The Ultimate Property Investment Guide2

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In this report I’ve concentrated on the first two reasons. which in the current economic climate, seem to me to be the most relevant. But updated “modules” on the others, particularly the use of …

In this report I’ve concentrated on the first two reasons. which in the current economic climate, seem to me to be the most relevant. But updated “modules” on the others, particularly the use of property to provide a tax efficient pension fund. will follow in time.

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  • 1. http://www.proebayer.comDon’t get ripped off on eBay!Down load your free eBay buyers guide and sellers guide from:http://www.proebayer.com/tips.htmSign up for your free monthly newsletter for more eBay money making tips,tricks, reviews and much morehttp://www.proebayer.com/news.htm
  • 2. FORE WARNINGTHIS PUBLICATION DOES NOT CONSTITUTE ADVICE WITHIN THE TERMS OFTHE FINANCIAL SERVICES ACT 1996 (OR ANY SUBSEQUENT REVISIONS, ADDITIONS,OR AMMENDMENTS).The contents are a general guide only and are not intended to be insubstitution for professional advice. All readers are strongly advised to takeadvice from their solicitor, accountant and surveyor before proceeding withany property purchase. 4
  • 3. ContentsPage 8 Section One Why this e-book was writtenPage 14 Section Two Do I need property to achieve my goals?Page 26 Section Three The Planning systemPage 49 Section Four Deciding on, and forming, your system of businessPage 51 Section Five The Financing systemPage 57 Section Six A Buying systemPage 91 Section Seven The Innovation systemPage 99 Section Eight Management systemsPage 114 Section Nine The Accounting systemsPage 122 Section Ten A system for reviewing 6
  • 4. The magnificent sevenSEVEN qualities are needed to make a successful entrepreneur, say researchers atthe Durham University Business School, who reviewed other research andinterviewed 16 graduate entrepreneurs and 100 small businesses.David Johnson and Rosa Ma say the qualities are a: • ability to envisage where the business should be at points in the future • motivation to succeed • ability to set realistic goals • desire for autonomy, though tempered with the readiness to accept advice • ability to calculate real risk and plan to reduce it • knack for spotting opportunities • willingness to take the blame rather than ascribing performance to luck • creativity and innovationBut Mr Johnson said people acted differently. Venture capital providers and bankmanagers “tend to decide intuitively whether the person in front of them is worthyof support”.As the list indicates behaviour it may be possible to train people to be moreeffective entrepreneurs, he said. Daily Telegraph 1st August 1994My aim in this e-book is to show you how to be a more effective property entrepreneur. 7
  • 5. Section OneWhy this e-book was writtenIn this section you’ll learn: • How I discovered the contents of this e-book and why I think they are so important to your successBut first a quick recap…I was very pleased with “An Insider’s Guide to Successful Property Investing” andjudging from your comments, so were you. It covered the topics a lot of other propertyinformation doesn’t cover, but which is essential information for a private propertyinvestor to have, such as: The attitude and attributes of successful property investors A laymans guide to the three main valuation techniques, so that you can be sure to buy low and sell high A comprehensive look at why gearing is an investors best friend and how you can benefit Other people’s money and how to legally use it to fund your deals The truth about buying at auction Strategies for achieving income or capital growth: and The things you need to be aware of when you are a landlordHaving laid the background it then went on to look at the different types of propertyinvestments such as flats and houses, and some of the more unusual and nicheinvestment opportunities including residential reversions, freehold ground rents, andlock–up garages, and how to get the maximum returns from them.It’s now just over two years since I first launched “An Insider’s Guide”. In that time Ihave successfully started my own property business and am building up a sizeableportfolio.I’ve also spent the last 2 years reading thousands of pages about “Nothing Down”deals, mainly from America. It’s fascinating reading. In the USA propertyentrepreneurship is big business with a lot of full time investors and developer/traderswho started out like you and me. 8
  • 6. I think we can learn a lot from the States about creativity and flexibility in property, butapart from anything else we can learn that:“the small guy” really can become a successful property investor, even if hedoesn’t start with a lot of cash of his own.When I was looking around at the Internet a few months ago, I came across a web sitehosted by a property entrepreneur who is a millionaire on paper, but who was moaningthat at one time his cash flow had been so poor that he had been almost bankrupt.To survive financially he had to completely change his tactics and instead of buyingproperty to hold as investments, he now concentrated on refurbishment and selling on.By doing so he had intended to build his cash flow and not his capital. Howeverbecause of the margins he was able to create between purchasing a run-down property,refurbishing it and selling it on, he had in practice increased both.This wasn’t a surprise to me because it was around that time that I realised that owningproperties wasn’t the answer in itself. You see, when I first started out building myportfolio, I was determined to create cash flow. That was my most immediate need.Remember, owning property isn’t a goal in itself – it is merely the means of realising twoof my principal goals • to quit the day job and do something more interesting • to create a permanent passive incomeWhen I first started buying property, my strategy was to assemble a portfolio of highyielding properties. I figured that if I were able to buy enough of them, then at somepoint in the future, the income would be so good, that even after allowing formanagement fees, mortgage repayments, repairs and even voids and re-letting feeswhen the odd one became vacant, there would be sufficient income to pay me a goodsalary, and some left over to plough back into the business. I’d use this extra topurchase more properties.I had calculated that it would take me about two years to become financiallyindependent, by which time I would have around fifty properties. When this stage wascompleted, I intended to sit down and look at my strategy again. I thought at that time I’dswitch into commercial property safe in the knowledge that the activities from phase onewould give me a decent income no matter what.However, what looks good on paper doesn’t always reflect reality. I’ve got to say, thiswas my first attempt at building a property portfolio. Up until then I had always workedfor clients who were all established property owners. So although I was able to helpthem build their portfolio, it was always in the context of assisting them with an existingportfolio. So I wasn’t prepared for how the system really worked for “newcomers”, whenyou start from scratch.After reflecting on the conflict between ownership and cash flow I realised that there aretraps to fall into which are not obviously apparent until it’s too late. I’m glad to say that Ihaven’t fallen into all of them, but having been in and out of several, I think I am in a 9
  • 7. position to help the unwary avoid most of them. Mainly this comes down to commonsense but sometimes it’s hard to see the wood for the trees.So, sitting at my computer that Saturday morning, I read those words on the internetand thought, “Yes, I can relate to this, it’s about time I did some serious thinking” aboutwhat I am doing and what I should be doing.The result of that serious thinking is this, “An Insider’s Guide to Successful PropertyInvesting – Part 2”.I came to the conclusion that there are key questions that need to be asked andanswered by every prospective or active property investor before they do anything.These are: • What am I trying to achieve and why? • Do I need to own property to achieve this? • Where and how do I start? • What strategy do I need to adopt?In a sense, any success will be traced back to the quality and quantity of planning andresearch made prior to taking the first steps.I suspect that many inexperienced property investors have never thought very deeplyabout any of these questions, especially those who are currently piling in on the Buy-to-Let scheme.Their failure to do so illustrates what Brian Tracey calls the two main reasons whybusinesses fail: • Lack of direction • Lack of a (financial) planI hope to be able to give some thoughts in this e-book so that you can answer thesequestions for yourself. However, answering these questions is only the first step, wethen need to put the theory into practice.The transition between knowing what you want to do, and how to actually go about it, iswhere most would be investors get stuck. If they understood clearly • How to buy the most suitable properties for their purposes, and • How to do so with the minimum of riskthen jumping in at the deep end, whilst daunting, would be do-able. 10
  • 8. The next stage is then to learn: • How to best protect their investmentsThe more I thought about it, using my own experience of the realities of propertyinvesting, I came to the conclusion that the best answer to these questions is to havethe systems in place which will automatically steer you in the right direction.In fact, I have subtitled this e-book “Milking the System” because I believe that nomatter how clever you are, if you don’t have the right systems in place to find, buy, runand manage your property business, you are never going to be successful.On the other hand I believe that if you do have the systems in place, and you use them,you almost can’t help but be a successful property investor or developer.This is not to say that you won’t need to think and use your common sense but thereare things you can do, almost on automatic pilot, to make sure that you get the bestpossible results and avoid the problems.In this e-book I will show you the systems you need.Interspersed with these principal themes, I have also dealt with some of the mostcommon issues that have arisen during some of my “one on one” consultations, which Ican see are genuine concerns to new and experienced investors alike.Before I show you the systems all good property investors could and should use, let megive you some of the background behind how I stumbled upon them.Now let me say from the start that I am relatively new to direct property investment andI am not too proud to admit that I made loads of mistakes. So what I am about to tell youin this e-book really is the result of trial and error.However, if I can help you to start and run a property business, and to avoid themistakes I made, I will think it’s a job well done.Here are some of the reasons I spotted early on as to why people’s businesses fail.Firstly, there are the lack of planning reasons • Not knowing why they are in business • Not knowing which business they should be in • Not really understanding how they can use their business to get where they want to goThe antidote to these uncertainties is to have a proper system of goal-setting, so youknow what you want and why, and secondly a proper planning system so you canformulate a strategy which will help you to achieve those goals. 11
  • 9. The next reason for failure is setting up the business in the wrong form. There are onlyfour basic forms that one can realistically choose, excluding a Plc, but the choice willimpact on cash-flow, tax, red-tape, and ultimately your exit strategy, if you ever need tosell the business. Most buyers and investors give this hardly any thought at all.The next reason property businesses fail is because they don’t have proper financingsystems in place. If your aim is to have one or two investment properties, then shoppingaround on the internet or ringing a couple of building societies for details of their best‘Buy-to-Let’ deals might be sufficient. If you want to run this as a proper business, youneed to have proper systems in place. This will become very apparent when you areoffered deals which you lose through not having ready funds available. This is why Ithink having a finance system in place should come before having a buying system.The next reason for failure is not having a proper system for identifying and buyingproperties. I could be pedantic and separate this out, but they really go together. Partlythis goes back to strategy; you need to know what you are buying and why. Randomlyacquiring properties ad hoc may seem like a good idea if they are all bargains, but howwill this affect the speed and ease of your exit if you ever need to sell? How will thebank treat them if you need to refinance? And without the proper system in place, howare you going to avoid properties which look like good purchases at the time but whichturn out to be unsuitable?Next, many property businesses don’t look ahead to the day they own their firstproperty. How are they going to manage it? Do they do it themselves or get someoneelse to? Either way there are fundamental implications for the business.The business itself needs to be managed. A lot of this is about implementing andoverseeing the other systems. It would be nice if they worked on auto-pilot, but it’s reallymore like spinning plates. If you leave them they’ll fall down. Then, and this maysurprise a lot of people, there’s self-management. Property is a people business and ifyou are not in top form, it will be reflected in how well you do.Then there are businesses which don’t have proper accounting systems. Thesebusinesses just do not last. This is more than having the accounts prepared once ayear, this is more about early-warning systems to alert you before things go wrong. It’salso about not missing opportunities because you don’t realise you can afford it.Finally, there has to be a system for reviewing. This isn’t about slapping yourself on theback at the end of the financial year. This is a constant process of refining what you doand learning to do it better. If you don’t review where you’ve been, you’ve no chance ofgetting where you’re going.In the e-book you’ll find links to other sites, some run by developers and agents dealingin property, I have identified these mainly by use of search engines, as any potentialinvestor doing their own research would do. The fact that the link exists is merely toshow that the site is there, it is up to you to decide whether it is useful or not. Thepresence of a link should not be treated as an endorsement of either the site or itsoperator by either the author or More Than Two Publications, it is purely for informationonly. 12
  • 10. This book is not designed as a once only read. It is intended as a tool that you’ll want touse regularly. Instead of being a dull and dusty textbook, I’ve added a few light touchesto make it even more interesting. (So I very much hope that you enjoy it and find itstimulating and exciting)If you find there is something that I’ve missed and you think should be included in thenext edition please email me:mailto:peter@propertydeals.fsnet.co.uk and if I use your idea I’ll send you a copy of thenew edition free of charge.Please refer to this e-book again and again as you work through your preparation forbuying your next property or starting your business. Take your time to come back tospecific chapters and review the points.So let’s start by looking at arguably two of the most important systems, those for goalsetting, and those for planning. 13
  • 11. Section TwoDo I need property to achieve my goals?In this section you’ll learn: • Why you need to think carefully about whether property is right for you • Five things that property can do which other investments can’t • Why you need clear, measurable, and achievable goalsBefore I show you the systems that you’ll need to build a property business, you’ve gotto know whether you really need and want to own property.You may be wondering why I would even ask the question “Do you need property toachieve your goals?” In the UK we just take it for granted that owning and tradingproperty is a good thing to do, and that more is better. It’s in our blood.Traditional thinking says that property is a great investment mainly because: • It can produce rental income • There can be rental growth • There are potential capital gains • It can be a hedge against inflation in certain economic conditions. • It can be very tax efficientThis is all true, and as an investor you may be trying to achieve one or more of these.However, property is only one of many different types of investment available. Whetherproperty is the right one for you or not will depend upon what (and why) you are trying toachieve.Property is not perfect and has its drawbacks, for instance: • it is relatively illiquid, meaning it is not easy or quick to sell • acquisition costs are high, especially when you get into higher bands of stamp duty • management costs are relatively high • unlike other forms of investment, it needs to be repaired and maintained • disposal costs are also relatively highBefore putting any money into property you need to consider whether it will achievewhat you require of it. 14
  • 12. Property can provide an investor with: • capital growth and “security”, but usually the trade off is low returns from income. • high returns from rent but the trade off is low capital appreciation and poor security • any permutation in between.The tension between income and capital growth is discussed in more detail in AnInsider’s Guide to Successful Property Investing.The type of property, and the location you choose will reflect how you weigh the meritsof returns against risk, but if your buying criteria requires you to be able to invest anddeinvest quickly and easily, property may not be suitable.Alternative investments such as high income bonds, shares or gilts (the traditionalmarker for commercial property investments) may be more appropriate for you.When I first started writing about residential property investing about ten years ago, itwas a really very much a minority interest. There were only a relatively small number ofprivate landlords, and there were also a few semi-professionals doing houserenovations and conversions. The majority of residential investments were owned by anumber of small private and quoted companies, and by family trusts.Over the last decade things have changed completely.It seems that more people than ever before are thinking about, or actually, putting theirmoney into property. On the face of it there has probably never been a better time;record low interest rates, close to full employment, increasing capital values, and thesuccess of the Buy-to-Let scheme have given smaller investors the confidence to havea go.In fact, everyone wants to get a piece of the action. You can decide what you want toread into this but I’ve just read an article in the Sunday Times entitled “MPs rush to join the homes-for-rent club”.The article says “More than a fifth of MPs supplement their incomes with second homesor businesses, according to the new register of member’s interests…landlord MPsdeclaring property interests, including 65 on the Labour benches, are taking advantageof the booming housing market of recent years…..Labour’s landlords are joined by 44Conservatives and 11 Liberal Democrats…the MPs are part of a growing phenomenon,the Buy-to-Rent market. Rising prices and looser tenancy laws make property attractiveto those seeking stable investments…..In the second half of the 1990’s second homeownership in England rose by 22% from 936,000 to 1,139,000. More than 130,000 Buy-to-Let mortgages, worth £10 billion, have been taken out.”So why has everything changed? At long last it seems that the residential propertyinvestment scene is recognised as an industry in it’s own right. Government interferenceis at an all time low, for the time being at least, although the recent proposals to licence 15
  • 13. owners of Houses in Multiple Occupation may become an issue. Finance is available formost aspiring landlords through Buy-to-Let. Interestingly, following the relatively poorperformance of the Footsie over the last couples of years, residential investmentproperty is now of interest to the large institutional investors who are queuing up to gettheir hands on as much stock as they dare to take.However, not everyone is convinced that residential property investing is a dead cert.In November last year (2001) the Sunday Telegraph ran a piece entitled “No Room Leftfor Buy-to Let” which suggested that buying for investment surged after the attack onthe twin towers on September 11th, when nervous investors decided to put their moneyinto solid bricks and mortar.The article went on to say “There are now 130,000 Buy-to-Let mortgages in the UK. Butmany of the 28,000 borrowers who have become landlords since the beginning of thisyear have already seen the value of their property drop”.It continues “the major attraction of Buy-to-Let is that the typical investor, who borrowsabout 70% of the purchase price of the property, covers mortgage payments with therental income and pockets the capital increase when he sells. This goes horribly wrongif property prices stall or fall, particularly if the property proves hard to let or rents haveto be slashed to get tenants.”Subscribers to my newsletter, Property @ Investment, will remember that last year(2001) I commented on an article published in the Estates Gazette which suggestedthat Buy-to Let had reached it’s peak in the South East, and that over-supply was goingto push down capital values and rental values.Six years into the Buy-to- Let scheme, are we finally about to see the bubble burst?Despite the dire warnings from the Estates Gazette and Sunday Telegraph, Buy-to-Letlending to private investors carried on increasing during the last half of 2001.In fact 2001 was a record year for property price increases, with average prices acrossthe country rising something like 15.5%. And the statistics seem to be showing thatthings are not slowing down in 2002, yet.However, there are suggestions that property values in the South East are poised tocollapse because of the boom in Buy-to-Let.This is interesting and is backed up by anecdotal evidence. A colleague of mine who isa very successful property investor, has recently bought a house in a prestigiousLondon borough, which he is now trying to sell asap. This he will be able to do, and hewill make a good 10% to 15% on his investment in a little under 6 months, so he’ll behappy.But he’ll also be relieved. He was intending to keep the property and let it out, but in thesame London borough he knows of many properties which were bought through the‘Buy-to-Let’ scheme, which have not been occupied since because of a lack of tenants.The owners are having serious problems with cash flow. 16
  • 14. To maintain and cover the mortgage payments these properties need to be let for£1500+ per month. If the rents were £1000 a month or less, they’d be plenty of takers,but demand is limited at the upper ends of the market. One lady investor I was talking tosays she has had to cut her rents by £50 a week. As you’ll see later, most of myproperties are only let for £50 a week (well, about £70 a week on average to be factual)so I feel for her.The owners of these properties are being eaten alive by the negative cash flow. OurAmerican cousins call properties like these ‘alligators’. These properties are going tocome back onto the market, and probably in sufficient numbers to depress the owneroccupier market, if only temporarily. I’m not saying prices will fall, necessarily, and ifthey do I am not predicting a massive crash, but inevitably I think things will have toslow down.So is property investing finished?No, not in my opinion. The Buy-to-Let scheme’ is great and has opened up propertyinvesting even to people with modest means. But like all good things it got too populartoo quickly. Many people just didn’t do their homework as they jumped on the bandwagon.A correction was, or is, inevitable. However, that is not to say that the idea itself isn’tsound.My view is that we have hardly started yet. In my opinion there are two principle reasonswhy the private rental sector will boom in the long run: • Changing demographics • A shortage of rental propertiesAs they say ‘It’s an ill wind…’ but unfortunately as society continues to fragment thesmall, private landlord will come into his own.According to the official statistics the private rented sector is destined to explode overthe next 15 years as demographics change Britain into a country of “live alone singles”.In 1996 10 million households comprised married couples, 6 million households had justone person. By 2016 it is predicted that this will reverse with only 6 million householdscomprising married couples, and 10 million households with just one occupantBecause of this it is predicted that the number of households in the UK will jump fromaround 20 million to about 26 million in 2021. And of the extra 6 million households mostare expected to be small family units, singles and couples, many of whom will want torent, not buy.Now consider these predictions in the light of two further trends that have occurred andwhich are set to continue.The number of households in the private rented sector has dropped from around 12% ofthe housing stock since 1981 to around 10% today, although the trend is now on the 17
