properties - it has been known for these to be inflated by vendorsand it is vital to rely upon independent RICS valuations
- Buy in carefully researched areas using specialists such as Assetz for Investors.
- Be careful of 'Free' seminars teaching you how to buy property with no money down - especially when they are just selling you a very expensive follow-on seminar or very expensive membership of a club.
- Beware of companies offering a constant stream of highly discounted properties ion a rising market - do your own research on the discounts, they are likely to be more genuine in a weak or falling market.
- If you don't have any money to pay deposits and costs then you are taking a massive risk by borrowing it for deposits.
- Always check rental indications against actual market value rents of comparable properties - it has been known for these to be inflated by vendors
- Always leave some capital spare for deposit shortfalls and rent shortfalls.
- Don't fall for the discounts shown on a price list from a developer or agent that was only reprinted at new prices a few minutes before! It is not unknown for there to be a buy-to-live price list and an 'investors' price list!
In order to build a successful portfolio please feel free to contact us to discuss these points in more detail.
And remember - please seek independent financial advice before acting on any advice from ourselves or others!
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