The tabloids recently reported house prices had risen by £11,000 in the past year – that’s £30 per day, they cried.
Some property investors have taken the increased activity in the residential market as a sign that they can forget everything they know about property investing. As professional investors we know that a buy-to-let property that generates a return of, say, 10-20% (depending on area and strategy) is an excellent deal. We invest in property to make money.
Then why have I been out bid and ‘gazumped’ on properties on more than one occasion over the last four months? My target return on House of Multiple Occupancy investments is between 15-18% net after all costs.
It is crucial to ensure that a property covers its costs at a test rate of 8% or more. My investment deals still return 8-10% at a possible interest rate of 10% – that is why I feel confident to share these opportunities with my clients.
I am not an economist or financial adviser, simply a professional investor, who works hard to monitor the market and understand how money is working. From my research there is nothing significantly different in the current economic, employment, or lending market to warrant a change in the balance of supply and demand.
We know there are not enough houses being built to satisfy demand and that the availability of mortgage loans has been, and continues to be, severely restricted by the banks despite encouragement and guarantees from the government.
The signs are clear; some investors are fools with cash. They’re buying over the asking price and making, frankly, foolish offers. After doing the maths I cannot understand what these investors are thinking.
Why would you pay over the current street value for a property that needs £20,000+ of refurbishment? It makes no sense. Two deals came back to market 4-6 weeks later – either loans did not materialise or the investor realised the deal did not make sense.
Don’t become a “FOOL” – someone who Follows where Others Opaquely Lead.
Know your business, know why you invest and follow the rules:
1) Calculate the costs and work out the profit
2) Don’t bid more than a property is worth – work your spreadsheet
3) Be solid, consistent and reliable – then estate agents will know that you will keep your word when you make an offer
4) Check your profit will still hold when interest rates rise – 6%, 8% even 10% to be safe
5) It’s not the number of properties, it is the cash flow (profit), that makes you rich
6) Check and monitor all properties even after offer; call the estate agents and check on progress, let them know you are waiting with a sensible offer and you are able to complete
7) Be prepared and be quick, do the maths, view it and confirm figures, put in the offer and then send ID and proof of funds, go straight to DIP and instruct your survey. Follow through and be thorough
The message to the professional investor is hold your nerve. Remember that you need to be able to hold your asset for the long term in order to benefit from capital growth. You still need to make a profit when interest rates inevitably rise.