  • 15. way up again. During the same period, presumably as a result of the success of theRight-to-Buy scheme, when council tenants were offered their properties to buy at adiscount, the number of households in social rented housing dropped from around 30%of households to around 20%.Unless I am mistaken, if these two trends continue, by 2021 there could well be asevere shortage of rented accommodation, both private and social, particularly social.This suggests two possible areas where private landlords may well prosper, and providea desperately needed social service.The first is in the “middle ground” providing good quality rented property to middleincome, working tenants. Ten years ago the average age of a first time buyer was 21,now it is over 30. A lot of these people will buy, but for now they want to rent goodquality accommodation.The second area is by making up the shortfall in publicly provided social housing forsocially excluded tenants. Local authority housing stocks are reducing. Despite effortsto boost the role of Housing Associations, private landlords may prove to be the onlyway to get rid of the current dependence on Bed & Breakfast and hostelaccommodation.Unfortunately there are still some in Government who dislike private property inprinciple, but I think their power base is quite weak. The thing they don’t understand isthat the Government now need private investors to provide social housing and asylumseeker accommodation. This is a real tangible service which is meeting a real tangibleneed.It’s a classic symbiotic relationship with both sides benefiting. The landlord gets a readysupply of tenants, and when the benefits system works, money backed by theGovernment. On the other hand the Government gets cheap accommodation forsocially needy groups, but without having the hassle of ownership and all that goes withit, such as the trouble and cost of maintaining the housing stock. Just think of all thatcapital which was once tied up in Government and council owned property which cannow be put to better uses.Over the last few years the Government have been falling over themselves to sell offeasily disposed of housing. A good example is the privatisation of armed forcesaccommodation. Another example is that Local Authorities are now being encouragedto sell on whole housing estates to “socially responsible” landlords, and these aren’t justHousing Associations.So unless politics gets in the way, it’s difficult to see how small private landlords can failover the next twenty years.But does this necessarily mean that property investing is a good idea for you?The answer is that it makes sense, if it makes sense for you. Whether it makes sensefor you will depend upon what you are trying to achieve through property ownership. Inthe UK over the last 50 or more years, rightly or wrongly, we have developed a culture 18
  • 16. of property ownership. Most people assume that property ownership is a “good thing”and don’t question it. As the success of the Buy-to-Let scheme shows, given theopportunity, people will just charge off and buy as many properties as they can.What they may be overlooking is that, as I said earlier, owning property is not an end initself, it is a means to an end.People associate property with security, giving us the expressions “as safe as houses”or “as safe as bricks and mortar.” It can be a great hedge against inflation. If we buy theright properties in the right areas, it can provide the means to grow our capital. Usedproperly it can be a very tax efficient way of accumulating wealth to supplement apension. And if we really know what we are doing, it can provide an income. We’ll belooking at aspects of all these in later sections.Property Versus other types of investmentsAlthough we’ve already seen that property isn’t without its problems, it is supremelyversatile which makes it an excellent investment for most people.Here are five reasons why property gets my vote as a better investment than all others: • Capital values grow at a higher rate than money rates • Returns can be supercharged through gearing • Property values can be disproportionately increased by spending on repairs and improvements • Virtually any one can borrow to buy property • It’s never going to go out of fashionLet me illustrate each of these by comparing property to other types of investment. Tomake it a bit easier I’ll assume that we have £10,000 to invest as we wish.Capital values grow at a higher rate than money ratesMy definition of an investment is something which provides an income. Some maydisagree with this definition, and I realise it’s rather simplistic, but I think that mostpeople would recognise that this definition is reasonable.An example would be if you had some spare cash you may choose to invest it in aBuilding Society account. Say you put our £10,000 into a Building Society, and theaccount is paying 4% pa gross interest, then over the next year you would earn £400,less tax if you are a taxpayer. Not very exciting, but it ’s an income of a sort, and so bymy definition this is an investment.Property compares extremely favourably. The average return for a Buy-to-Let propertyhas been calculated as being around 7% to 8%, and it’s possible to purchase rentalproperties so cheap in some areas that the return can be 15% pa or more. (By contrast, 19
  • 17. in high value locations such as central London, the yield will be much less, probablybetween 4% and 6%).I was reading recently someone else’s view that an investment is only a true investmentwhere the capital invested grows in its own right, regardless of the income generated.Going back to our example of the cash deposit in the Building Society, that wouldn’t beconsidered an investment under this definition because the amount deposited won’t begrowing in isolation to the interest.This may seem rather confusing but let me give you another example. Instead ofinvesting the £10,000 in a Building Society, we could use it to buy some stocks orshares instead. Assuming that the company whose shares we buy are doing OK, weshould receive a dividend, which is effectively income and the equivalent of the interestfrom the Building Society. A lot of companies in the FTSE 100 will pay dividendsequivalent to 3 or 4% of the share value. So we should still receive an income of around£300 or £400 per year.However, if things are going reasonably well, and there is sufficient demand from otherinvestors for these shares, then the share price will go up as well. So, if we had bought1000 shares at £10 each and the value of each share went up by £1, our £10,000 wouldthen be worth £11,000. So we’ve had growth on the capital element of £1000, or 10%,and a dividend or income of, say, £300 which is 3%.Let’s compare that to property. If you buy even a modest property in a reasonable area,then you’ll know from long term historical trends that the capital value is almost sure toincrease.According to the latest Quarterly Review from the Nationwide, house prices haveincreased on average by 7.5% per annum since the beginning of 1993. There’s noreason to assume that in the long run this trend won’t continue, and historically the rateof growth has been higher, nearer an average of 10% a year over the last 30 years.And if you’ve bought with letting in mind you will get a rent, or in other words an income,as well.Returns can be supercharged through gearingSo far, property is comparing very favourably. But now we can even blow stocks andshares away by doing something with property that you can’t do with most other typesof investments.“ I’m now going to tell you probably the most important secret known by, and used by,all the great property investors. I think you are going to be surprised. “Nobody ever risesabove mediocrity who does not learn to use the brains of other people and sometimesthe money of other people too… it takes a combination of the two”. So said NapoleonHill, the man who through his philosophy of personal achievement probably helped tocreate more self made millionaires than any other person in history. 20
  • 18. The trouble with using other peoples money is that debt makes us squeemish. From anearly age we are told that debt is bad and should be avoided. And that is true, or at leastpartly true. There are certain types of debt that we should avoid at all costs, but, like it ornot, any businessman will tell you that most businesses cannot grow without the properuse of investment debt.This is especially true of property where the sheer scale of the figures involved meanthat only the super rich can afford to be seriously involved without some form of debt. Ifyou want to build a sizeable and profitable property investment business the truth is thatyou will require some short term debt.So the first rule of property is “ investing in property works better when you usesomeone else’s money” “. Source ‘An Insider’s Guide to Successful Property Investing’Let’s apply this rule to our example.Ordinary investors can now borrow considerable sums of money to buy property. This issomething you have difficulty doing with any other type of investment unless you are‘something’ in the City. However, with the introduction of the Buy-to-Let scheme, mostpeople can borrow a sizeable proportion of the purchase price of residential investmentproperties.For example, the bank I deal with will lend 85% of the lower of the purchase price or thevaluation. So, let’s assume you use the £10,000 to buy a property. If you can borrow at85% to gear up, then after allowing a bit for legal fees, stamp duty and bank charges forsetting up the loans, you should be able to buy a property worth around £63,000.Assuming a fairly modest yield of 10%, your gross income will be £6,300 a year, and attoday’s interest rates the mortgage will probably cost you around £3,100 a year (to keepit simple this is assuming an interest-only loan at 1.75% above Bank of England baserate).Let’s look at what you’ve achieved.After allowing for management fees, insurance and mortgage repayments, your netincome will be around £1,900 a year. That’s a return on the original £10,000 invested of19%.You also have a property worth £63,000, the value of which is compounding probably ataround 7.5% pa if the trend of the last decade or so continues. So if you hold theproperty for ten years it will be worth £130,000. If you deduct the original purchase priceof £63,000, you have made a profit of £67,000. That’s a 570% return on the original£10,000 invested, not including the 19% per annum you’ve been making from the rent.And all this is being paid for by somebody else, by the tenant.“This is the power of gearing and the effect is even more pronounced with higheryielding properties, and when you are able to arrange loans at lower interest rates. 21
  • 19. If there is a key to success in property this is surely it. When you understand what ishappening you will see why buying property with other peoples’ money is much moreprofitable than buying property with your own money.” Source ‘An Insider’s Guide to Successful Property Investing’Even if you do have enough money to buy a property outright it would pay you not touse all your own money. Let me prove it.If you had bought a property outright, and without a loan, using the £10,000 (yes, insome areas of the country, this is possible) you would still have a decent return from therent, probably around 15.75% after deducting costs, but the capital growth would becompounding from a much lower base. If you achieved 7.5%, which is doubtful for thistype of property, the value after 10 years will be at most £21,000. The profit will be£11,000, so the initial investment will have grown by only 110% compared to 570%That’s why being able to supercharge the returns on the money you put in makesproperty so attractive, and gearing a property investors best friend.Property values can be disproportionately increased by spending on repairs andimprovementsIt’s a “rule” in property that cost does not equal value. You’ve probably got neighbourswho you know have spent thousands of pounds on their homes but you know that ifthey ever put them on the market they’d never recoup the full amount they’ve spent.A classic example is conservatories. You can spend £20,000 on a conservatory but addonly £10,000 to the value of the property. An even more extreme example is swimmingpools, which can cost thousands and thousands of pounds to put in, but which manyestate agents will tell you add nothing to value of the property. This is because potentialpurchasers see them as a liability rather than an asset. They are hard work and cancost a lot of money to maintain.Another less extreme example is double glazing. I wouldn’t be without it but you’reunlikely to get back in extra value what you spend.The good news is that this rule also works in reverse. There are things that you can doto a property which will increase the value by more than the amount you spend. Twoprime examples are kitchens and bathrooms. You can spend £5000 putting in a newkitchen safe in the knowledge that it will increase the value by £10,000. The same withthe bathroom. And, to a lesser extent, it also works with central heating.So the ideal is to find a property that requires some renovation and to do it up. Let’s saythat you buy the property worth £63,000 but which has an old-fashioned kitchen and nocentral heating. You spend £10,000 improving it, and end up with a property worth£85,000, which you then let out.You now have the best of all worlds. You have: • an instant capital gain of £22,000 for the refurbishment 22
  • 20. • compounding capital as house prices increase, but now the baseline from which that will be calculated will be £85,000 and not £63,000 • an income from the rent, which will be higher, reflecting the improvements you have madeYou can’t actively “work” and “add value” with the other types of investment we’velooked at because they are passive investments. To do the same you’d have to be ableto influence the Building Society is run so it is more efficiently and can pay moreinterest. Or you’d have to have a direct say in the running of the company in whichyou’d bought shares in order to improve the way it is run, or even find new activities forit to undertake which are more profitable. Both of these are impossible for a smallinvestor.Virtually any one can borrow to buy propertyWith the Buy-to-Let scheme, and much more positive attitude by the banks to property,virtually anyone with a job can now borrow to buy property investments.It’s never going to go out of fashionThis comment is really self explanatory. In the case of residential property in general itis 100% true, every one needs somewhere to live and always will. However, don’toverlook that certain types or ages of property can become functionally obsolescent,and certain areas can go out of fashion.In the case of commercial property, certain types of property regularly go out of fashion;we’ve seen the demise of the corner shop, the high street bank, the rural post office.Wine bars look as if they are on the way out, as are smaller cinemas. Other things ariseto replace them; at the moment gyms, themed pubs, internet cafes and other leisureactivities.However, as a general principle, we will always need property, especially residentialproperty, and at the moment we need a lot more than we have.Compare this with other types of investment like internet stocks, which came and wentin a flash, leaving a lot of lost money and heartache behind them.So if after reading all this you think that property is the most suitable form of investmentfor you, you will need to think about the systems you to put in place to start, run andmanage your property business.The starting point is effective goal-setting and planning. 23
  • 21. What am I trying to achieve and why?In its simplest form your goal setting and planning systems should work together likethis:Step One: Know what you are trying to achieve and why.I dealt with goal-setting in detail in “An Insider’s Guide to Successful Property Investing”,and so I don’t propose to cover it again here. However, knowing what you are trying toachieve and why is a crucial question for anyone thinking of getting involved in property.It’s a major investment, even the most basic of the “raw material” required to start youoff in property will cost you thousands of pounds.My reasons for going into property investment were primarily to create a short-termcash flow, hopefully coupled with long-term capital growth which will substitute orsupplement my pension in 20 or so years time.You will have your own reasons for wanting to invest in property, and these should beconsidered in relation to your goals and aspirations in the other areas of your life. This isimportant because when we consider devising a strategy to help you achieve yourproperty goals, you will find it impossible to do so if you don’t know what you are tryingto achieve or why.Remember, owning property is not an end in itself, it is merely a means to an end.Investment in property for investment’s sake is completely pointless unless you arestriving for an anticipated outcome.The other steps in the planning process then follow on:Step Two: Develop a strategy which you feel comfortable with and which is right foryou, with the aim of achieving a predefined goal or target.Many investors have no strategy as such, they would say that their strategy is “To buyproperty”. This is asking for trouble. Any one can buy a property, the key is to buy theright property.Step Three: Take action following that strategy in order to achieve that goalStep Four: Review progress regularly and fine tune your strategy as necessary. Whenyou achieve your goal, set another and produce a new strategy to achieve itStep Five: Repeat the aboveBefore we go any further, just think about your answers to these questions. • What do I want to achieve from property? i.e. capital (state a specific amount) and/or income (state a specific amount) • Why do I think I can use property to achieve these goals? 24
  • 22. • Am I prepared to pay the price?The first two questions may seem self-explanatory and with some careful thought youshould be able to find accurate answers. However, the last of these questions needsmore thought.Let’s face it. Property investing isn’t everybody’s cup of tea. First there’s the fear thatgoes with putting so much on the line. Even the cheapest property investment isrelatively expensive. If you do it properly and take out bank financing, it can be anuncomfortable feeling to be in debt to the bank for thousands or even hundreds ofthousands of pounds.I’ll talk more about the fear of buying later.Even when you break through this psychological barrier, we all know that owningproperties can be stressful. Having tenants doesn’t make it any easier, most tenants arefine but one bad experience with a tenant can last you a lifetime.But you know there’s no such thing as a free lunch, and it’s usually true that the greatestreturns are achieved by taking the greatest risks.Even before I went into property investing, I had never had a hassle-free ‘proper’ job.Property investing has its difficulties but I see it as swapping one set of problems foranother. In my opinion I am no worse off, even when I have severe managementproblems to resolve. In fact, because of the potential returns, I’m actually much betteroff.So, assuming you’ve taken the time to write down your clear, specific, measurable andtime limited goals, and that you are quite clear what you are trying to achieve inproperty, let’s move on to making a plan. 25
  • 23. Section threeThe planning systemIn this section you will learn: • What your trading options are: Cash generation Cash flow Equity • How to devise a strategy to achieve your goals • What sort of property suits your purposesSo, assuming you’ve established your goals, you’ll now need to make a plan to achievethem. If you are going to use property to achieve them, we now need to look at whatoptions property gives you, and how property can form part of your plan.If you already own property, now is good time to review your current goals, strategy andprogress, and familiarise yourself with the processes that follow to make sure you areon track.What are the options?There are three basic functions of property. It might help if we describe them as “cashgeneration”, “cash flow” and “equity”.In plain English they can be defined as follows: • “Cash generation” is the active creation of immediate profits as lump sums, usually through trading, which you can put into your pocket. • “cash flow” is the building of a positive passive income where the rent received exceeds all on-going costs and outgoings • “equity” is the net worth of your interest in the property, usually defined as the open market value less any loans still outstanding against the property.The reason for buying any property should be to benefit from one or more of these.Let’s have a closer look at each. 26
  • 24. Cash generationThe easiest way to generate cash in property is by buying and selling. There are threeways to approach this, being: • Retailing • Renovating • Wholesaling Retailing • The first main form of cash generation is ‘retailing’ which is to “buy low and sell high”. In it’s simplest form, this is where you will identify and buy a bargain property i.e. a property where you can negotiate a purchase price below market value, and resell it at a higher figure, or it’s full value. If you are prepared to put in the hard graft you will be able to find properties at below ‘market value.’ An alternative to you putting in hard graft is to get someone else to do it for you. We’ll look more at buying systems later, but just as a taster over the last month I’ve bought 7 properties at well below their market value. This is solely due to the activity of an agent who wants to build his management business. He has sourced and identified the properties for me, at no charge. On average, by keeping his eyes open and talking to his fellow agents on a regular basis, he has found properties which he knows are being sold at prices below their market value. In most instances the vendors want a quick sale, but in one case the property has simply been put on the market at the wrong price. As a result of steering me to these bargain properties he has saved me at least 20% on every deal. That means I’m in a profit situation as soon as I complete each purchase. Renovating • The second main method of cash generation is when you buy a property which needs work doing to it to make it saleable. In other words, to renovate it, or as the Americans say “Rehab it”. If you can buy the property at a bargain price, in other words at a price lower than it’s value even after taking into account the repairs required, then the profit potential is even greater. If you get this business right, you can do very well from it. A couple of houses a year in the right area and at the right price can make you a decent living. There are a lot of books and manuals available which cover the subject in great detail, so I don’t intend to do so here. 27
  • 25. However, before you rush out to buy a wreck there are a few things you shouldthink about.There are drawbacks: • It takes time. This isn’t necessarily your time, unless you decide to do the works yourself, but the time taken to run and complete the project. You should budget on 180 days from start to finish, depending on the size, type and location of the property and the works required. This assumes everything goes well and that you find a buyer in a reasonable time. Don’t expect to see any profit for at least 6 months. In the meantime you will need to live. • These projects are cash intensive. How much you will need to spend will depend on the size of the project you opt for, but even relatively small properties requiring renovation may need £20,000 spending on them. Add that to the price of the property and you’ll see that you need a lot of working capital to start with. This doesn’t necessarily have to be your capital. Some lenders will finance this kind of project, and you may be able to juggle credit cards (especially using credit card cheques and the offers of ‘nil interest on balance transfer’ deals) to cover the cost of the works themselves. However, this means that you have to have an eye on the interest paid and this will make your timing even more critical if you want to exit the project with a (decent) profit.If you think that renovating houses could suit you, you will need to set up asystem to find un-modernised houses or houses in disrepair. The most obviousway is to register with estate agents in your target territory. Also to “drive thearea”. This is covered elsewhere in this e-book.When you find a house, you’ll need to estimate the cost of repairs andimprovements. Once you’ve done two or three projects you’ll find it relativelyeasy to estimate the costs yourself. For the first few you may have to makearrangements to obtain quotes from contractors before making an offer, or makean offer subject to obtaining quotes.When you first start out you might want to start small and build up slowly. I’veheard it suggested by other professionals in this field that you shouldn’t startwith houses with major structural problems. Instead you should cut your teeth onhouses in need of cosmetic repairs or updating. Then once you become moreconfident you can step up to take on bigger challenges.When you find a suitable property you’ll have to work out how much you canafford to offer. Working backwards from the estimated resale price is the bestway to calculate the maximum price you can pay. Here’s a very rough and readyguide: 28
  • 26. Estimated Resale Price (conservative)Less: Repair costsLess: Holding costs (i.e. interest on house price and repair costs)Less: Resale costs (i.e. agents fees and solicitors fees)Less: Minimum Profit, £10,000Equals: Maximum Purchase PriceA more detailed example of a spreadsheet for calculating the value ofredevelopment and refurbishment projects is given in “An Insider’s Guide toSuccessful Property Investing”.Try to buy it for less than the figure you arrive at. If your maximum purchase priceis so far removed from the vendors expectations that you can only buy it bytrimming your profit, then walk away. Don’t be tempted into a project where theprofit is less than £10,000,or whatever you think is appropriate bearing in mindthe size of the project. This is really your minimum buffer. It only takes oneunforeseen problem to significantly reduce this amount.For example, on my first renovation project I unexpectedly found that I needed tore-render the property. This extended the refurb period by about a month, so aswell as adding the cost of the rendering work itself, it added a months interest tothe holding costs.Once you’ve purchased, you’ll need to do the repairs and renovations. There’s alot of material available which suggests ways you can plan your projects so thateverything runs smoothly and in order. It’s important to do the jobs in the rightsequence so one contractor doesn’t have to undo the work of the contractor whohas just finished. For example, there’s no point having the plasterer in if theelectrician and plumber then arrive and start hacking chunks out of the wall to runcables and pipes. It’s all common sense but needs to be thought through beforeyou start.If you aren’t going to do the work yourself, you’ll need to put a team together. Thebest way to find them is word of mouth recommendations by friends and family.Otherwise look in the local paper and the Yellow Pages. Always get more thanone quote.For example. When I arranged replacement windows for one of my renovationprojects, I had about 5 firms come and visit who offered various deals, but all atprices more than I had budgeted, and all of which would have significantlyreduced my profit.In the end I went direct to a local manufacturer, explained I was renovating aproperty as a business and asked for a “trade discount”. I got 50% off. I also gotfree fitting. The fitter told me that if I had pushed harder I would have got a 60%discount.Always go to trade outlets for your materials: you can now always ask for, andlegitimately claim, a trade discount on anything you buy for your properties. 29
