dothesums blog

In difficult times it is often good business practice to go back to first principles and see if a sound strategy is being used.

The Buy to Let property market is certainly going through a tough period, although there are some benefits, lower buying prices being one.

How can investors take advantage of reducing prices and increasing rental values, to lay down a property investment for the medium and long term?

Follow good business practice:

1) Start with the customer, not with the property.

2) Identify your target tenants.

3) Research their needs.

4) List their wants.

5) Find post codes where these needs and wants can be delivered.

6) Check rents in these areas with local letting agents.

7) Survey the prices of suitable properties in these areas.

8) Analyse the potential growth in value of these properties within the identified post codes.
9) Work out the cash-flows for three to five years.

10) Calculate the Return on Invested Capital.

[ Be comfortable with a number of false starts. If it was easy, everybody would be buying there and prices would be much higher. Also, by designing your business model to match customer/tenant requirements you will be minimising empty periods and maximising sales revenue.]

Interest rates on loans is of great interest to investors. Not only are we seeing a reduction in the products available, but we are seeing higher rates and arrangement fees.

The Bank of England base rate is currently 5%, with the prospect of a 0.25% reduction next month. However, the money market rate is about 5.8% and the general expectation is that the two will come more closely into line.

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In today’s Indie there is a quote by Warren Buffet, the richest man I the world. I think it worth reporting in full, not because he is rich, but because he has the longest history of successful investing.

"I haven’t the faintest idea where the stock market will be next week, next month, or next year. We are looking for businesses that are properly priced. If you are right about that, the stock prices will take care of themselves."

If it is true for shares, then it is also true of property.

Two questions then emerge. Are we in a period where ‘proper prices’ exist and can we appraise deals to establish the ‘proper price’?
Buffet’s maxim is to buy at the right price, do not follow the herd and invest for the long term. This is equally true for investing in property.

What are we to make of the so called ‘credit crunch’ and investing in buy-to-let properties?

Loans and mortgages are more difficult to obtain with fewer than one third of those available at the same time last year. When you do find the right loan, it is likely to be more expensive, with both higher interest rates and larger arrangement fees.

And yet paradoxically, because the property market is operating at a lower level, deals can be made, sometimes at attractive prices.

In our view, the mistake that the public makes is to see the property market as one entity. They are encouraged in this perception by the oversimplification of the media, usually in terms of a property ‘bubble’. Well, they have to sell newspapers, it is in their interest to dramatise every situation and spread gloom and despondency.
In our view, the market is more like bubble-wrap, rather than one large bubble. That is, numerous small bubbles each surrounded by relative sanity.

The skill then becomes how to choose those few areas/postal districts, which will provide the significant price increases over the next few years.

We can rule out two main categories.

Firstly, avoid new build flats, because they will carry the developers profit-premium. We have been advising our clients for two and a half years now, to avoid these properties, because they are likely to be substantially more expensive than older nearby properties with similar accommodation. This is especially true, if they are in a city centre as developers are always tempted to over-supply that local market.

Secondly, avoid locations where there has been a recent, exaggerated increase in prices and where the market values have reached a probable ceiling.

Here are a few locations to look at and a few to avoid at the moment.

Examine:
* Lyme Regis (det)
* Virginia Water (det)
* Birkenhead (semi)
* Steyning (semi)
* Camden (terr)
* Windermere (terr)
* Hove (flat)
* Jarrow (flat)

Avoid:
* Flint (det)
* Stocksfield (det)
* Staleybridge (terr)
* Brough (terr)
* Chorley (flat)
* Lingfield (flat)

Recent television programmes have exposed, yet again, the dubious element in the property sector. It was ever thus I am afraid. I am old enough to remember similar scams in the nineteen seventies in the West Sussex area in the residential sector. Several solicitors, estate agents and valuers went to prison for fraud.

‘No deposit’ purchasing, where the investor’s cheque is torn up by the developer/vendor and in effect, receives a discount without the knowledge of the loan company, or bank, is deception. Not only are the banks deceived into lending one hundred per cent, or more, of the price of the property, but the Land Registry records show a false price, leading to inflated future price comparisons for similar properties. In a falling market, this will lead to negative equity and a loss of confidence.

Best not to get involved in these get rich schemes and concentrate on running buy-to let as a proper business based on sound business principles. There is profit to be made without resorting to these types of practices, it just takes a little more work that’s all.

The other issue to emerge often from such programmes is that of caveat emptor, ‘buyer beware’. One of the purchasers had bought four student properties, sight unseen and presumably without surveys. How daft is that?