  • 27. The final stage is to sell the property. In a very “hot market”, you may be able to do this yourself. Otherwise it would be preferable to use an agent. If you decide renovating and reselling should be part of your plan, buy with selling in mind. In other words operate in areas where owner-occupiers want to buy. If not you’ll be disappointed if you can’t sell for a long time, and your profit is eroded by interest payments. Wholesaling• The third main method of cash generation is ‘wholesaling’. This is where you buy low and sell low. This could be a starting point if you have no capital at all because the idea behind it is that you’ll identify bargain properties and then resell them on to other property investors at a price which will give you a profit, albeit a modest one. If you have no cash to put down on a property in the first place you could instead source suitable properties and then introduce them to other investors or developers. You can then charge a finder’s fee for your efforts and, depending upon the value of the property, you may still receive a sum similar to the profit you would have achieved if you had been able to purchase and sell the property on. I’ve seen this done, and I know that it works. You just have to know who’s in the market and what they are looking for. My old boss, who is a master wheeler and dealer, identified a maisonette in Kensington which he knew could be converted and split to make two separate flats and a decent profit. He knew this because he had done it for himself and he knew what was required: he knew how to get planning and building regulation consent, and he knew to within a thousand pounds or so how much it was going to cost to do the works. Just as importantly, he also knew that a fellow investor had admired his previous work and had said that he would like to do a similar scheme to keep one of the flats for himself and rent out the other. My old boss merely had to walk into the Estate Agent’s office, make an offer which, after one or two phone calls, was accepted, and then ring up his contact and tell him the good news. Contracts to buy and sell were exchanged simultaneously and on completion the funds came from his purchaser and by electronic transfer went through his account straight on to the vendor. And he made £10,000. 30
  • 28. Cash flowThe creation of cash flow is the second basic function of property.Is it possible to create a positive cash flow by buying and holding properties to let asinvestments? The answer is yes, but probably only if: • you pay cash • you are prepared to wait, or, alternatively • you buy high yielding propertiesIf you buy properties where the gross yield is 9% or less, you will find it hard to finance apurchase and create a positive cash flow. This is especially true if you have otherincome and any profit on the rent received is taxed as income.Even without accounting for income tax, and taking into account current low interestrates (the Bank of England base rate is 4% as I write), it will be hard to produce apositive cash flow on yields as low as 9% because finance and running costs will almostcertainly exceed the rent.These are the costs you will need to take into account:Firstly, letting and management. You may be able to do both yourself. If it is not easy,quick and cheap for you to find tenants, then by not using a letting agent you will becreating a false economy.Management can be very time consuming, and depending on the tenant, quite stressful.A few weeks ago a pipe burst in an empty flat of mine (nothing to do with cold weather,an old joint just gave out), and water seeped into the flat below. The owner of the otherflat was besides himself with worry in case it got any worse, but there was nothing Icould do. I was in Spain 1000 miles away.One phone call later and my managing agent was there in ten minutes, and a plumberwithin the hour. The whole incident was sorted for just £50.A full management service like this will usually cost between 12½ % and 15% of therent collected, plus VAT. For a ‘letting only’ service you will probably have to pay 10% ofone years rent plus VAT.I’ll tell you more about management in a later section.The second major cost is finance. My lender lends at 5.5% on loans over £25,000, 6.5%on loans under £25,000. You can reduce the monthly payments by taking out aninterest only loan, but you will have to pay off the capital one day. There are differenttheories and views about this which I’ll tell you about later.As an aside, I started with interest only loans to build maximum cash flow which I wasable to plough back into building the portfolio. My lender doesn’t require interest only 31
  • 29. loans to be backed by endowment policies which is handy, and meant I could keepmore of the rent. I was able to put this back into buying more properties. I used thesurplus as a deposit to cover the difference between the purchase price and what mylender would allow me to borrow. I have now reverted to traditional capital repaymentterms.You can also reduce monthly payments by increasing the length of the loan period,although you will pay more interest in the long run.Another way to reduce monthly payments is by borrowing less if you have the cash todo this, but you will then be losing the ‘gearing effect’ I showed you earlier.The next major cost is repairs and maintenance. These are difficult to quantify as theywill relate directly to the age, and type of construction of the property, how well it wasbuilt, and how well it has been maintained. I suggest budgeting 10% of the rent. Even ifyou don’t spend all that in any one year, keep the balance to one side as a fund,because you will have to upgrade decorations, fixtures, fittings and furniture at leastevery 5 years.Then there are voids. These are bound to happen but are unpredictable. I’ve hadtenants stay in a property for two years, others have left after 6 months. How quickly aproperty will re-let will depend on what and where it is, and what the potential tenantmarket is like.You should get warning of the tenant leaving because strictly they should give a monthsnotice, so you can start advertising before they go, and start showing potential tenantsthe day they leave.Finally, there’s insurance. Again this is difficult to quantify for the same reasons asrepairs. There are special schemes for landlords, and if you own several properties youwill probably find it cheaper to insure under a Bock policy.Let’s have a look at the effect of these costs on cash flow assuming the purchase of a£100,000 property yielding 9% gross. I have assumed that a repayment loan has beentaken out for the full 85% loan to value available.Annual rent received £9,000 per annumLess management at 15% £ 1350Less VAT on management £ 236.25Less repayment loan on £85,000 for20 years at 5.5% £ 7016.4Repairs say £ 900Insurance, say £ 350Total costs £ 9852.65Balance (£ 852.65) negative 32
  • 30. Even if you are able to negotiate a better deal on the management, and take out aninterest only loan, the cash flow will look like this:Annual rent received £9,000 per annumLess management at 12½% £ 1125Less VAT on management £ 196.88Less interest only loan on£85,000 at 5.5% £ 4675Repairs say £ 900Insurance, say £ 350Total costs £ 7246.88Balance £ 1753.12This is the equivalent of 11.69% on my own money invested, which is not very exciting.Because of the difficulties of generating a positive cash flow on properties giving thenational average yield or lower, I purchase properties with gross yields of 13%. Thissuits me, although I have sacrificed potential long term gains in capital value.You would probably think that large family homes in London and the south east shouldbe a great long-term investment. After all, the capital growth in these areas has beenphenomenal over virtually any period of history except for one or two recessionary blips.But because they are relatively low yielding, in other words the rent is likely to be lowrelative to the capital value, they are often, at best, only a break-even position in termsof cash flow. Even if they carefully select a property to show a positive cash flow, veryfew “newbie” investors think ahead to all of the real expenses which crop up withproperty ownership such as ongoing maintenance and repairs, insurance, management,the cost of voids when the property is vacant and the associated costs of re-letting, andperiodic upgrading.You can be sure that no matter how much you are expecting to spend on your property,you will always need to spend more.EquityProperty is great for building equity which is mainly generated by: • increases in capital value • paying off the capital element of the loan • undertaking repairs and improvements which disproportionately enhance the value.We’ve already looked at the last point in ‘renovating’. Let’s have a closer look at the firsttwo. 33
  • 31. Increases in capital valueThere is common misunderstanding which has given rise to the popular view that“properties always go up in value.”This is not true.For example, from first hand experience I know that the areas where I buy are unlikelyto show signs of significant capital growth in the short to medium term. At best theremay be some minor growth in the long term – I’m talking about a few percent over tenyears.In the short to medium term I always have the prospect of a fall in values hanging overme. The plight of the inner city areas has been well documented where demand forterraced houses fell, values plummeted and whole streets are now empty and boardedup. In many of these areas prices have hopefully stabilised, and demand from investorshas taken up some of the slack.However, the average wage in this country, coupled with the lending multiples availablefrom the banks and building societies, means that first time buyers are able to leap-frogproperties at the lower end of the market. They are able to go straight to the next level.I predict that market forces will eventually correct the balance, and that this extrademand will push prices in the next level up to a point where the ‘first tier’ properties willbe of interest again to the first time buyer. This may take years to work through thesystem, unless interest rates rise significantly over a relatively short period and buildingsocieties and banks tighten their lending policies.One of the areas I bought in a couple of years ago has seen a lot of properties beingbought by investors to put asylum seekers in. The result is that the usual tenant market,which comprises claimants on benefits, are reluctant to live there. In the long run thismay have a depreciating effect on capital value. Of more concern is that if theGovernment cancel their contracts for asylum accommodation with private landlords, alarge number of properties could become vacant and available to let or for sale at thesame time. That could force capital and rental values down.However, having said all of that, most peoples’ experience in most areas of the countryis that the long term trend is for property prices to rise. For as long as anyone canremember, this has been true, and is true even though we have seen occasionalgeneral downturns during recessions.I’ve just downloaded the latest Nationwide Building Society commentaryhttp://www.natonwide.co.uk/hpi/quarterly/headlines.htmwhich says that year 2001 was the strongest year of price growth since1988. Eventhough it was predicted that the house market would slow, house prices are stillshooting ahead in 2002. Some experts are predicting a correction. They point out there 34
  • 32. is pressure on the Bank of England to raise base rate, and talk of unlet ‘Buy-to-Let’properties coming back on the market and depressing values. We’ll see.In “An Insider’s Guide to Successful Property Investing” we looked in some detail at howrises in capital value can produce significant long term equity growth, and how this canbe enhanced by buying in ‘hot spots’ early in the economic cycle.As an aside, and remember that I said capital growth is a bonus which I am not countingon, I’ve just discovered that one of the properties I bought about 18 months ago hasprobably literally doubled in value.I tell you this not to be smug, but merely out of interest that even depressed areas cancome back. This is a useful lesson to learn.In fact, one strategy I have seen promoted by a successful investor is to invest in areaswhich have ‘bombed’ but which for well researched reasons will come back up over athirty year time frame. I’ll tell you more about that later.Paying off the capital element of the loanLogic suggests that this is even more worthwhile when: • there is an increase in capital values • the loan is paid off by other people’s money, for example, by rent received from tenantsOne of the strongest combinations is both of the above occurring simultaneously.As I said earlier, I am not relying on growth in the value of my properties. I see anygrowth as icing on the cake. However, while I am receiving rent I am effectively gettingthese properties for free because the tenants are paying the mortgage and buying themfor me.Even if I put the properties into an auction and sell them at the end of the loan term, andonly get back what I paid for them (unlikely, even I am expecting growth over twentyyears) I am still quids in. Because the rent produces a surplus over the mortgagepayments I will have taken my money out long before.Which option is right for you?So how do you know which is the best option for you? The answer is, they are all rightfor you, but they aren’t necessarily all right for you now.New investors will opt either for refurbishing properties and selling them on, or buyingproperties to hold and rent out.This decision may be based on something as naive as they like DIY, so they opt forrefurbishing. Many people get stuck because they don’t know which one they should beconcentrating on first. Of the two ideas, holding to rent out is the most popular. 35
  • 33. If they are in full time employment they may assume that they don’t have time for goingthe refurbishment route. Or they may think they only want to create an income tosupplement their salary or pension, and so jump straight into being a landlord.These influences may sound logical but even so they are wrong, and can lead tounexpected results.Most people charge off and start accumulating rental properties. The thinking behindthis is quite sound on the face of it. They assume that they can produce a healthy cashflow while, at the same time, building up equity for the future.If you are able to keep paying the mortgage then after 20 years you’ll have loads ofequity. But what happens in the meantime?It is likely that they’ll wake up one day and realise that actually their income is no betterthan it was before, sometimes it’s worse, and they always seem to be broke.The idea of being a professional landlord is much more appealing and much easier toachieve now that the Buy-to-Let scheme is in full swing. It’s for you to understand that ifyou go into the rental side you’re really tying your capital up and overlooking theopportunity to make capital lump sums.What a lot of people getting involved in the Buy-to-Let stampede don’t realise, becausethey haven’t thought it through, is that they need to carefully select the type of propertywith their goal in mind.There is a strong argument that if you are just beginning in property then cash is themost important consideration, especially if you are hoping to get into property full timeas quickly as possible.In fact, cash doesn’t just fund your costs of living, but it also helps build your savings,which in due course can accelerate your investment programme.Firstly, let me put paid to one false assumption that trips up a lot of would-be investors,which is that, ‘being a landlord is good and will pay a decent income.’There is a school of thought that says you should not become a long term landlordduring your first year in the property business.Instead you should concentrate on cash generation. Buying rental properties won’tnecessarily create a cash flow you can live on in your early days. The best advice I’veseen is:“If you think this is the case, take a current landlord to lunch and ask him or her whereall the money goes from rentals. You won’t like the answer.” Ron Legrand.And this isn’t just an isolated view. 36
  • 34. I’ve seen owning multiple rental properties being compared to running a large business.When a new business first starts up, it takes quite a long time before you see a profit.This is also what happens with rental properties. Most properties will need somemodernising or repairs when you buy them, and this can mean it could be months oreven years before you get back the money you put in.I’ve seen it argued that if a boiler blows, for example, or if you have another majorproblem, you may have to spend hundreds, or maybe thousands, of pounds to put itright. That’s why you need cash reserves.So if you don’t have a lot of money you might be better off not going into the rentalbusiness and instead should be concentrating on refurbishing and trading to build upyour capital.You’ve also got to consider this in the context of how much rent you get from theproperty that you purchase. My particular forte is low value property with a relativelyhigh yield. These are the sort of properties that let for £60 or £70 per week. I only needone or two small items of repair to crop up and half the month’s income can be wipedout. If you’ve geared up and have mortgages on the properties that can mean no profitthat month, or even worse, a loss. Every time I arrange a gas test to get a CP12certificate I lose the equivalent of a week-and-a-half’s rent.I’m not necessarily saying that being a landlord would be bad for you. I don’t know yourneeds or resources. Remember, all these comments are really geared towardsprofessional landlords who need to live off their income.If you have the resources and income to live independently of your propertyinvestments, and you are happy for the properties to break even while you build capital,this may not be a concern. But either way, I think you should know that renting propertyisn’t necessarily the money-spinner many people assume it is. At least, not in the short-term.To try and redress the balance some owners of property investments will increase theirborrowing against the property. If the figures stack up then through the use of overgearing they can borrow more than they put in. If they are able to do this again andagain they can build up quite a cash deposit in their bank account.For example, they may be able to: • Buy a property cheap • Wait for increases in capital value as property prices rise • Do improvement works which increase the value of the propertyIn any of these situations they will be able to remortgage the property to take out part ofthe extra equity as a loan. If they wish, this could go straight into their personal bankaccount. 37
  • 35. However, no matter how satisfying this may seem, it is still debt and the more debt youhave the more rent will be going towards paying it off. Unless they are careful, whatseems like an asset, in other words having cash in the bank, can quickly become aliability. It only takes a couple of interest rate rises and cash flow is suffering again.Now let me deal with two misconceptions to do with property refurbishment.Firstly, renovating houses doesn’t necessarily take a lot of your time. If you subcontractthe work out, and merely attend to the project management, it can take only a few hoursa week, and most of that can be done on the telephone.The second misconception is that the way to make money from renovating properties isto do the work yourself. In the scheme of things your time is much better spentorganising the refurbishment, or looking for new projects, rather than trying to do tasksyourself. You are only going to be saving £4.50 an hour which you would otherwisehave paid to a school leaver.If you want to do the works yourself, you will only be creating another low paying job foryourself.How to devise a strategy to achieve your goals“The main thing is to keep the main thing the main thing.” Stephen CoveyLet’s quickly summarise where we’ve got to so far. • We have set goals (specific financial targets) to achieve and dates to achieve them by • We have reviewed our various investment options and decided that property best fits our requirements • We’ve seen that property can be used • for cash generation through retailing, renovating and wholesaling • for cash flow • for equity • We’ve seen that cash flow and cash generation can be mutually exclusive; what seems like a good idea to novice investors, i.e buying rental property, can kill their business there and thenOnce we have decided which of the options is our priority we can start to think aboutstrategy. So how do you devise your strategy? There are so many books, courses andseminars about property nowadays, I’m sure that most people feel overwhelmed and 38
  • 36. don’t really know where to start. Often the more you read the more confused you canbecome.In my opinion most private investors would be wise to start with residential property, asother forms of investment property require more specialist knowledge.Also other types of property investment sell at higher prices and therefore need moreinitial capital, and an investor potentially has more to lose.Then you have to make the decision whether you buy and hold for capital growth,whether you buy and let out for rental income, or whether you refurbish and trade on tomake a capital profit. Each way seems attractive but most people don’t have the readyfinance to try all three at the same time.This is an individual process. I assume that 99 times out of 100 property investors andentrepreneurs will be looking to increase their capital or net worth in the long term andso will be looking to build their equity. This suggests owning and holding properties forthe long-term increases in capital value and this will inevitably be supplemented byrental income.However, you will still have to decide whether your current priority is cash generation, orcash flow.If it is cash generation, then the best strategy may be to concentrate on the use of thethree methods listed, but coupled with a plan to set aside a certain proportion of theprofits generated to fund the acquisition of an investment portfolio.Alternatively, if like me you are able to keep the day job going, you may wish to skipstep one and go straight to cash flow through the selective purchase of propertyinvestments to hold mainly for growth in capital to build equity (either by increases invalue or by using the rental income to pay the mortgage) but also over time to create acash flow surplus for income.Or you may choose to keep the day job going but opt for cash generation, toprogressively build your capital. This will be accelerated due to you not needing to dipinto it for living expenses. You can then choose to build a portfolio purchased for cash,with the possibility of an instant cash surplus, or instead you can gear up on a largerscale.You will need to decide which permutation of these best fits with your financial goals.Most beginners in property find it confusing devising a strategy because of the largenumber of permutations of property type, location, tenant type etc etc. Just think aboutthe lists that follow:Reasons for buyingCash generationCapital growthTax breaksIncome 39
  • 37. Methods of tradingRefurbishmentBuy-to-LetWholesalingRetailing“Buy low sell high”Property typesCheap propertiesExpensive propertiesSingle propertiesMultiple propertiesPortfoliosResidentialCommercialFlatsHousesOfficesFactoriesShopsTenant TypesProfessionalWorking familiesWorking singlesStudentsBenefit claimantsAsylum seekersWith so many choices in each category, how can anyone come up with a strategy thatthey can follow consistently? The danger is that you can easily be distracted and try toomany different approaches.What you need is an approach or strategy that suits you, and then to stick with it.There is a school of thought that any strategy or plan with an aim in mind, followed withpersistence and consistency will produce better results than a series of random butotherwise worthy actions backed by no overall plan. “Consistently putting deals together is easier than you think. Really! Making things happen and making serious money as a real estate investor doesn’t require luck or extraordinary negotiation skills, and it doesn’t take talent or money or a masters degree in business. Heck, none of that stuff matters. What does it take? In a word, PERSISTENCE” Joe Kaiser 40
  • 38. Exit strategyA key element to an any strategy is knowing what the end game is. It really worries mewhen people have no exit strategy.For example, if you are buying to refurbish and sell on, the exit route should bestraightforward, but you will still need to know • how am I going to sell it? i.e. by auction or by private treaty • who is going to sell it? i.e. an estate agent, and auction house, or myself, privately • who am I going to sell to? i.e. investors or owner-occupiers?Often, things may not be so obvious. For example, if you are buyinginvestments to let and hold you may need to ask questions like these: • should I sell the property to an investor as an investment with the tenant in place? • Would I be better off waiting for the property to become vacant and then selling to an owner-occupier? • Which of these options will produce the quickest sale. • Which will produce the best price? • What do I need to do if I need my money back in a hurry?As I have said my niche is low value, high yielding residential property. The locations Ideal in have a limited owner-occupier market, and if I ever need to sell I will be planningon selling to an investor.Rather that selling individual units, I will sell the portfolio as a whole. This is my plan andI have deliberately put together a portfolio with a mix of properties which is regionallyfocused for ease of management. They are all held in a limited company which will savea potential purchaser stamp duty, and which will make conveyancing easy – it onlyrequires a sale of the shares.This is a plan, and when I ever want to get out of property, or if I ever need to get out, Iwill be several steps ahead of other investors who have thought no further ahead thanthe next rent cheque. 41
  • 39. What sort of property suits my purposes?Unless you have specific reasons for considering a niche investment category like fishfarms or telecommunication aerials, most investors will choose between eitherresidential property, or more mainstream commercial properties such as offices, shopsor industrial or warehouse units.I’m now going to look a bit closer at the pros and cons of: • residential property • commercial propertyResidential propertyIn “An Insider’s Guide to Successful Property Investing” we looked at different types oftenancy arrangement, the legal requirements of being a landlord, and even some nicheresidential property investment opportunities such as residential reversions, freeholdground rents, and holiday homes.For most property investors the choice will lie between houses, flats or houses inmultiple occupation - an HMO. A house in multiple occupation could be a single dwellinghouse, in which individual bedrooms are let and amenities like the kitchen and bathroomare shared, or could be a property comprising a number of individual, self-containedflats, accessed off a shared landing.The definition of an HMO is given within the various Housing acts, and this definition iscurrently under consideration by the government. Of the three principal types ofresidential property you are most likely to get involved with, HMOs are the least straight-forward.Unfortunately there seems to be a lot of uncertainty surrounding the government’scurrent review of licensing HMOs, which I understand is now mandatory for all localauthorities. Although I have read plenty of articles in the professional property press,have visited the government’s website dedicated to the licensing of HMOs, and havespoken to environmental health officers in local authorities, whose job it is to undertakethe licensing, I have to admit that I am still confused as to what the scheme isattempting to achieve, what the requirements are to comply, and which particularproperties are affected.As far as I can see, and I am prepared to be corrected on this, it is down to individuallocal authorities to plan their own programme for licensing. If you own, or want to own,an HMO, the best advice I can give is to ring the environmental health officer at the localauthority concerned, and discuss with them what is required.I went through this process a few months ago when I considered buying a propertywhich had been constructed in Victorian times as a single dwelling house but which has 42
  • 40. subsequently been converted to provide four self-contained flats. Although the flatswere self-contained, they are all accessed off a shared stairway and landing, whichbrought them within the definition of an HMO even though for practical purposes theyare not.The conversion had only been done about 10 years ago and I rang the local authorityPlanning Officer and Building Inspector and confirmed for myself that planning consentand building regulation consent had been granted. However, even though it is arelatively recent conversion, I thought I should check that it complies with the currentrequirements for an HMO licence. One thing I didn’t want to do was to purchase theproperty and then find that I had not budgeted for several thousand pounds of work tobring it up to standard.The conversion had been to a good standard, and included the provision of a proper firealarm system with break-glass alarm boxes to the stairwell, and even the provision of anexternal metal fire escape from the upper flats at the rear of the property.Even so, the Environmental Health Officer informed me that to obtain a licence, strictly,the accommodation within each individual flat would have to be arranged so that eachroom was accessed off a common lobby rather than having access direct from room toroom.The idea is that the lobby can then be fireproofed to ensure a safe exit for the occupant.Also, that all principal doors would have to comply with the required standard for fireresistance, and would have to have intumescent strips. These are fire-resistant stripsheld in a groove around the edge of the door which melt to provide a firm seal to keepsmoke and poisonous gas out.Also that the common landing and staircase would need mains-powered secondarylighting and that the stairs would need suitable fire protection, possibly some kind ofenclosure.I could see that the property complied with some of these requirements, but not all. TheEnvironmental Health Officer was more than happy to make an appointment with theFire Officer from the local Fire Brigade to inspect the property and even to give a roughestimate of the cost of the works, before I signed a contract to purchase.Unfortunately the deal fell through for other reasons before the Environmental HealthOfficer and the Fire Officer could inspect the property. But I could see they recognisedthat the situation was confusing, and were very willing to help me.Most of the properties in my portfolio are individual self-contained flats, each with theirown front door at street level. This really reflects the area in which I have purchased,and I haven’t deliberately sought out properties of that construction. If the right HMObecame available, I certainly would consider purchasing it, subject to making properenquiries of the local authority.Whether you choose to purchase houses or flats should ultimately be driven by marketforces. I talk elsewhere about my own experiences where my preliminary investigations 43
  • 41. into the suitability of buying properties in a particular area revealed that the demandfrom tenants for houses was stronger than the demand for flats.If you intend to buy properties to refurbish and sell on, it may be that the best option isto specialise in houses. Houses tend to be freehold and although some works mayrequire planning consent or building regulation consent, at least you won’t have to gocap in hand to the freeholder for consent as well.It’s also worth remembering that whether you are buying for refurbishment or to hold asan investment, individual flats held on a long lease usually require the payment ofground rent and a service charge, which can impact the profitability and the cash flow.One way around this is to try to buy the freehold, though this may mean buyingindividual blocks of flats.There is a school of thought that it is better to buy multiple units i.e. a building dividedinto flats, or even adjoining houses, than single family homes.Firstly, there is less cost per unit. For example, a small 2-bedroomed family house inyour chosen locality may cost you £90,000. A property divided and converted to providetwo 2-bedroomed flats may cost £120,000. Although the overall cost is £30,000 more,the actual cost per unit is £30,000 less. As a general rule of thumb you will find that themore units there are in an individual property, the less per unit you will be paying.What makes this exciting is that in many areas the rent paid for a 2-bedroomed flat willbe the same, or not much less than, the rent paid for 2-bedroomed house. This meansthat the net initial yield per unit is also higher.Then there’s the question of financial security. If you have one letting unit, such as afamily home, you will usually find there is one family living there. If you have financedthe property, you have in effect one family making the repayments for you through therent received. If, on the other hand, you buy a property with two or more units, you willhave two tenants paying the rent. As the amount of mortgage per unit is less, you havemore chance of collecting enough rent to cover the mortgage, even if one of the unitsbecomes vacant.Similarly, if you have a single family home and it is vacant, it’s 100 % vacant. However,if you have four flats in a property and one of the units is vacant, you only have a 25%vacancy rate. The more letting units you have in a property, the less impact the void willhave on your cash-flow.Owning multiple units also simplifies the management. If you have a number of singlefamily homes scattered around your target area, you or your managing agents canpotentially be running around all over the place.If instead, you buy a property divided into flats, you potentially have all of your tenants inone location. If you have enough units located close enough together you could evenconsider employing your own caretaker and could probably afford to provide hisaccommodation, instead of putting the management in the hands of a managementcompany. 44
  • 42. Buying multiple units can also save on expenses. For example, if you have to call anelectrician or plumber out to deal with the ground floor flat, you may as well get him tolook at the problem in the first floor flat at the same time. This makes a lot of sense ifyou have to pay a call-out charge. One call-out charge will cover two flats.Commercial PropertyThere are distinct advantages and disadvantages to investing in commercial property.Let’s have a look at both.The first main advantage is that the most common form of lease used for commercialproperty makes the tenant responsible for all repairs, and for reimbursing the landlordthe cost of any insurance policy. This can be contrasted with a residential assuredshort-hold tenancy, which will make the landlord responsible for all repairs and forpaying for insurance.Secondly, rent will be paid quarterly in advance, meaning that the landlord has only toinvoice the tenant four times a year. As the tenant will be a commercial business, itshould be relatively easy to collect the rent by standing order if the tenant is agreeable.Compare this with residential tenancies where the rent is technically due at thebeginning of the month, known in the trade as “monthly in advance”. In my experience,managing agents pass on the rent at the end of the month in which they collect it, so itis usually received by the owner “monthly in arrears”.If your tenants are receiving Housing Benefit there can be even more delay. At themoment a Housing Benefit office I deal with is about 11 weeks in arrears, so by the timeI am passed payment by my managing agents, I’ll be receiving the rent about fourmonths in arrears.If there is any management required, (in the case of multi unit investments such as anoffice building let as floors or individual suites, or an industrial estate let as individualbuildings where there may be a service charge) the lease will invariably allow thelandlord to re-charge the tenant any costs incurred by managing agents and their fees.By contrast, residential managing agents will charge from 12½ to 15% of the rentcollected plus VAT, and this cannot be recharged by the landlord to the tenant.In reality most commercial properties are easily managed by the landlord, often all thatis required is posting out an invoice for the rent once a quarter. However, the option ofappointing a managing agent and recharging their fees to the tenant is usually providedfor in the lease.The result of all these advantages is that the landlord should receive the full rent statedin the lease. In other words the rent agreed with the tenant is the net rent because thereshould be no deductions from it.This can be contrasted with the rent received from a residential property where thelandlord will pay say 15% of the rent +VAT for management, and a suitable sum forinsurance and repairs. 45
  • 43. Another advantage is that commercial property can allow the prospect of “adding value”.In the trade this is known as “working” an investment. This can be by selling ordeveloping any surplus land, by refurbishing the property, by operating break clauses inthe lease to bring in new tenants at a higher rent, or by using break up situations, forexample where an industrial complex which has previously only had one occupier is letin parts to multiple occupier all at higher pro-rata rents.But there are also disadvantages with commercial property. Firstly, commercialproperty tends to be more expensive than residential property. For example, dependingupon where you are buying, a decent flat for letting out may cost between £60,000 and£100,000, but as a general rule, there aren’t many commercial properties that would beworth buying for the same money. I’ll explain why later. The effect of this is that if youwant to get involved in commercial property investment you need to start with a lot moremoney than you would if you start in residential property.Also, commercial property tends to sell at prices reflecting a low yield. Again, thisapplies to decent properties. Commercial properties offering an attractive yield do sobecause the yield reflects the increased risk in purchasing them. Commercial propertieswith high yields aren’t for the faint hearted.Financing a commercial property investment is not as straight forward as financing aresidential investment. Finding finance for residential investments is now easy on theBuy-to-Let scheme. However, it’s generally true that the terms you will be offered by abank will not be as attractive for a commercial property and the number of lendersprepared to deal with you will be limited.Another down-side with commercial property is that it encourages private investors toput all their eggs in one basket. Unless you are substantially wealthy, and can afford tobuild a portfolio and to spread your risk, you may have no alternative but to concentrateon one or two commercial investments.That may be fine while the economy is in good shape, but if anything happens to theeconomy or the tenant, you could come unstuck. For example, with £200,000 you maybe able to build up a nice portfolio of 2 or 3 residential properties yielding say 8%. Evenin a downturn, well selected residential property will still let.However, for that same price an equivalent commercial property may be a small officebuilding. If the tenant goes broke then you will have 100% vacancy or void in yourinvestment portfolio. If the economy is slow or in decline at that time then you could befacing a prolonged void before you can re-let the property, during which time you will beresponsible not only for the repairs and the insurance, but also for commercial rates. Ifyou have taken out finance, and you have to cover mortgage payments, you couldquickly be facing bankruptcy.Although there are disadvantages in investing in residential property, the one advantagethat residential property does have over commercial property is that there is always ademand for housing. In the commercial world, businesses can go broke and so thesupply of tenants can decline. However, the residential market, the number of people 46
  • 44. requiring a roof over their heads remains constant no matter what the economicconditions.Which type of property for you ?Your choice of property should relate to what you are trying to achieve: • If cash generation is your priority through renovating and refurbishment, then you probably want to be looking for older style single family homes, which will include houses and flats • If you are after cash flow, you could be looking at commercial if you have the funding and experience, otherwise I think you’d be better off sticking to residential, at least to start withCommercial Property Versus Residential PropertyAdvantages and disadvantagesResidential advantagesSmaller lot sizes without losing qualityRelatively easy to fundLarge market of potential tenantsDemand doesn’t decrease during recessions – people still needsomewhere to liveResidential disadvantagesHigh management costsRelatively quick turnover of tenantsLandlord pays repairs and insurance etcCommercial advantagesLeases longer than residential leasesTenant pays for repairs and insuranceLimited management requiredCommercial disadvantagesMuch larger lot size/cost per individual propertyMore difficult to fund and more expensive than Buy-to-LetTenant demand falls in a down-turn 47
  • 45. Pulling it all togetherLet’s summarise where we’ve got to so far: • You have set realistic financial goals with target dates • You have concluded that property is the best way to achieve them • You have started to formulate your strategy by considering whether your aim is to create ♦ Cash generation through Retailing Renovating Wholesaling ♦ Cash flow through Buying investment properties ♦ Equity through Holding properties for increases in capital value Using the rent to pay off mortgagesYou may consider one of these, or a combination of any two or all threeYou have decided between residential and commercial propertyNow, moving on…You will need to establish a system for financing your properties…and a system for buyingBut, before that, you need to decide the business system through which you willoperate. 48
  • 46. Section FourDeciding on, and forming, your system ofbusinessThis is a very short section because all the information you need is quick and easy tofind.The best place to start is at your local bank. All the main high street banks will give youa Business Starter Pack which explains how to decide the status of your business set-up.These also have financial planning aids and detailed descriptions of how to produce abusiness plan.At least one bank supplies a computer programme on a disk so you can producespreadsheets showing financial and cash flow forecasts, and so you can update andprint out your business plan.There are also plenty of books in the library on the differences, and the advantages anddisadvantages of each type of business.The key point of this section is : • that you organise your property ownership as a business.The major advantage of this is: All legitimate expenses can be offset against tax.When legitimate spending is financed using pre-tax pounds, you save a lot of money.Please note I am recommending that you organise your ownership as a business, andthis is not the same as a company, although owning property through a limited companyis one business option you can consider.Inland Revenue booklet IR150, ‘Taxation of rents - A Guide to Property Income’,confirms that this is how the Inland Revenue will treat your rental income:“Profits from UK land or property are treated for tax purposes, as arising for a business.The broad scheme is that your rental profits are computed using the same principles asfor trades…” 49
  • 47. It goes on to say: “it does not matter how many properties you have….This means that normally all yourrental receipts and expenditure can be lumped together and, hence, that your expenseson one property can be deducted from the receipts of another” .As we’ll see later, when you start thinking of your property ownership as a business,you’ll need to set up proper record keeping systems so you can offset costs and benefitform lower taxes.The four types of business ownership you should consider are: • Sole trader • Partnership • Limited liability partnership • Limited companyYou need to decide which is best for you. I recommend that you talk to an accountantfirst, as there are different legal, tax and cost implications for each.For example, if you form a limited company, you need to file accounts prepared in theproper format to lodge with Companies House, even if you aren’t actively trading. Thismeans using an accountant, and that can be expensive.Also, jointly owning a property with another person does not necessarily make you a“partnership” for tax purposes. But you may be deemed to be a partnership for legalpurposes and you will then become jointly liable for any debts incurred by your partner.There are also practical implications resulting from your choice. From my ownexperience, having decided to establish a limited company to hold my property assets, Ifound that the number of lenders prepared to finance my acquisitions was much morelimited than if I had held them in my own name, as a sole trader, or as a partnership.Instead of holding the properties in a company or a partnership or whatever, you couldhold them in a pension scheme. Schemes like FURBS allow residential property to beheld in the scheme. However, this has to be set up through an employed position. Thismight be possible if you are “employed” by your new business, but then you’ll have tothink about PAYE. Alternatively, you could think about buying properties into thepension scheme of an existing business, if you have one.An alternative pension scheme is a SIPP, through which you can hold commercialproperty, and which can be mortgaged up to 75% of value so you can benefit from‘gearing up’ your pension contributions.However, pension planning advice is beyond the scope of this e-book, so please talk toan accountant about the most suitable way for you to hold your property purchases. 50
  • 48. Section FiveThe Financing System“ I soon learned it wasn’t the cost of the funds that count, but the availability of them” Ron LeGrandIn this section you will learn about: • Putting together a financial strategy • An introduction to “Nothing Down” finance techniquesPutting together a financial strategyWe looked in detail at the nuts and bolts of finance and how to raise it from a variety ofsources in ‘An Insider’s Guide to Successful Property Investing’.Knowing how to raise finance is only half the story, you also need to have a financialstrategy. Before you do any deal you will need to know how you are going to finance it,and what you will do if and when things don’t work out the way you expect.Here are the key decisions you will need to make • Who will provide my principal source of finance? • Will I be using bridging finance at any time and who will provide it? • Will I use one lender or a variety of sources? • Will I borrow interest only or capital repayment? • Will I be refinancing at any stage to take cash lump-sums out of the business?In deciding between lenders you will need to know: • What is the maximum term they will lend for? • Will they lend interest-only and capital repayment or capital repayment only? • If they lend interest-only, will they need some form of security like life assurance or endowment policies? • What are their fixed-rates like and what are their redemption penalties? • How often do they change their product range, and how easy it is to switch between them? 51
  • 49. I actually have two lenders but my preferred strategy at the moment is to use myprincipal lender if possible. The second provides a back-up if the first cant or won’tperform.It’s also part of my strategy to have taken out borrowing with the second lender and todevelop a relationship with them. I have a facility with my principal lender, but oncethat’s spent I’ll negotiate a similar arrangement with the second lender so I can continuebuying.By that time I will have been with the second lender for two years. As I haven’t missed apayment. I don’t anticipate any problem in expanding my borrowing power with them.One question I’m often asked is whether it’s best to take loans on an interest-only, or acapital repayment, basis. Personally, I don’t think there is any right or wrong answer tothis. I recommend you decide this when you know what type of property you are goingto buy, and what your strategy is.When I first started buying I used interest-only loans. The reason for this was • The monthly repayments were lower than for an equivalent capital repayment loan, so there was more cash available to roll over into buying more properties • My lender doesn’t require an endowment or any other security • The loan offer allows me to switch to capital repayment if required in the future.Another thing you’ll need to consider is how you fund your deposits. When I first startedmy property company I was using close to 100% borrowing. 95% to be precise. Forsome borrowers this can cause problems. Let me explain.Although it’s possible to obtain 100% finance by way of a mortgage on a property youintend to live in, for commercial loans or Buy-to-Let loans it’s usually only possible toborrow between 60% and 85% of the purchase price. As a condition of the loan thebank will insist that you fund the balance, that is the difference between what they willlend you and the purchase price. You will have to use your own funds and you will haveto state on the loan application form that this money is not borrowed. Clearly, when 95%of your funds are borrowed, this is difficult.But for most people the solution is simple, they would merely lie. However, call me old-fashioned if you like, but I like to sleep at night with a clear conscience and I wouldmuch rather find a way to work within the rules, than break them.The way I found around this was to set up a limited company. It’s not a perfect solutionand I guess if I were to be a purist I could say that it was probably fudging the issue, butthe fact is that under English law a limited company is a separate legal entity in it’s ownright. This means that it is one stage removed from myself and the funds which I hadborrowed to set it up and could be shown as share capital, alternatively as a director’sloan. 52
  • 50. The down side is that although I was sleeping better at night, it actually made borrowingfrom the bank harder than if I had been borrowing as an individual. More on that later.An introduction to “Nothing Down” finance techniquesOver the last couple of years, I’ve taken a close interest in property finance techniques,mainly because I have purchased several properties. Every time I make a loanapplication I give thanks for the Buy-to-Let scheme.The Buy-to-Let scheme has revolutionised the private investor market. If you are new toproperty you may not appreciate that before 1996 you would have had to have taken acommercial loan, which could have cost as much as 4% above mortgage rates. Andyou’d only have got that if your income was enough to cover the new loan and yourexisting mortgage liabilities. No account was taken of the rent from the property youwere buying. Inevitably this limited the investment market to the seriously wealthy.If you were able to get a foot on the ladder, the chances are you would have beenrestricted to one or two purchases, meaning the opportunity for multiple propertyownership, which we take for granted today, was not an option for ordinary people.That’s why I’m a big fan of Buy-to-Let and I’m using it to the full to build my portfolio. Mylender is currently advancing me 85%, so I only have to find 15% plus associated costslike legal and valuation fees. I don’t mind putting in some of my own cash; the way I lookat it, if interest rates rise, then I have a bit of a buffer.However, there’s been a lot of interest recently amongst investors in what is called“Nothing Down.” There are books and articles, and there’s even a seminar companyrunning residential courses, to brief you on the subject. So what is it all about?As the name implies, the current wave of interest can be traced back to the USA in the1970’s. The phrase “Nothing Down” has two meanings, one being the purchase ofproperty with no deposit payable by the purchaser, the other being the purchase of aproperty using none of the purchasers own money. These two strands have nowbecome merged into one ‘philosophy’, for want of a better word, and a number oftechniques for their achievement have been developed.Let me first set the scene by explaining that in the USA they do things differently. Fromwhat I understand it seems that “Nothing Down” arose because property financing inthe States was much more flexible. As an aside I think it is less so now, and there issome frustration over there that some of the early “Nothing Down” techniques are stillbeing peddled by the ‘gurus’ but are clearly no longer workable.That flexibility allowed two principle strategies.The first is where the purchaser takes over the vendors mortgage. Imagine the vendorof a property worth $100,000 has a mortgage for $80,000. Then assume, the theorygoes, the vendor needs to sell quickly because of divorce, bankruptcy or some otherhardship. As a “don’t wanter” he may be prepared to transfer the property to thepurchaser, in return for the purchaser taking over the mortgage. The vendor takes a$20,000 hit for a quick deal, the purchaser gets the property at a $20,000 discount 53
  • 51. without having put in a single penny of his own. This works as long as the bank arehappy with the purchaser taking on the mortgage.I don’t fully understand the intricacies of the US mortgage system (I’m too busy makingthe most of ours!) but the implication is that, as in parts of Europe, the mortgage runswith the land and is not personal to the borrower. The reason why this won’t work in theUK is that although mortgages are secured against the property, in the UK they areinvariably personal to the borrower and are non-transferable.The second principle strategy is for the vendor to grant a private mortgage to thepurchaser. Using the same example, the vendor may accept an offer of $90,000 for aquick deal, subject to the purchaser taking over the existing mortgage of $80,000. Thebalance of $10,000 will be ‘loaned’ by the vendor to the purchaser by way of a privatesecond mortgage secured against the property (or any other asset that the vendoragrees can be used as collateral). This will be repaid on terms agreed between themi.e. as a repayment loan over an agreed number of years, as an interest only loan with a‘balloon’ payment after an agreed number of years, or perhaps as a single lump sum toinclude all the capital and interest on an agreed date in the future.A variation on this theme, applicable where the vendor doesn’t have a mortgage, iswhere the vendor agrees to create a private mortgage for the whole purchase price.The ‘private mortgage’ approach is workable, in theory, in the UK if the vendor will granta private mortgage for the whole purchase price.The second mortgage approach may also work if the purchaser is able to substitute anexisting mortgage to the vendor by way of a new loan to himself, and the vendor isprepared to grant a private mortgage for the balance.However, before you get too excited, there are two problems. Firstly, I don’t know howhappy most lenders would be about granting a loan knowing that the balance of thetransaction requires the creation of a private second mortgage, and the implication thatthe purchaser either isn’t able, or willing, to put any of his own funds into the deal.Secondly, in practice how many vendors would want to grant a second mortgage andtake payments by instalments? Surely it would make more sense to wait and find a cashbuyer, who can pay the whole amount up front with no conditions, even if this meantaccepting a lower price.Not to be discouraged, persistent property investors are trying to find ways to adapt”Nothing Down” techniques to the UK market. In fairness some of the ideas areworkable, if not a little unconventional.The most obvious permutation would be to borrow 85% from a bank, and borrow theother 15% elsewhere. The balance shouldn’t be too hard to find; perhaps by way of aprearranged overdraft facility, or by remortgaging your house to take out some equity, oreven by taking it off your credit card. Yes, credit cards will work; you may need morethan one, and you may need access to credit card cheques. Both are easily arranged,and there is fierce competition between credit card companies at the moment so you’llprobably get an excellent rate of interest as well. 54
  • 52. In practice even this approach will have it’s problems. More than likely the bank willmake it a condition of the loan that the balance of the purchase price comes from yourown funds and isn’t borrowed. If you mortgage your home to raise the balance yourmortgage company will want to know what it’s for and may not be too happy about youputting it into an investment property, which they may see as a commercial venture.This means that in both cases, your only solution is to lie, and take a chance that thebank don’t rumble you, or try to make a deal with the bank and reassure them this ashort term solution.I’m not going to get moralistic and tell you what to do, but lying to the bank makes mevery uncomfortable in principle. It may not worry you and you might see the bank as fairgame, but if they do find out, very are going to be very unimpressed and your creditrating is going to tumble.So, is there any hope for “Nothing Down” techniques in the UK? The good news is yes.I’ve already mentioned credit cards and credit card cheques. By using several incombination you can put together a useful pool to fund low value transactions. Don’tforget that in some parts of the country you can still buy decent, tenantable terracedhouses for £20,000. If by pooling cards you can access £20,000, you can still get a fairlydecent property in some areas, and probably at a yield high enough to leave a smallprofit even after you’ve paid the monthly repayments. 55
  • 53. Pulling it all togetherLet’s take time to summarise where we’ve got to again: • You have set realistic financial goals with target dates • You have concluded that property is the best way to achieve them • You have started to formulate your strategy by considering whether your aim is to create ♦ Cash generation through Retailing Renovating Wholesaling ♦ Cash flow through Buying investment properties ♦ Equity through Holding properties for increases in capital value Using the rent to pay off mortgagesYou may consider one of these, or a combination of any two or all threeYou have decided between residential and commercial propertyYou have decided on the business system through which you will operate.You have established a system for financing your propertiesNow you need to think about a system for buying properties 56
  • 54. Section SixA buying systemIn this section you will learn: • How to make a good deal great • What to do if it’s not such a great deal • Tricks of the trade to beware of • The Fear of Buying and how to overcome it • Doing your due diligence • Risk analysis • A commonsense approach to buying propertiesMaking a good deal greatIt probably goes without saying that you’ll need to weed out good properties, and gooddeals, from the bad. A great property deal is when you buy the right property at the rightprice. Buying the wrong property doesn’t make a great deal, at any price.A key axiom in property is “The profit is made on the purchase”. If you had ten propertyinvestors in one room, you’d probably get ten different opinions on what this actuallymeans.Here are a few ideas of mine.Number one – Don’t buy a property unless it is showing, or can show relatively quickly,a positive cash flow. Unless you have good reasons for doing so, you should never buya property which is going to drain your finances. The only reason why you might buy aproperty like that is if you think: • You can put it back into positive cash flow • You are going to more than compensate for your losses through capital growth, or through being able to trade on at a profit 57
  • 55. Number two – Always try and buy property at a price below its true market value. Aswe’ll see later in this section, it can be done, particularly if the seller wants or needs aquick deal.If you can always try to buy at 10% to 20% below market value, you’ll be boosting yourequity and net worth every time.And, if you ever want to refinance and take out cash, either to expand the business bybuying more properties, or to pay yourself a salary, there will be equity there to borrowagainst.There might be times when you can’t negotiate a better deal than the market value, butyou know the property is still worth buying. Perhaps you know that area is about toboom, or that properties in that location have always appreciated faster than average.In which case, you need to be sensible and not apply this idea too rigidly.Number three – Always cut costs. I really believe there’s never any harm in asking, aslong as it’s done courteously. The worst thing that can happen is that they can say no.For example, when I arranged a bank loan to buy four properties, the bank said theywanted a £1000 arrangement fee. I asked if that was the lowest fee they could chargeme. They said no, and reduced the fee to £500.The same bank said they would lend at base rate plus 2%. I asked them if that was thelowest rate they could offer me. They said no, and offered me a loan at base rate plus1¾%. It took just a few minutes to pick up the phone and ask.As far as you are able, shop around for the best loan rates, even if it means switchinglenders. ½ % off a repayment mortgage of £100,000 will save you £6849.60 over 20years, if you can cut the rate from 6% to 5.5%. £7000 or thereabouts is a lot of money.Also, always ask if that’s the best price when you appoint surveyors, solicitors and anycontractors. Every pound you save really will help your business. I said in an earliersection that I have changed my bank, mainly to cut costs as I’m switching to a freebusiness banking service. This will save about £250 a year. However, over the next 20years that’s £5000, which is the deposit on a property worth £33,250. Looked at thatway, and assuming I take out finance at 85% of the value of the property, the savings inbank charges has given me a free property.However, like all good rules there are exceptions, and there are costs you can savewhich can turn out to be false economies.A classic example is the property entrepreneur who decides to save an estate agentsfee and sell the property himself. Although he may sell the property in the end by hisown efforts, the money saved is more than offset by the aggravation, and the extendedmarketing period that resulted.The next worst idea is to haggle with your estate agent to reduce his fee. There’s nopoint in disincentivising anyone whose cooperation you require to achieve your goals. 58
  • 56. There’s a limit to how far you should push trying to save money. An estate agent mayhappily knock half a percent off his commission rate if he sees you’re likely to be aregular client, but if you push him to point where his profit is going to be negligible, oreven worse where you push him to the point of being resentful, then your property willgo to the back of the pile. Anything you save off his fee when the property eventuallysells will be more than offset by the time that’s been wasted.Similarly, I use a mortgage broker and budget 1% of any loan for his fee. You mayremember from “An Insider’s Guide to Successful Property Investing” that I think he’sworth his weight in gold. Recently he persuaded my lender to provide a facility meaningthat I now have access to guaranteed funds with the minimum of hassle and red tape. Icould have cut corners and dealt with my lenders direct, but I know that my fundingwould already have dried up by now.What to do if it’s not such a great dealIn my opinion, the number two reason for crashing your business is doing deals younever should have done. I’ll tell you later what I think the number one reason is.There’s another true axiom in property which says:“Buy the worst property in the best area, not the best property in the worst area”If you do enough property deals, the chances are good that one or more will turn out tobe what I call a ‘dumb deal’. Dumb deals come in many forms and it may not beapparent that quickly that it was a dumb deal.The key thing is to accept that it will happen, but to make sure it doesn’t happen often!It may be as simple as paying too much for an otherwise sound property, or buying whatseems like an OK property that turns out to need a lot of work you didn’t anticipate;Perhaps you skipped a survey and missed a hard-to-spot but expensive-to-put-rightdefect, or perhaps you bought a property as an investment where there is just no tenantdemand.I spoke to one investor about a year ago who was desperately trying to sell a propertyhe had bought through a firm who put together bespoke Buy-to-Let packages. They hadadvised him to buy a small 2-bed house in a mining village in the north-east. The agentswere to do the repairs and let the property and the total cost to the investor was about£20,000. I can’t remember whether the repairs were ever done, but I know that a yearlater the property was still empty having never been tenanted, it was boarded up, andwas being systematically vandalised by the local youth.My contact wanted to sell, but there were no tenants, and there were even less owner-occupiers who wanted to buy. I lost contact with him so I don’t know what he did. Myguess would be this property would end up in the auction where he’d be lucky if he goteven half his original purchase money back out. 59
  • 57. I’ve done dumb deals. Like my first ever deal was dumb. I bought a pair of flats in anarea which I could see was far from desirable. But I bought them because a. the properties were cheap, and b. the returns were fantasticThe agent who sold me these properties told me the area was OK. I could see, to put itkindly, that this was a highly subjective statement, but I was anxious to start myportfolio and jump in with both feet. However, the quality of the area reflected thequality of the tenants and these flats had a succession of problem occupants. Also, astime went by, I could see the general locality was deteriorating. I hadn’t anticipated anycapital growth in the short-term but I wasn’t too pleased about the idea of capital valuescreeping down.This area has now been designated an improvement and regeneration area and thecouncil have asked me to sell on a voluntary basis so they can bulldoze and start again.In the meantime the rents have paid the mortgage and I’ll still come out ahead. But itcould easily have been worse and my capital could have been better employedelsewhere. However, I have learned my lesson and now I do my own due diligencebefore buying my properties and I don’t rely on the recommendation or views of others.As dumb deals go, that one was easy to spot, but they aren’t always that obvious.When I first started buying and I showed photos of my properties to my friends andfamily, the response was almost always the same. They would turn up their noses andsay ‘Why don’t you buy properties in xxx?’ and always rattled off the name of a highervalue location where properties cost at least 3 times as much.I learnt to take a deep breath and went through my well-rehearsed and preparedresponse that ‘The yields in the areas I am buying in are better. The rents in thelocations you mentioned aren’t that much higher than in the area I’m buying but theproperties cost 3 times as much to buy.’Buoyed by their logic and encouragement, a novice investor would only consider buyingin the higher value areas. On the face of it, as these are the areas where capital growthis most likely to occur, you may think that’s a sensible move. Maybe, if that’s the game-plan.American property gurus warn against what they call ‘Alligators’, literally propertieswhich will eat you alive. This is what will happen if you buy properties without thinkingthrough the consequences and doing your homework. You need to test yourassumptions and look at the maths first. The result can be that the finest property can,and often will, produce a negative cash-flow, especially if you are using finance topurchase it. And if you’ve learnt the lesson about gearing, I hope you will be consideringusing finance to buy all your properties.Before you do any investment property deal you must sit down and do the maths, andmake sure that the cash-flow on paper is realistic. We’ll be looking at that in more detaillater. 60
  • 58. Tricks of the trade to beware ofSometimes buyers will be suckered into doing dumb deals. You should be aware ofsome of lengths unscrupulous owners (or more rarely, agents) will go to, to get you tobuy their property.Here are four relatively common examples of deception you may well come across inthe property business:Number oneA friend and myself went to visit a firm in a northern city who specialise in Buy-to-Letpackages. You know the sort of thing, like a lot of these firms they deal with propertiesthat are located in low-value neighbourhoods which they can pick up even cheaperbecause they hunt around for mortgage repossessions and other distressed stock. Theywill then arrange for any repairs or improvements to bring them up to a reasonably goodminimum standard and then let and manage the property for you. You’ll pay a packageprice which includes refurbishment, a finders fee, a project management fee, letting feesand furniture, and sometimes the legal costs involved in buying.There are a lot of firms offering this type of schemes in locations across the country.Some of these firms are very good and some of them I wouldn’t touch with a proverbial.Anyway it turns out that these were some of the latter and I’ll tell you why.Basically they were offering to sell us terraced houses for around £20,000 to £22,000each. They reckoned that they’d get a rent of around £75 to £80 per week letting theseproperties to tenants on housing benefit. We were given a guided tour and could seethat the neighbourhoods they dealt in seemed very pleasant with tree-lined streets andneat little Edwardian terraced houses.We were shown a couple of properties which they had just bought and which hadn’tbeen refurbished and then we were taken to a couple of properties which had beenrefurbished. Everything looked fine and we were definitely very interested, particularlywhen we were told that these properties would be re-valued at around £30,000 andthere would be no problem at all in obtaining a 75% mortgage. In effect that meant we’dget 100% funding. All we had to do was to find the first £22,500 and in theory one couldthen develop a chain of purchases and refurbishments, and assuming there were noextra costs you could go on indefinitely.As an aside, although these types of schemes may seem too good to be true, it canactually work or almost work and I have purchased properties in a similar scheme inanother part of the country. As I say, some of these operators are OK, some are not.Let me continue. We were offered a batch of properties there and then but as both myfriend and myself are fairly cautious people, we declined what appeared to be afantastic opportunity, even though we were under some pressure to accept. It’s a goodthing we did decline. You see my friend who used to live not so far away from wherethese people operate decided that he would stay overnight and have a better look 61
  • 59. around in the morning. Unfortunately I was unable to join him because I had to beelsewhere the next day.What he decided to do was to go back to the suburb that we had been driven throughand retrace our steps. However, every so often he took a slight detour off the main roadand found that in reality the area was fairly depressed and not as nice as it looked atfirst sight. In other words we had been taken along a very well-planned route whichshowed the area at it’s very best.The next thing he did was to pop into some local Estate Agents to find out what theseproperties would be worth once they were refurbished. After all if these people wereprepared to sell them to us at £22,500 when, in reality they were worth £30,000 thatseemed like a cracking deal. So imagine how he felt when he popped into the localEstate Agent and discovered that those houses could be purchased for £10,000 or less,often only around £6,000 or £7,000, meaning that even with the refurbishment costsand the legals, all in they were only costing around £12,000. To produce the samefurnished property would cost, at most, £15,000.As I say, and as I’ll tell you later, I’ve invested in similar schemes elsewhere but infairness the people I’ve been dealing with have been making nothing like £7,500 a time.Yes, I know they’re making a bit but only around £2,000, and let’s face it they’re savingme the trouble of having to find the properties, they project manage the builders andfind and deal with the tenants. All things considered, I think they earn their profits.You may be thinking that making a large profit in itself isn’t dishonest and I agree. If thatwas as far as it went then I would say “Good luck “ to them. But unfortunately that isn’tas far as it goes.This lot were well-known to the local Estate Agents who were full of stories aboutproperties being left unrefurbished and empty for months if not years. Basically, oncethey got your money that was it and they were a big enough and scary enoughorganisation not to care, no matter how upset you got.Number twoIf you are going to buy an investment property at auction then beware! I am thinkingparticularly of lower value residential properties in areas like the one I was describingjust now. There’s a whole host of things that unscrupulous vendors will do to make surethat you buy the property and that you pay well over the odds for it.When you read through the auction catalogue you may see a nice little terraced house,usually in a northern city, which is let on an AST say at £60 or £70 per week. With aguide price of £12,000 or thereabouts this looks like an extremely attractive propositionyielding you about 25%.You will do your due diligence and send for your legal pack before the auction. If youdon’t send for it prior to the auction you get there especially early so that you can gothrough the papers before the auction starts. In it you find a nice clean copy of the AST,signed by the tenant and confirming the rent to be £60 or £70 per week or whatever youthink it’s meant to be. 62
  • 60. However, what you don’t know yet, and what the solicitors don’t know, and what theauctioneer, who is acting in good faith on instructions from his client, doesn’t know, isthat there is no tenant. The tenancy agreement is literally not worth the paper it’s writtenon. There is no rent of £60 or £70 and if you haven’t done your homework properly youmay find that even once you’ve bought the property and you try to let it out, you’ll neverget anywhere like £60 or £70. It may be that the going rate in that area is only £50 aweek.How can the vendor get away with this? Well it’s difficult to prove that he’s actually doneanything to mislead you. After all, all he has to say if and when you arrive at theproperty and find that there is no tenant is that the tenant’s done a runner. Yes, intheory you could look into this further and try to find out whether the tenant has everactually existed. After all, if there really had been a tenant you might be thinking that youcould enforce the lease against him and get some rent out of him. But this is the realworld, where a tenant living in a property like that isn’t going to have the money even ifyou did catch up with him.If, on the other hand you were able to prove that the vendor is a lying cheat and thatthere never was a tenant, how much are you prepared to spend to prove it, and howmuch do you think it’s going to cost you to take him to court. He knows that 99 times outof 100 it just isn’t worth the purchasers while and he’s going to get away with it.So how can you make sure that you don’t become a victim of this scam? Well obviouslyyou need to do your homework. You need to visit the property and see if there are signsof a tenant there but this may be inconclusive. I think the best you can do is to try to establish what the going level of rents is in thatlocality and try to get some idea of how easy it will be to re-let the property should itbecome vacant.Then at least if the worst comes to the worst you know what your fallback position isand you can plan accordingly.Number threeAgain let’s use the example of a mid-terraced house in a northern city that’s apparentlylet for £60 or £70 per week on an AST. You may be buying it privately or you may bebuying at auction. It makes no difference to the vendor, he’ll catch you just the same.Here’s what happens. This time you go around to the property and yes, there is atenant. In fact you know there’s a tenant because you actually meet him or her. You cansee them, can touch them, and if you’re really unlucky you can smell them. But therethey are. You talk to them and you ask them if they are happy living in that property.They tell you they would like to stay on as long as you’ll let them.“That’s fine” you say, after all, you don’t want a void period, or the hassle of having tore-let. 63
  • 61. So you sign the contract and purchase the property only to find, lo and behold, there isno tenant – they’ve gone.So what’s happened here? Well, it’s not unknown for unscrupulous vendors to putpeople into the property to play the role of tenant. Obviously the bogus tenant isrewarded in some way.In more extreme cases I’ve heard of homeless people being given use of theaccommodation, the obvious benefit to them being that they get a roof over their heads.In other cases, I’ve heard of being taken there after the pub to sleep off their excesses.If they are nicely hung over they’ll still be in bed when the prospective purchaser views,and they’ll be none the wiser.How can you guard against this? Well the honest truth is you probably can’t.Number fourThis is really a variation on a theme. The facts are almost identical to number 3 above.However, instead of using an unrelated third party, these landlords actually employthese so-called “tenants” full-time, and use them to sit in their various properties as theyput them on the market.Again the same general warnings and comments apply as in 2 & 3 above.Why do they do it?Good question. Why do they do it? Well it makes financial sense – to them at any rate.Don’t forget that these people are probably buying these houses for five or six grand,giving them a tart-up, then putting them into the auction. The reason why they canjustify the guide-price is because of their claims that the property is receiving £60 or £70a week in rent. At a guide-price of £12,000, a rent of £60 a week works out at a returnon your investment of 25%. That’s why you were interested in the first place and that’show they get you hooked. They hit your greed button.Now I should say, that there are a lot of very genuine vendors selling properties thatreally are let as stated in the sales particulars or the auction catalogue, and the chancesof you being conned are statistically low.However, with the knowledge that it can happen it makes sense to minimise your risk,which is why I suggest that you take to heart my advice that you try to establish, for yourown peace of mind, that there is a tenant. But in case the tenant is either bogus or maydo runner, you should be aware of what the rental value of your respective purchasereally is, and how easy it is going to be to let it.You should be doing that groundwork in any case. 64
  • 62. What if you find you have done a dumb deal?Well, mainly that will depend on why you did it, and just how dumb it turns out to be.Assuming that it was down to your error of judgement rather than anything underhandby the vendor, your only option may be follow yet another well known, but very true,axiom:“Cut your losses and dump poor real estate – run with the winners”There’s really no point hanging on, hoping a bad deal will somehow turn around.Perhaps over time it will; even the lowest value property has a chance of increasing invalue over the long run. But while you’re waiting you could have got your money out andinto something which is going to provide much higher levels of return.This has often got to be the better option. Even if it means making a loss getting out ofthe first deal, any cash you free up can potentially more than make up for that if it isinvested in something better over ten or twenty years. So don’t stick with the wrongproperty just to save a few thousand pounds, if it means you are giving up theopportunity to put that cash into something which could make you tens of thousands ofpounds.The Fear of Buying and how to overcome itC S Lewis, the great theologian, once said of the “darkside” of the spiritual realm wordsto the effect of “there are two great and equal dangers people fall into when considering the demonic. One is to be too interested, the other is to be not interested enough”.I think a similar warning applies to property entrepreneurship. Procrastinating and tryingto attend to every detail can kill deals, and your business. Being over complacent canbe equally harmful.Nervous investors often put off buying property because of fear. The most commonfears are: • all the tenants move out of their newly acquired properties • they will then find they can’t re-let them so they have no rent • the economy will go into recession and capital values will plummet.These are not the things which are likely to crash your property business. For a start,the chances of all your tenants moving en masse out of all your properties is very slim.Even more unlikely is that you will never be able to let them again. After all you will havedone your due diligence and you will know that there is a rental demand. We’ll lookmore at due diligence shortly. 65
  • 63. From my experience, all of my properties have been fully let for most of the time. I havenever had trouble finding a tenant when a property has become vacant. Even if you onlyhave one property with one tenant, you will have done your homework before youbought and you will know that there is a demand for this type of property at the rent youare charging. So we can safely assume this fear is unreal.What about a fall in capital values? What about these? It doesn’t happen often andeven when it does, the long-term trend is still upwards and any reversal, so far, hasalways been temporary. Of the recessions since the second world war, the one in theearly 1990s was the worst for property by a long way. Sustained double-figure interestrates killed the property market stone-dead. But only temporarily.I’ve been back to the Nationwide house price indices to see what happened during therecessions of the early 1970’s, the early 1980’s and the early 1990’s. This is what thefigures show us:Number One – the average values for all areas show no decrease at all in the early1970’s.Number Two – the recession of the 1980’s does show a slight fall in values:Quarter North Yorks & North East West East Outer Outer London Southwest Humberside West Mids Mids Anglia South Med EastQ2 1981 42.7 47.9 45.4Q3 1981 40.8 49.1 39.2 46.4 42.5 47.5 48.1 45.5 47 45.1Q4 1981 48.2 38.3 45.9 41.3 48.2 47.5 45.0 45.6 44.1Q1 1982 49.3 38.7 45.4 41.3 46.9 47.6 45.5 46.9 44.9Q2 1982 39.7 46.8 42.3 48.6 49 47.9 46Q3 1982 44 42.6Max % 0 1.8 2.29 2.1 3 2 1.2 1 2.9 2.9fallNo of 0 1 2 2 5+ 2 2 1 2 3qtrs inrecessionwww.nationwide.co.ukI haven’t shown Wales, Scotland or Northern Island, because as in the north, propertyprices just kept climbing in a straight line.I accept these figures are based on averages and are shown as an ‘index’, but even sothey give a very good idea of what was happening in the market. Which is basically, nota lot. One of the worst effected areas was the southwest where prices fell by 2.9 % atthe worst point, but within 3 quarters, i.e. 9 months, prices were higher again than at thebeginning of the recession. Similarly, the West Midlands fell by about 3% at the lowestpoint. I haven’t shown the full story for the West Midlands, but if you look at the figures,by Q1 1983 recovery was well in place. 66
  • 64. The point is that property prices were hardly touched at all, and when they were, theybounced back quickly. At the time you’d probably not even have known the value ofyour property had fallen.Number three – the recession of the 1990’s was worse: Quarter Index Quarter Index Quarter Index Max Index before before at at when when % at Q1 recession recession lowest lowest fully recovered fall 2002 point point recoveredNorth Q2 1991 106.8 Q4 1994 91.7 Q2 1998 108 13.3 130.2Yorks & Q3 1989 132.3 Q1 1996 94.7 Q2 2001 132.2 28.4 142.9HumbersideNorthwest Q3 1991 108 Q3 1995 95.1 Q1 1998 109.1 11.9 148East Mids Q4 1989 133.5 Q1 1993 100 Q3 1999 135.4 25 181.4West Mids Q3 1989 117.5 Q1 1994 98.1 Q1 1998 118.7 16.5 173.8East Anglia Q2 1989 155.8 Q1 1993 100 Q1 2000 156.3 35.8 202.3Outer S Q3 1989 154.1 Q4 1992 98.8 Q3 1999 156.5 35.8 220.2EastOuter Met Q2 1989 144.3 Q4 1992 99.6 Q3 1998 147.2 30.1 222.9London Q2 1989 145.9 Q4 1992 99.4 Q1 1998 147 31.8 256.5South West Q2 1989 135.5 Q4 1992 97.4 Q2 1999 139 28 204.4Wales Q1 1990 112.2 Q1 1995 93.7 Q2 1999 114.4 16.5 144.8Scotland Q4 1989 92.4 Q1 1990 86.1 Q2 1991 93 6.8 132.6N Ireland Q1 1990 86.7 Q3 1990 80 Q2 1991 88.6 7.7 220At the lowest point of the recession capital values in the worst affected areas declinedby almost 36%.Now please don’t think that I am in any way unsympathetic to those who lost theirproperties due to repossession. I am. And I accept that 36% is a large percentage dropin value. But that is only part of the picture.Look at it this way. Most property owners had benefited from substantial increases incapital value prior to the fall. So, in general terms, even with this fall, most propertyowners were still in pocket. 67
  • 65. Here is a another table showing the latest date when a buyer could have purchased andwould still have been ahead at the lowest point of the recession: Region Quarter Index North Q2 1989 91.9 Yorks & Q3 1988 92.3 Humberside Northwest Q2 1989 90.1 East Mids Q2 1988 93.2 West Mids Q2 1988 83.9 East Anglia Q2 1987 99.3 Outer S Q1 1987 96.7 East Outer Met Q4 1986 93.1 London Q3 1986 95.3 South West Q4 1987 92 Wales Q3 1988 83 Scotland Q2 1989 83.9 N Ireland Q3 1988 78.9Those who were out of pocket were, by and large, those who had: • Bought in London or the south east after the end of 1986 • Remortgaged their properties between January 1987 and January 1989If you had bought before the beginning of 1987, the chances are you would have notlost financially. You might have been frustrated that your investment wasn’t performingas well as you had hoped, but you would not be broke. Nor would you be in negativeequity if you had taken out a loan in 1986 or before, and had not re-mortgaged.Now think of this.In the two other recessions property values had barely fallen, if they had fallen at all. Sofar, in terms of post war recessions, the dramatic fall in capital values during the 1990scan be seen as being the exception, not the rule.The measure of the fall in capital values in the 1990s wasn’t negative equity, althoughthe level of negative equity that affected some home-owners was hitting the headlinesregularly.At that time private investment in property as we know it today didn’t exist. By and largeit was the wealthy who owned residential investment properties, often mortgage-free(along with private family trusts etc). Because of relaxations of lending criteria by banksand building societies, many owner-occupiers had been encouraged to take mortgagesthat were at, or close to, 100% of the value of the property.So when capital values fell private investors were largely unaffected. It was the owner-occupiers who suffered most. Those who had bought most recently, or re-mortgaged, 68
  • 66. found themselves in a situation where their mortgage value exceeded the value of theirproperty.This is not a comfortable feeling. At the same time, interest rates had risen to a pointwhere they could no longer afford to make the monthly payments. Even when theproperty was repossessed and sold by the bank or building society, the sale proceedswere not enough to pay off the outstanding loan and so the borrower was still committedto paying off a debt they often could not clear.This was compounded by the banks and building societies flooding the auction houseswith otherwise sound properties and effectively taking any price offered, almost alwayswell below what the property was actually worth. Rather than panicking and adopting a‘fire sale’ policy, the banks and building societies would have served themselves andtheir borrowers better by adopting ‘a reasonable period for the marketing of theproperty’ (RICS definition of open market value) and getting a decent price. Thatbehaviour created a non-virtuous circle where the low prices obtained from ‘forced sale’strategy ended up dictating expectations and prices in the marketplace.Now compare all of that with today. If you buy a property tomorrow as a residentialinvestment under the Buy-to-Let or similar scheme, you will not be able to borrow 100%of the value. The best you will be able to get, in my experience, is 85%. Most lenderswill not go beyond this loan-to-value ratio which means that whatever happens youalready have a built in 15% buffer before you need to worry about ‘negative equity’.If you invest in the stock market, you accept that the value of shares can go up anddown, often by the hour. What you should be investing for is the long-term, and hopingthat your share pick will grow in value over time, despite short-term fluctuations.Despite any fall in capital value, statistically, your property is more likely to grow incapital value over the long term than any share you choose to invest in. What I’m reallytrying to say is, so what if capital value does fall?Unless you sell the propoerty, this will only be a ‘paper loss’. If you hold your nerve andexercise patience, you will almost certainly do better than with any other type ofinvestment, despite this short term set back.The truth is, it is not cataclysmic events which are most likely to crash your business.It is often the mundane things which you loose control over by neglect such as: • Not having proper processes for due diligence when you buy • Not having proper property management processes in place • Not having proper accounting practices in place and loosing control of cash flowThese things need not be a problem if you start, and use, proper systems. 69
  • 67. Doing your due diligence“Remember, good homes in good neighbourhoods will let you profit and sleepwell at night” Claude W Diamond.Before you purchasing a property you will need to know how it fits with your overallstrategy, and therefore your “game plan” for it. Really you need to know“why am I buying this type of property?” and “why am I buying this particular property?”Are you buying to refurbish it and sell it on? Are you going to keep it and rent it out? Areyou going to hold it long term or short term?I know from my own experience that buying a property can be stressful, even if you area hardened and experienced property entrepreneur. As you know my speciality isbuying properties to hold and let for cash flow and my main worries going into a dealare: • Am I paying too much for the property • Will I be able to let it once I’ve bought it • Will I get sufficient rent to create a positive cash flow • Am I buying in an area where capital values are likely to rise, or could they fall • What is going to happen to cash flow if interest rates go up • What happens if voids are more frequent or longer than I budgeted forIf I were buying to build equity, the questions may be • Am I paying too much • Am I buying in an area where capital values will rise • Will I be able to sell quickly and easily to release my capital and profit • Will it be easy to find a tenant and will the rent cover any holding or finance costsIf I were buying to refurbish and trade on I guess my fears would be • Am I paying too much for the property • Am I confident that I can refurbish within budget or are there problems I don’t yet know about 70
  • 68. • Will I be able to sell it quickly and easily when I have finished • Will it achieve the price needed to make a good profitFaced with questions like these, and not knowing how to answer some or all of them,many would be investors stop here and get caught in the trap of “paralysis of analysis.”Without exception, in an ideal world, all these fears can be put to rest by properresearch and due diligence prior to purchase. I appreciate that there are times whenyou have to move quickly to secure a great deal and you don’t have time to do all theresearch. You have to go on your gut feel and hope you’ve got it right.However, assuming that you can do things at your own pace, when you’ve done yourresearch, you can go through the “what ifs” and work out your: • ultimate ‘downside position’.If you know what that is, you can decide (a) the probability of it happening (b) whether it is something you could live with if it were to happen in which case the worries cease, or (c) alternatively plan either to avoid that situation arising in the first place, or put a plan in place to overcome it if it does occur.In other words, • if anything goes wrong, what is the worst thing that can happen? • if it does happen, can I live with it? • if I can’t live with it, what, if anything, will I be able to do about it? • knowing this, am I prepared to carry on?The starting point is to sit down and work out what the risks of a particular projectactually are, and to look at the probability of any problem occurring. Depending uponyour answers you can then decide whether to dig deeper and start making contingencyplans, or to start planning to try to make sure those problems don’t occur in the firstplace.The two weapons all property entrepreneurs have, but don’t always use (effectively) aredue diligence and risk analysis.Before buying any property there are certain checks you should make. Yes, a solicitorwill undertake searches for you, but these really relate to questions of legal fact, such aswhether the title is ‘unencumbered’ or whether a new road is planned which could be 71
  • 69. detrimental to the enjoyment of the property. The one thing your solicitor will not checkis whether this is a good deal.Else where in this e-book I have suggested a process for identifying and purchasingproperties, which includes a general process of due diligence. In this section I’d like tosuggest a couple of things which you should clarify if you are buying property as aninvestment.Rental valuesIf you are going to let the property to obtain an income, it is vital that you understand themarket you want to operate in, otherwise you have substantially reduced your chancesof succeeding.If the purchaser is a cash buyer they will have the buffer of not having to pay interest ona loan (although they will then be missing the gearing effect) but there will still be otherholding costs like insurance, council tax and repairs.Unfortunately a lot of buyers don’t have this buffer and buy on the assumption that theywill let the property, and at a rent sufficient to cover costs. Regrettably, if they’d donetheir research, they may have saved themselves a lot of problems.A good example of not understanding the market is illustrated by the top end of thecentral London letting market. If there is any truth in the stories put out in the press thatBuy-to-Let landlords will one day get into trouble, then this is where it will probablyhappen. And probably all because they didn’t do their homework.There’s a tendency to assume that a nice property in a nice area will let easily. So thereasoning goes that if one is to make the maximum capital gain on a property, oneshould choose the most expensive one that one can afford. If capital values rise at anaverage 10% per annum, it’s obviously better to start from a base of £150,000 than£50,000.Purchasers need to realise that at the top end of the market, tenant demand is limited.There are not an infinite number of tenants, and when the number of propertiesavailable to let exceeds the number of tenants, some properties will remain empty. Tocompound problems, market forces will result in rents falling as agitated landlordsdiscount them to attract tenants. So now rents are lower, and there are still emptyproperties. It was suggested in 2001 that the sale of vacant properties, which had beenbought by now frustrated landlords under the Buy-to-Let scheme, caused a temporarydown turn in central London property prices in the late spring. It seems this is likely tohappen again later this year as well.The only way not to be caught out like this is by doing the leg-work to make sure thatthere is tenant demand for the property you are buying. In most areas of the countrythere are far fewer tenants looking for a four bedroom detached house than there aretenants looking for a two bedroom flat or house. Even so, if you had the opportunity toput money into a property investment a nice four bedroom house may be tempting forthe reasons given above, and especially if the owner occupier market for 4 bedroomhouses is strong. 72
  • 70. I recently considered purchasing a HMO (House in Multiple Occupation) whichcomprises four 1 bedroom flats. The gross yield would have been about 14% and therewas some prospect of capital growth. With a little work these would have been very niceflats and the selling agent made it clear that they would like to take on the managementafter I’d purchased. In their opinion the flats would easily let and would achieve around£70 a week.This was encouraging, and I really believe that they believed it and it wasn’t just salespatter. I needed a second opinion so I rang a specialist letting agent who doesn’t do anyresidential sales. In other words they should be the experts on rental values.Their view was completely different. They told me that there was a limited demand for 1bedroom flats in the town generally, and that although the area I was buying in was‘nice’, tenant demand for this location was patchy. If these were 2 bedroom flats theywould be more confident of letting them.I consider myself to be an investor, not a ‘speculator’ and I wasn’t prepared to risk£70,000 on buying a property prone to void periods. I pulled out.Risk AnalysisAs the size of your portfolio increases, or as the size of your individual transactionsincrease, you may have conflicting feelings on how things are going. As I buy more andmore properties, and the loan from the bank gets larger and larger, I realise that ifanything were to go wrong, the financial consequences could be devastating.Against that is the thought that the more profitable properties I own, the better able I’llcope if anything goes wrong an individual property.Risk analysis is an excellent way of telling me at what point the various negative factorswhich affect the portfolio could become a cause for concern. Knowing this I can makecontingency plans just in case, and watch for these problems developing. So I can takeearly, preventative action.Risk analysis is a good way of answering the last two questions on my investor worrylist: what is going to happen to cash flow if interest rates go up? what happens if voids are longer than anticipated?Before purchasing a property, it’s relatively easy to calculate when cash flow will fall tothe breakeven point or below, assuming a rise in interest rates, or a prolonged voidperiod.To a limited extent, if you are borrowing under the ‘Buy-to-Let’ scheme the bank willhave already imposed a rough ‘rule of thumb’ risk analysis by asking you to show thatthe rental value exceeds interest payments by between 1.3 and 1.5 times minimum.This allows for other costs like insurance, repairs and management, and gives comfortto the bank that the current income is sufficient to cover current costs. 73
  • 71. But what happens if and when those costs change? Or what if the income changes, forexample, if it is temporarily suspended during a void period?Using an example of a property I have just purchased, lets undertake a simple riskanalysis.The purchase price is £31,000 and I am borrowing 85% for 20 years under a repaymentmortgage. The current variable rate offered by my lender is 5.75%. The rental value ofthe property is £350 per calendar month.Rent £ 4200LessMortgage repayments £ 2088.76Management £ 525VAT on management £ 91.88Insurance £ 135Repairs @ 10% £ 4202 week initial letting period £ 160Total costs £ 3420Balance £ 780The surplus is equivalent to 9.75 weeks rent meaning that the property can be vacantfor that period of time in any one year before cash flow is negative.Once I know this figure I can take a view as to how likely it is that the property will bevacant for that period of time in any one year, and either continue with the purchase orpull out. It is very unlikely this property will be vacant at all – I am confident that if itbecame vacant it would take only days to find a new tenant.If, having purchased the property, the voids are at a higher rate than I anticipated, I canreconsider my letting strategy and take appropriate action to avoid having a negativecash flow, such as appointing new letting agents, by offering future tenants incentives tostay, or even by cutting the rent.By repeating the calculation, and through trial and error trying different mortgageinterest rates, we can calculate at what point the cash flow will become negative ifinterest rates (and therefore mortgage rates) increase.Rent £ 4200LessMortgage repayments £ 2844.96*Management £ 525VAT on management £ 91.88Insurance £ 135Repairs @ 10% £ 4202 week initial letting period £ 160Total costs £ 4176.84Balance £ 23.16 74
  • 72. *This is the balance left after deducting all the other costs from the rent. I’ve thenworked back through my mortgage payment tables to get to the closest figure.In the above example bank base rate will need to go to 7.25 % before cash flow is atbreak even, assuming I am paying base rate plus 1.75% for the loan, and so all otherthings being equal negative cash flow will cut in when interest rates hit 7.5%.By being forewarned I can opt to switch into a fixed rate mortgage if and when this mayseem preferable to being on a variable rate.One interesting aspect of risk analysis is to plot two variables simultaneously. This isknown as ‘ Sensitivity analysis’.For example, you may want to know what the effect on cash flow would be if the voidperiod was slightly longer than you anticipated, whilst at the same time interest ratesstarted to rise. This can be calculated using a spread sheet and shown as a matrix. Aprogramme like excel will calculate matrices for you.By using spreadsheets to calculate the result of changes in one or more variables youcan get an overview of where potential problems lie. By using computer spreadsheetsyou can relatively easily set up your own programmes to do fairly complicatedcalculations such as the effect on the whole portfolio of changes in interest rates, voidperiods etc.So far we’ve looked at risk analysis in the context of buying properties to hold and let.It’s also useful to do ‘what ifs’ for other scenarios.Going back to the questions at the beginning of this section, if you are buying a propertyto renovate and sell, you can calculate the effect on profit of: • increases in building costs i.e. what will happen if I overrun budget by 5% or 10% or 15% • increases in interest rates during the project period, which will impact on the notional or actual interest paid as holding costs and on the building costs • an overrun of project i.e. if it takes 220 days to complete and not 180Using a spreadsheet you can calculate the effect of combinations of these.Similarly, if you are buying to hold for capital growth and increase in equity, it may beinteresting to calculate: • increases in equity at different growth rates • if you are financing the property conventionally, and have let it to provide an income to contribute to the holding and purchase costs, the effect of interest rate changes 75
  • 73. A commonsense approach to buying propertiesIn the cassette course “The Road to Wealth” * (available through Nightingale Conant)Robert Allen, the American “Nothing Down” property millionaire, laments a propertypurchasing system which makes you pay full market price using big down-payments,exhaustive credit checks, embarrassing questions, hassle and lack of flexibility.Instead he suggests that to obtain the best buys prospective purchasers should belooking for flexible sellers with problems that need solving, and suggests 8 steps to gothrough every time you buy a property: • Visualise your long term intention • Build a short term action plan • Decide on a target territory • Activate you system for finding highly motivated sellers • Analyse each property • Complete a physical inspection of the property • Negotiate the deal • Find the down paymentRobert’s explanation of each is geared towards his experience of the market in theUSA, and has a “Nothing Down” slant. Even so, the broad principles are worth lookingat, and for want of a better plan, are worth following. As I intimated before “ Any planwith an aim in mind, followed with persistence and consistency will produce betterresults than a series of random but otherwise worthy actions backed by no overall plan.”So using Robert’s broad headings here’s my view on buying property in a logicalmanner. Where his comments are appropriate to the UK market, I have included themas quotes.Step One Visualise your long term intentionThis relates directly to goal setting and the reason why you want to buy property. As it istrue that you should in any case review your goals regularly, it makes sense to makesure that the purchase of an individual property is in line with your goals, and in line withyour chosen strategy for achieving those goals.If it doesn’t fit your game plan, you should discard it unless there are other compellingreasons for buying it.For example, my game plan is to buy high-yielding property in cheaper areas so as tocreate a positive cash-flow. I’m regularly offered more expensive properties in moreaffluent areas. There is always a temptation to look closer at these, especially as theyhold out the promise of capital growth. However, my strategy at the moment is to buildcash-flow, not equity, and so I take these properties no further. I know what I need to doto achieve my goals, and buying these properties will not fit.In time my strategy will change but at the moment to give these properties a secondthought is an unnecessary distraction. 76
  • 74. Step Two Build a short term action planThis is where you start to take your goals and strategy and devise a plan to put it intoaction. This is where you’ll state the specifics such as: • I will identify one property for refurbishment • The maximum price will be • The maximum cost of the works will be • The minimum profit will be • I will find this property by 31st October 2002. • I will set aside one hour per day during the week and 3 hours on a Saturday to search through the local paper, meet and telephone estate agents, and view propertiesStep Three Decide on a target territoryRobert Allen says, ”The more you know about values in a particular area, the better offyou will be. Profit is made when you know the value of things and loss is created whenyou don’t know the value.”The location and extent of your target territory will depend on your overall aim and thestrategy you are using to achieve it. It may also be determined by the type of propertyyou wish to acquire.So the target territory may literally be a locality, such as a suburb in your home town.This will suit if your strategy is based on buying for refurbishment and resale and youwant to be on hand to project manage the works.If you want to buy and hold properties as standing investments the target territory mayinclude any suitable location in the country where you can achieve your requiredbalance between yield and security.My niche is lower value, high yielding properties and I have two “target territories” bothabout 150 miles from my home. Over the last couple of years I have researched values,local authority planning policy, and spoken to most estate agents operating there. I haveregularly driven around both areas just to get a feel of the market and the locality ingeneral. During that time I have noticed changes in both areas, I am pleased to say forthe better. If nothing else this has given me peace of mind that my overall strategy isn’tas crazy as I sometimes wonder.On one of my “drive arounds” I noticed from the number of estate agents “SOLD”boards that there had been a lot of sales activity in and around a “target street” in one ofmy target territories. So I rang a local estate agent just to get a feel for what was 77
  • 75. happening, and was offered a property which they had literally just taken on. I promptlyinspected, made an offer which was accepted, and bought the property. In round figuresI think I bought it at a discount of 25% to market value, and with some minorrefurbishment I have increased my equity in the property by 52%.I could only do this because I was in the right place at the right time, and I knew valueswell enough to know that this was a bargain.Step Four Activate your system for finding highly motivated sellers“What’s a highly motivated seller? They are sellers who are willing to be more flexible inprice or terms than the majority of sellers. What causes sellers to become flexible ormotivated? In a word, problems.”Robert Allen then goes on to give a suggested list of what those problems could be.“What kinds of problems exist that cause sellers to need to sell quickly and to drop theirprice….substantially? Here’s just a brief list:Money problems, management problems, people who have to move…., people who losttheir job, people who are ill. What about inheritance, vacancies, taxes, estate andprobate sales, delinquent payments (mortgage and tax arrears), divorce and death,debts and partnership problems.When people get problems they become ‘don’t wanters’ because they don’t want theirproperties.”Like me your first thought when reading this list is that this seems like anencouragement to prey on the vulnerable. I have to confess feeling the same when Isaw the bargain prices repossessed properties were selling for in the recession of theearly 1990’s. Here’s what Robert says if you have any qualms.“Let me say a quiet word here about ethics. After I rattle off a list of misfortune like thisit’s possible you might be saying to yourself that you don’t want to take advantage ofthese peoples problems. Actually, its just the opposite. These people have problemsthat you are going to help solve, they actually need you. They don’t need their realestate anymore, it’s become a burden to them…They need you to help them get rid of itas quickly as possible. They will be very grateful for any help you can give them. Inactuality you can use this as your opportunity to show how helpful you can be. Proveyour ethics. You can be involved in a business which can be extremely humanitarian.There’s no better feeling in the world than to help other people and to realise that you’vehelped yourself in the process…There are nine sources of highly motivated sellers: • Newspaper classified adverts • Realtors and real estate agents • Your own sphere of influence • Banks and lending institutions 78
  • 76. • Your own adverts • Direct mail • Exchanges and investment clubs • Other professionals ……..”Not all of these translate easily across the Atlantic and some need some adaptation tobe useful. However, the principle of having an open and flexible mind is always soundand distinguishes the successful investor from the merely average.Here are my views on Robert’s list. Newspaper classified advertsIn the UK classified adverts aren’t used by property seekers to the same extent as theyare in the USA. This largely reflects that over there it is more common for properties tobe sold directly by the vendor rather than going through an estate agent.However, it is always worth having a skim through the national broadsheets, the localpaper and local advertising such as Loot.If you have the time, even if an advert doesn’t immediately suggest flexibility, it is stillworth calling to see how flexible they are. As Robert says, you may as well be up frontand tell them what you are trying to achieve. Don’t be offended if they are not flexible,and don’t push it too far. At this stage you are merely collecting information and notnegotiating. Realtors and estate agentsRelationships with estate agents are definitely worth cultivating if you are serious aboutmaking property a business and not a hobby. This makes sense if you are going tospecialise in a limited number of geographic areas and so you can afford to put in thetime and effort with a relatively small number of estate agents.When I first qualified as a Surveyor I worked in a small estate agents. Although I am notsuggesting anything underhand or immoral, it was definitely true that investors anddevelopers who had a reputation for being able to complete quickly were called firstwhen a suitable property was taken on.I’ve seen it suggested that when you have narrowed down the area you want to investin, and are familiar with the market, you should select an agent that does a lot ofbusiness in the target area. You will find this agent by driving around the neighbourhoodand seeing who has the most “For Sale” signs up.Whether this approach is right for you will depend on the type of property you arelooking for. These comments apply directly to looking for refurbishment and resaleopportunities. In this context I can’t see any reason for not creating ties with all themajor agents in an area.Conversely, my experience is that the most interesting properties, particularly thosesuitable for investment or refurbishment, are handled by agents who have made a nichefor themselves but who are not necessarily the largest agent. 79
  • 77. My advice is to spread your net and not limit yourself, bearing in mind that you need tofind agents dealing with the types of property you are interested in.There are a lot of people in this business including a lot of “wannabees” and timewasters. This means that you have two main problems: • getting the agent to take you seriously • getting them to remember youBoth require patience and some hard work. In an ideal world I’d start by telephoning themanager who should have the best overall view of what’s happening in the office andwhich properties are being taken on. But in reality any hungry negotiator should do.During the initial conversation I’d be very specific about your requirements, if you give ashopping list that is too general they may not take you seriously. I’d also stress,assuming that it’s true, that you are a cash buyer or already have in principle fundingarranged. Ask the negotiator if they have anything that sounds suitable. Ask for detailsto be sent or faxed, and make an appointment to view one or more properties as soonas possible. This suggests that you are serious.After the viewing go back to office with the negotiator to discuss why the properties youhave just viewed were or were not suitable. This will show that you know what you after.Take the opportunity to reconfirm your requirements and your ability to move quickly,and to start building rapport.If you find that you are not receiving new details regularly, ring to make sure that youare still on the mailing list. If you can, tour the area as often as you can. If you see anew ‘For Sale’ board up on a property that you haven’t been informed about, ring up tofind out why. Without being too aggressive, you keep yourself fresh in the agentsmemory.If you buy a property through another agent, let all the firms you are in contact withknow. Call each of them and tell them why you bought that particular property, andreassure them that you have more funds and are able to move quickly on similarproperties.It’s usually true that once you’ve completed on one property, if you let enough peopleknow, you’ll have no shortage of properties being introduced to you.If you are buying properties to refurbish and sell on, you will want to choose the agentmost likely to sell at the best price. That might not be a niche agent who found theproperty in the first place. However, chose who you use carefully, don’t be swayed onlyby their charges. Use this as an opportunity to build your relationship.As you become more established you may find it easier to deal with only two or threefirms of agents, as they recognise that you are building a business and over time willwant to help you grow if it increases their sales. 80
  • 78. Your own sphere of influenceThe idea here is that you tell everyone you know that you area looking for propertiesand can act quickly. If you tell enough people, hopefully, sooner or later, you’ll getfriends of friends, or distant relatives calling you to tell you about ‘hot leads’.Of course, you’ll have a lot more chance if you can think of a way of incentivising them.As a decent deal can make you thousands, you could offer a weekend for 2 in Paris, orwhatever you feel is appropriate. Focussed wandering aroundThis goes hand in hand with deciding on a target territory, if you feel this is appropriatefor the type of property you wish to be involved with. Every one knows the expression“Location, location, location” but local knowledge can expand the possibilities evenmore by allowing you to consider less obvious locations.For example, I was impressed by a private investor/developer I met who, on a hunch,bought a redundant coal yard next to the disused railway sidings in his home town. Itcost very little and he was happy to hold it for several years as common sense told himthe land available for development in the town was limited and this area must comegood some time. Several years later the sidings were sold to a supermarket chain todevelop as a superstore. His coal yard was essential to the development, and theinvestor was paid a considerable sum.However, getting back to the subject of identifying “don’t-wanters” this will mainlyinvolve ‘talking and listening’ and ‘looking and watching’.Your primary source of information should be the estate agents you’ve been cultivatingrelationships with. As you get more involved with an area you will gain valuableinformation from your other contacts such as your contractors and suppliers, neighboursin the street where you are buying and local shop keepers.A contact of mine became aware of a house on his “patch” which was semi derelict. Hewas interested one day to see a home made ‘For Sale’ sign appear which directed allinterested parties to a house in a nearby street. He walked around the corner andknocked on the door. The lady who answered explained she’d just inherited the propertybut didn’t have enough money to make it habitable. It was a liability to her and she didn’twant it. He made her an offer there and then which she accepted. He refurbished theproperty and sold it almost immediately to a local couple who had been renting nearby,and doubled his money. Banks and lending institutionsThey become “don’t wanters” typically when they repossess property after default onloan repayments. The auction houses of the 1990’s were full of decent properties soldat bargain prices.As an aside, I can’t see the point of the banks selling large quantities of property into adepressed market. Surely they could come up with a more creative solution such asrenting them out until the next upturn? Still, as long as they get their loan back, theydon’t care. 81
  • 79. Happily, the numbers of properties being repossessed are now much lower, but even inthese relatively prosperous times there will be people who can’t help getting intofinancial difficulties and whose properties are sold by the bank on a “forced sale” basis.The banks are required to openly and widely market the property to get the best price.Their first aim is to get enough back to cover the loan. Any excess of the sale price overthe amount of the loan is then given to the borrower.That means that any offer which covers the loan will be of interest to the bank, even if itis below the market value of the property. That is why you sometimes see adverts in thelocal papers saying an offer of £x has been received on such and such a property andthis will be accepted unless a higher offer is received in the next seven days. This is thebanks covering themselves and showing they have done al they can to be “fair” to theborrower and get the “highest price.”About two years ago I bought a property at about 60% of it’s market value in return for aquick cash deal. The reason why it was so cheap was that the purchase price coveredthe loan, and the borrower just wanted to get out. I’m not sure whether technically thebank had to, but they discussed it with the borrower, so I know that the borrower washappy for them to accept the offer. Both the bank and the borrower were “don’t wanters”and I was able to provide a quick solution.By spending a relatively modest amount on a few basic improvements, the property wasrevalued two months after I bought it at double the original purchase price.To cover themselves a lot of major lenders automatically put their repossessionsstraight into the auction so if this type of opportunity is of interest to you then you willwant to send regularly for catalogues. The downside is that there is now keencompetition among buyers and at the moment the bargains there once were are hard tofind.The UK’s largest residential mortgage lender, the Halifax, have regular regionalauctions.www.halifax.co.uk/auctionI also recommend that you keep an eye on the web site of Allsop & Co,www.allsop.co.uk who are one of the leading auctioneers of residential property.Also it’s worth checking with the estate agents in your target area to see which lendersthey deal with. The repossession property I bought never made it into an auction, it wentonly to a local agent. Your own advertsI’ve never tried this but I have seen adverts run by investors in the national propertypress and also in the property section of my local newspaper. 82
  • 80. The key is to be specific. The adverts I have seen make it clear that all properties will beconsidered, quick decisions made, and any transaction completed quickly for cash inreturn for an acceptable discount being given by the vendor.Running adverts like this is a good way of marketing yourself and of obtaining areputation in your target area. I imagine that you would soon get “don’t wanter” contactscoming to you direct with interesting proposals, rather than trying to sell initially throughestate agents, especially as word of mouth referrals increase. Direct mailThis is something I have tried without success, but that is not to say that in othercircumstances it wouldn’t have worked.I tried it as a follow up to having completed a refurbishment of a three bed house on anestate of similar properties. As each house on the estate was pretty well identical, beingthe same age and construction as my property, I thought that refurbishing anotherwould be like shelling peas. I knew roughly what work would be required, what it wouldcost, what the value of the property would be at the end, and how much I should bepaying. So I devised a general “Dear Owner” letter asking them to call me if they wereinterested in selling and wanted a quick deal. I posted one by hand through every dooron the estate and didn’t get one response. Still, I think this says more about mycopywriting skills than the idea itself. If I’d repeated the process regularly, say everymonth, I’m sure I would have got interest. As it was I found my next project elsewherequite soon after and so had no need to continue.Direct mail is often recommended by the American “Nothing Down” gurus. Bythis theymean mass and repeated mailings of “Don’t Wanters” identified by trawling through therecords at the local county courthouse. It seems that this is a rich source of informationabout defaulters on mortgages, taxes and rates, about divorces, and about deaths.Many “Nothing Down” gurus suggest regular visits to the court house to keep mailinglists up to date. They work on the basis of a numbers game. If you send out 1000 lettersyou may get a deal.I don’t think that the Inland Revenue over here would be very thrilled if you asked for acopy of their list of defaulters so you can write to them offering to buy their houses!The nearest equivalent I can think of goes hand in hand with “targeted wonderingaround” and it’s worth looking at Dave Whisnants theory of “The Dirty Thirty”.“What I did at the start of my career was drive neighbourhoods. I had a hard timeremembering what was what, but eventually caught on. One thing that I wish I haddone, and would advise you to do, is buy a Polaroid camera. Take pictures of housesand write the address on them and the price.You will notice that some houses in your neighbourhood look like they are wellmaintained. You will also spot some eyesores that are really in need of serious help.The yard looks bad, the paint is bad. There is junk lying around. They look and are infact neglected. Each house you see like this presents a great opportunity. It is either notvalued by its owner, or the owner may be in financial trouble and need to sell quickly to 83
  • 81. someone like you. Write down the address of such houses. Try to get thirty everyweek.”This is interesting when you read this in conjunction with his views on “Finding OurTarget Seller” in which he suggests concentrating on landlords.“You are going to be concentrating your efforts almost solely on one group. This is agroup of people that owns property, has owned property for a number of years in manycases, and may be sick of owning property and looking for a solution.This seller is often not aware of the true market value of his or her property, especiallyin HOT areas where the prices have risen strongly in the last 3,4,5,6 months. They havea perceived value of the property in their heads, often related to what they paid for it.Generally, they have a hard time adjusting their sights higher to where theneighbourhood is today.If the neighbourhood slipped in value at one point, they probably still think of it in thatstate. They often worry that it may slide back into problems.This group is the landlord.As a Landlord myself, I can tell you that I have favourite properties and those I actuallydislike. I don’t like going there or dealing with them. Many times this is related to badtenants that I may have had at the property, or other problems with the property thathave long since passed. The properties I love I really wouldn’t want to sell to anyone,but the ones I dislike, I might be interested in entertaining offers.” Dave Whisnantwww.4realestateinvesting.comDave and other “Nothing Down” gurus suggest that landlords are easily traceablethrough the county court house through tax records. Basically if the tax bill for a propertyis sent to an individual at another address, then it shows (in the USA) the property is letout and the individual named is the landlord.In the UK the equivalent way to find details of ownership, although it takes longer and ismore expensive, is through the Land Registry. For example, if you see a “Dirty Thirty”type property, and after asking neighbours, the local shop keeper and estate agentswho it belongs to, you are still none the wiser as to who owns it (I am, of course,assuming that it is vacant, although incredible as it may sound, I have heard tenantsclaim not to know who their landlord is or the name of the managing agents!) you cando a Land Registry search. This only requires filling in a simple form and sending it offthe relevant office with a cheque. They will then send you details of all the interestsregistered along with the names, and last known address if available, of the owners ofthose interests.You can then write or, better still, contact directory inquiries for their telephone number.I’ve written first on a number of occasions only to be frustrated when a couple of weekslater the letter is returned “not known at this address.” Ringing first saves a lot of time ifthey’ve moved on. 84
  • 82. This is standard practice for many developers wanting to identify properties and parcelsof land ripe for development. It should work equally well for determining the ownershipof let properties.As an aside, a few years ago I came across an advertisement run by HM Land Registryin a property journal which read: ‘Advertisements about claiming unregistered land’Recently a spate of advertisements has appeared in a variety of publications,suggesting that there are thousands of ‘unregistered titles’ to land, for which anyone canclaim title.These advertisements invite readers to send money in return for literature, which willexplain how title to land not already registered at the Land Registry may be claimed.Some of these advertisements state that there are thousands (or in one case millions)of unregistered properties and suggest that readers can claim them for their own using‘brand new laws which make claiming unregistered land and property easy’.Many of these advertisements and the literature provided are seriously misleading.Some of the advertisers seek to leave an impression that, because titles areunregistered, they are ‘unowned’.The facts are that under the law in England and Wales all land is owned by somebody,but need only be registered when the property is sold. Some properties are unregisteredsimply because no sale has taken place since compulsory land registration was firstintroduced to the area in question.This is especially true of land owned by local authorities and of properties inherited bysuccessive generations of a family without any sale taking place. This does not meanthat there is no sound title to ownership of these properties; only that the ownership is,as yet, unregistered.A number of owners, solicitors and other property professionals have contacted theLand Registry about the concern that these advertisements cause to home owners andoccupiers. There is also concern that unsuspecting enquirers might be misled intopaying for literature and other information, much of which is available free of chargefrom the Land Registry.The Land Registry advises that anyone seeking information about land ownership andland registration should obtain, as a first step, a copy of the Registry’s free ExplanatoryLeaflet No 15.This explains what information is available and how it can be obtained. A copy of thisfree leaflet can be obtained by post from any District Land Registry (the address will bein the local telephone book),or from HM Land Registry, 32 Lincoln’s Inn Fields, London,WC2A 3PH” 85
  • 83. Exchanges and investment clubs but less so over here.These seem to be a popular idea in the States, perhaps because we’re a bit morereserved and like to keep our financial affairs private.I received details recently of a seminar, attendees of which go on to become membersof an investment club. Contact steve@propertydealer.co.uk for more details.Otherwise there are various syndicates operating although the aim is really collectivebuying rather than trading within the group.Some internet newsgroups and notice boards can act as a medium for individuals tobuy and sell. Other professionalsIf you have a track record offering to complete a transaction speedily and efficiently itmay be possible to persuade a friendly solicitor to keep you tipped off about forthcomingprobate sales. Whether you will be offered property in advance of full marketing isdoubtful if the executors feel obligated to show that they have widely marketed theproperty and obtained the best price. But it can and does happen, and if you don’t askthe question you’ll never know.It’s also worth keeping in touch with accountants who practice as insolvencypractitioners. They deal with, and dispose of, the assets of firms and individuals goinginto bankruptcy and receivership.The larger firms of accountants usually have a list of all properties for disposal over theUK along with contact details of the estate agents dealing. These can range formindividual houses and building plots to whole shopping centres.If the accountants are under pressure from creditors to wind things up quickly they maywell be interested in any reasonable offer you have to put forward.Step Five Analyse each propertyWhen you have followed all the previous steps you should have found one or moreproperties which are for sale and which may be interesting. Whether any are worthpursuing will depend on the property itself and the flexibility and motivation of the seller.At this stage you will working from at most an external inspection, possibly only fromdetails form the estate agent. Before you even step out of the door to inspect you willneed to telephone the estate agent or the vendor, as appropriate, whose help you willneed to answer some or all of the questions on the “bargain finder.”There are five things you need to establish: • Seller motivation and flexibility This can be found out only by talking and asking the direct question “Is there any flexibility” or “will you/they consider offers and if so, how much?” 86
  • 84. • good location You should be able to gauge this from your knowledge of your target area and your focused wandering around. • Is the property readily financeable? The answer to this may depend on the type of property you are targeting, the area you are operating in, and the lender you are proposing to use. For example, I have chosen to specialise in relatively low value but high yielding properties. Many lenders have a minimum loan amount and will not lend on these properties. My lender also operates a two tier system. They lend 85% of the valuation if the loan amount is more than £25,000, but only 75% if it less. They also charge 1% less on their rates at the higher amount. • Good condition You may have an impression of this from your external inspection or from any photos on the sales details. You can ask the estate agent or vendor if they are aware of any works that are required. Their comment may be sufficient for filling in the bargain finder, but shouldn’t be relied on for more than an initial appraisal. • Good price If you know your target area or type of property, you’ll probably know a bargain, or at least a good price, when you see one. Under most market conditions asking prices will be negotiable, although in “hot spots” in strong markets it has been necessary to offer in excess of the asking price to get a property.You can now fill in the bargain finder by scoring each of the above on a scale of 1 to 3,where 1 is poor.This takes the emotion out of buying. No matter how nice a property may seem, if itdoesn’t measure up on the bargain finder, you should forget it, unless it’s a close callwhich can be improved by negotiation.Only properties scoring 12 or more should be of interest, unless you know that throughnegotiating you can improve the score of the individual parts and get the score up to 12or more.For example, if it scores poorly on condition, but highly on everything else, you my stillconsider it if the vendor indicates a willingness to either attend to the repairs prior tocompletion, or to reduce the price pro rata. In this way the bargain finder gives anindication of the areas where you should be concentrating in your negotiations.Never waste time on a full inspection of a property until it has scored well, unless youhave other motives such as cultivating the estate agent. 87
  • 85. Step six Complete a physical inspectionIf a property scores 12 or more and fits your purchasing criteria, go and have a look atthe locality, do your check on prices for other (similar) properties and do your ownphysical inspection, both internally and externally. If necessary commission a fullstructural survey and ask the surveyor to give an estimate of the costs involved.Also talk to the vendor and estate agent again to see if there is room for any furthermovement on terms or price.Then re-score the bargain finder in the light of what you have found and heard. If it’s stillscoring well you will be able to go to the next step.I came across a useful check list in the ‘Which? Mortgage Guide to Buying and Sellingyour Home’ which suggests:Look at the surroundings before you go through the front doorOUTSIDE ♦ Is the traffic heavy? ♦ Is there car parking? ♦ Check the roof – are there slates or tiles missing? ♦ Check for stains on walls, which could mean leaking drainpipes and guttering ♦ Look for major cracks in brickwork, which may be a sign of structural problems ♦ Check the window frames for peeling paint and rotten wood ♦ Look at the condition of nearby properties. If they are dilapidated, they could hold down the value of your home, no matter how much work you put into it.INSIDE ♦ Are there plenty of power points to hand? ♦ Find out how long ago the property was rewired ♦ Patches of fresh plaster or paint may indicate the current owner has something to hide. Check walls and ceilings for signs of recent plastering, wallpapering. Wallpaper, especially, can hide a multitude of structural sins. ♦ If the heating is on full blast the present occupier may be trying to fight back damp patches. 88
  • 86. Step seven The negotiationI like Robert Allen’s approach to this, “friendly, fair and flexible,” definitely notunnecessarily macho or based on power strategies.He suggests that negotiations comprise three activities: • Gathering information • Building trust • Solving problemsMost if not all the information you need was covered in steps five and six, completingthe bargain finder and completing the physical inspection. This will reveal the areaswhere negotiating can improve the deal. With this in mind, always go into a negotiationknowing what your ideal outcome is and aim to achieve that.Building trust comes from treating the seller as friend and not as an adversiary. Treatthem with respect and see them as a friend with a problem who needs your help. Usethe negotiation to build your rapport.Solving problems means helping the seller to achieve what they most want to do. Don’tforget, in this section we are considering “don’t wanters”, all they want is to sell theproperty, although probably not at any price. Try to achieve a win – win situation, this iswhy it’s important to know your outcome before you start.Finally, remember that “whoever mentions a figure first, loses”. If you are buying, askthe vendor what the best offer he’ll accept is. If he won’t give an answer, wait.If you are selling and a potential purchaser asks you how much you’ll accept, ask “howmuch are you willing to pay?”In most negotiations, whichever figure is given first can generally be improved on by theother party.Step eight Finding the down payment “The most common stumbling block to investors in real estate is not having enough cold, hard cash to act quickly to snatch up the hot deals. What if you could create a hassle free, never ending supply of money to do all the deals you want? What if there were no red tape delays from big money lenders? What if you were finally in control of your own destiny? It’s like tapping in to your own ‘private’ bank…” Richard DesichReaders of “An Insider’s Guide to Successful Property Investing” will know that theeasiest way to start in property, if you have limited funds of your own, is to use otherpeoples money. 89
  • 87. This can come from banks or building societies, friends, relatives, business colleagues,in fact anyone will do. Using other people’s money greatly increases the profitability ofyour property dealings.The key is to have it ready, before you start looking for property.Otherwise you risk disappointment, and ruining your credibility with people you mightwant to do business with in the future. 90
  • 88. Section SevenThe innovation systemIn this section you will learn about: • Using the internetUsing the internetYou might remember from ‘The Magnificent Seven’, the list of qualities needed to makea successful entrepreneur, that the seventh key quality is creativity and innovation.We live in an age of outstanding innovation and technological advancement. New thingsare being discovered and invented all the time. And far from being the stuff of sciencefiction many of them have very practical implications and uses for propertyentrepreneurs.As this is an e-book, I think it’s entirely appropriate to promote the internet as one of thegreatest tools of recent times for property investors and developers.In my opinion the internet has three functions: • As a marketing tool • As a communications tool • As a library •The internet as a marketing toolThis is incredibly useful for two reasons. • Firstly, it allows you to look for and find properties – most estate agents now have their own web sites, or are affiliated to a web site marketing property. • Secondly, if you ever need to sell your property you can have a go at doing it yourself (if you think it makes commercial sense) through: o bespoke investment sites o messages to newsgroups whose members are known to be property investors and developers 91
  • 89. Looking for propertiesIf and when you start looking for properties you will no doubt receive details of agentsweb sites from the agents themselves.However, there are a few ‘search engine’ type sites which many of the major chainssubscribe to. This means you can type in the name of the town (or location) in whichyou are searching and you will be given either: • A list of agents operating in that town with their web site details for you to click on to get instant access to their sites, or • An opportunity to fill in details of your requirements and the search engine will then look for suitable properties for you in all of the subscribing agents sites.Here are a couple which I recommend you add to your ’favourites’ list:www.ukpropertyshop.comwww.smartestates.co.ukfor serious investors interested in commercial property investments check outwww.ukpip.comwww.verticalproperty.comSelling propertiesIf you think it is suitable to try to sell your properties yourself there a number of waysyou could try: • Newsgroups and message boards These are sites where like-minded people can communicate and leave messages or swap information. There are news groups and message boards covering just about every topic you can think of, including property investing and developing. Before you steam in and leave messages about your property for sale, I recommend that you look at the type of message being left and establish the ‘etiquette’ for that site. Not all of them want commercial usage. Here are two used by private investors www.auctionproperty.net http://pb32ezboard.com/propertyauctionsfrm1 92
  • 90. If you’d like to try your hand at a more direct approach to advertising, you can placedetails of any investment property you have for sale on www.propertylink.co.uk forFREE! This is a site set up specifically for advertising and selling property.The internet as a communication toolYou are probably used to using email, but one application which is being used more andmore is estate agents emailing property details direct to applicants.As this becomes more technologically advanced, I have noticed that emails are comingdirect from the central computer listings of some agents, presumably sorted accordingto my requirements and sent my way direct by the computer.This means I should have up-to-date information on every property which matches myrequirements as soon as the agent is instructed to sell them.I’m not suggesting that that you should rely on this; if you become aware that you are onan automated system I’d keep on ringing the agents from time to time. Computers arerigid – they’ll only send you what they are programmed to look for and will interpret yourrequirements to the letter. A human being has the flexibility to send you somethingthat’s not quite what you after, but which might be of interest anyway.A parallel to receiving property details by email is that I’ve recently been alerted to newproperties for sale by text on my mobile phone.I think this is a sign of how hot the market is at the moment that agents can tempt youinto inspecting a property there and then purely based on the limited information theytext over. Still it is fast, and if every potential buyer is entered on the system it’s fairerthat the agent just tipping off their friends.The internet as a libraryI think this is fantastic. If you want any type of information, the chances are it’s out theresomewhere if you just know how to find it. • Estate agents sitesAlready in this e-book I’ve provided links to agents for you to use. Agents sites are greatfor obtaining comparable evidence before you buy, so you can do your own informalvaluation, and make sure that you don’t pay too much.Or you can use this information to satisfy yourself you are buying a bargain.If you haven’t decided which area to buy in, you can checkout prices in locations all overthe country from the comfort of your own home, as the first stage of your research.These sites are full of details of properties for sale, many with full details andphotographs. And all this information is literally at your finger tips, for free! 93
  • 91. • Other property organisationsNowadays most organisations have their own web sites, with loads and loads of reallyuseful information.Just as a taster I suggest you add these to your list of favourites:www.landlords.org.uk This is the site of the Small Landlords Associationwww.rics.org This is the site of the Royal Institution of chartered Surveyors and isupdated regularly with important news and features about all aspects of propertywww.property-week.co.uk This is free site run by a magazine for property professionals,with features and news which will be of interest to anyone involved in propertywww.inlandrevenue.gov.ukif you have any tax questions, you’ll probably find the answer at this site.www.arla.co.uk The web site of the Association of residential letting agents, the brainsbehind the Buy-to-Let scheme.I could list hundreds of useful sites, but I never really intended this e-book to be adirectory.This is all fantastic general property information, but there is an application of the‘library’ function of the internet I am very excited about.And it is …..Assisting You With Your Due Diligence…There is one site in particular which I think is amazingly helpful to us property investors.I really can’t recommend it more highly.It is called ‘upmystreet’ and you’ll find it atwww.upmystreet.comThis site is wonderful. You can choose any location in the country and search by townname or post code. When you first go in you’ll be presented with a menu which lookslike this: 94
  • 92. Local InformationAll you need to make life easier... • Public transport • Property prices • Classifieds • Find My Nearest...™ • ACORN profile • Council performance • Contacting your council • Childcare • Education • Policing and Crime • Member of ParliamentWhat this means is that you can make in depth searches about the locality, about crimerates, about all sorts of information which will help you to decide whether properties inthis area are worth pursuing or not.But above all else, it will allow you to get a feel for current property prices, the strengthof the market, and, possibly even more useful than that, how property prices haveperformed since 1995.To do this, when you enter the site and select your town or post code area, click onproperty prices on the menu like the one above when it appears. Then click on ‘viewgraph or compare with another area’. Then you’ll get a page which looks like this: 95
  • 93. LINK TO US · FEEDBACK · ABOUT UPMYSTREET · HELP Go You are in NE8 4. Change to: Remove graph Draw A Graph Comparing ne8 4 With... i j k l m n the national average j k l m n another postcode For the following data: Terraced Price NONE SELECTED NONE SELECTED NONE SELECTED Compare Now! © Crown Copyright | About the data Property prices January to March 2002 NE8 4 England & Wales average Detached too few sales £187,808 (43,506) Semi-detached too few sales £105,553 (60,433) Terraced £45,633 (18) * £90,300 (71,532) Flat £17,824 (29) £127,810 (32,597) All property types £28,474 (47) £120,995 (208,068) * View graph or compare with another area * the figures in brackets refers to the total number of sales over the period shownThis is a search I did of an area in which I was interested in buying property. 96
  • 94. You’ll see that it has: • Data on sales of Detached, Semi-detached, Terraced and Flats for the last quarter • A graph facility where you can ask it to display movements in property prices since 1995And • You can set the graph to distinguish between types of propertyAnd • You can compare local prices with either o Properties in other locations, or o the national average.Now, this is potentially very exciting if you want to know what has happened to propertyprices in the past.But what would be more exciting would be to use this information to try to extrapolateahead and try to predict what will happen to property prices in this area in the future.There is a school of thought that says areas which have experienced high rates ofcapital growth in the past will continue to have high rates of capital growth in the future.So, the argument goes, you should concentrate on buying in these areas, to benefitfrom continued high rates of capital growth.In fact, the theory actually runs that as the average is exactly that, there will be areasthat have done much better than the average, and those are the areas you should beconcentrating on.If you hold with this view then you can see that the graph of property values provided onthis web site is a key tool in your search for property. You can easily see how priceshave performed for ‘all property types’, or specific categories of property, and comparethis with the national average since 1995. You’ll instantly be able to see whether itmatches or exceeds the national average, or whether house price increases aredepressingly low, or even negative.Now, I’m not necessarily saying that I agree with this theory, although I can see that insome locations it is clearly true. It is difficult to imagine, for example, that price riseswon’t continue to be sharpest in London and the south-east over the long run, and thiswill be a continuation of a trend that has been in place for many years. If an area is indemand, and has been for some considerable time, unless circumstances changesignificantly, there is logic to assume it will continue to be an area in demand. 97
  • 95. Of course, relying on past performance will not alert you to any changes, whetherpositive or negative, which have, or which are about to, kick in. These may depress aonce booming area, or kick-start a stagnant area. As financial advisors have to warnyou about insurance polices “ past performance is no guarantee of future performance”.There is another theory of property investing which says that you should look to buy inan area which was once doing well, but has now slumped, but where the expectation isthat over the next 20 or 30 years, it will come back up again strongly.We’ve seen this happen, for example in, some parts of south London. Once high qualityupper middle class surburbs dipped significantly in the post war era; some propertyprices were depressed and the housing stock was neglected.However, after the boom of the 1980’s, many of these areas gentrified as demand inother areas pushed property prices higher, and buyers were forced to look at cheaperareas to get their feet on the property ladder. In turn this drew speculators anddevelopers into these areas to bring neglected property back up to standard, and avirtuous circle of improvement and prosperity was created.With the use of information like that provided on this site, it may be possible to spot, orto confirm, an up turn or down turn relatively early, so that you can buy or sell asappropriate.In the example I have included you’ll see that the price for terraced houses largelyfollows the overall trend of the property market as a whole. This gives some comfort thatthe area is relatively stable, and if I invest here, unless there is a significant change inthe local market, I should at least benefit from the average price growth in line with thenational market as a whole. 98
  • 96. Section EightManagement systemsIn this section you will learn about: • management of the business • management of the properties o do you do it yourself? o do you appoint managing agents?Management of the businessThis requires: • managing the people who help you run your business • managing the systems you require to keep your business running • managing yourselfManaging the people who help run your businessNapoleon Hill, in his famous book ‘Think and Grow Rich’ puts forward the view, basedon interviewing many prominent business people of his time, that the one key tosuccess in any business is building a ‘Mastermind Team’ to support you.In other words, you can’t do it on your own, and for practical reasons you will need ateam.Here are the people you will need on your side, and the difficulties you will havemanaging them: SolicitorsBe under no illusions, Solicitors do not act for you. They act purely for themselves. Nomatter what they tell you, you must deal with them on the premise that they will do whatthey want to do, and only when they want to do it, regardless of what your needs maybe. 99
  • 97. This has caught me out several times. For example, imagine you’re trying to buy aproperty, but you can’t see that anything’s actually happening. So you ring your solicitorto find out where they’ve got to – the searches, or receiving a contract from the vendoror whatever it might happen to be and they either don’t know, or their file’s in a differentroom, or even worse, they’re not even there to take your call and they never bothercalling you back.Why is it that the most simple things can become so time consuming? BanksMost of the time when dealing with banks I’ve felt an ever-growing feeling of despair.This has happened on more than one occasion. I’ve put in an application for a loan andthe initial response seems so positive. They tell you exactly what they want, they giveyou a form to fill in and you think that you’re on your way.Next thing you know, there’s a change of policy. Since Monday this week they don’tlend on that type of property. Or since Monday this week they don’t lend on propertiesunder a certain value. Or, since Monday this week, they don’t lend on property, full stop.Then they want more information. They start asking for papers you don’t even knowyou’ve got, and if you did have them, you haven’t seen them for months or years.Another favourite is you put in the application form and you get an initial positiveresponse, and then nothing happens. You wait and wait and wait. Days, weeks, amonth goes by, and still you haven’t received your mortgage offer. I’ve had anapplication where the bank went through all off the above and then they issued thewrong offer. They sent the papers to the wrong solicitor, and they offered me a fixed-rate, interest-only mortgage when I wanted a variable-rate, capital-repayment mortgage.Back to the drawing board! ValuersIf you think that what I’ve described so far is bad just wait till you have to deal with thesepeople. They can make your day or they can break your heart.You have to remember that their job is to protect the bank from making a mistake.However, even more important than that, is that they have to protect themselves fromthe bank accusing them of having made a mistake. For this reason, no matter whatprice you agree on a property, they are always going to down-value it, with frustratingconsequences if your financing is on a knife-edge and every penny counts.That’s not entirely fair as valuers come in three different varieties: the bullish, thebearish and the boring. But most, as in about 98%, will fall within the bearish camp.You will find dealing with these people is frustrating. For example, you’ll find yourselfdrawn into illogical arguments. Supposing you see a slightly run-down property whichyou know is going to be worth about £80,000 when it’s done up but you’ll need to spendabout £5,000 to do the work. So you agree a purchase price of £75,000. 100
  • 98. Now the bank will tell the valuer the purchase price that has been agreed before hedoes the inspection. So the valuer will go around and have a look and he will say “Yes,this property’s OK, but it needs a bit of work doing to it, probably around £5,000 andthen he’ll chop that straight off the purchase price and come up with a figure of £70,000.I’ve tried on many occasions, and know that it’s futile to go back to the bank and arguethat the purchase price already reflects the condition of the property. Once a valuercomes up with his figure, he’s not going to lose face by changing it. If his comments killthe deal then unfortunately the deal is killed unless you go to another bank and theyappoint a different valuer.I recently had a valuer undertake a valuation before I put in the bank application just tomake sure everything would go OK. I knew which firm the bank would appoint so itmade sense to me to ask the valuer to give the property a quick once-over so as not towaste time. If he was going to down-value it I would like to know now rather than goingthrough the bother of dealing with the paper-work on the loan application.The valuer went out and had a look and basically said it was a fine property, and thatthe purchase price was a fair deal, but there were several bits and pieces of repair workthat needed attention. I had already picked these up from my own inspection and hadbudgeted a couple of thousand pounds to do the work.When he sent me the valuation report he made an itemised list of all the repairs. Therewere about eight in all, and although none of them were particularly serious inthemselves, I knew that a list like that could give the wrong impression if it to fall into thewrong hands i.e. the bank.So I called him and I explained that I understood why he had made that list but that if heput a list like that in front of the bank they would probably not lend on the property. Hereassured me that none of the repairs in themselves were serious and that none ofthem in themselves would warrant a retention (a retention is literally where the bank willhold some of the money they intend to loan you until the repairs are undertaken. Thebank I usually deal with have a policy not to put a retention on any repair costing lessthan £2,500).I asked him very nicely to make sure that he made this very clear in his report. I couldtell he wasn’t really taking me seriously and so I begged him to be careful. Rathercomplacently he told me this bank wouldn’t put a retention on any repair costing lessthan £2,500 and so I should be OK. Not to worry.So I waited for an offer from the bank. It never came. So, through my mortgage broker, Ichased the bank, to be told they were taking further advice from their internal valuationstaff surveyor. The problem? Well, the valuer had put the list in exactly as he hadreported to me, and the bank were alarmed. In fact, they not only put a retention on theproperty but they actually put a retention on the whole amount of the loan, all £65,000.That killed the deal stone-dead.Just out of interest, I rang the surveyor to tell him. To be honest I was annoyed. After all,I know this bank and I know they’re cautious. I had warned him that what he said wouldmake or break this deal. He had done it anyway. His response? Well, surprise. He 101
  • 99. swore blind that in his report to them he had made it quite clear that none of the repairsin themselves warranted a retention. But I knew it was too late, there was no point inarguing with the bank, they’d made their mind up. So all I could do was say “Next!” andmove on to the next deal.Valuers don’t need the issue of repairs to make life foggy and fun. A classic example isa property I bought a couple of years ago, I paid about £17,000 for it, spent three or fourthousand doing it up, and knew that it would be worth about £25,000. I then applied fora loan to finance my next acquisition. I had already had a valuation prior to undertakingthe works, which suggested that after the works had been completed it would be worthabout £26,500.That was encouraging but I thought it was probably slightly optimistic. So the bank’sstaff valuer came out and he valued the property at £23,500. I have to say that I wasslightly annoyed at that because I thought that that was overly pessimistic. I decidedthat the only way around this would be to make an application to another bank and theyduly sent out another surveyor who promptly down-valued the property to £17,500.Three different valuers, and a £9,000 range between them. Needless to say, I quietlyaccepted the offer I had received from my usual bank and went on to the next property. Estate AgentsBless them! In this business we can’t live with them, we can’t live without them. Actuallythere’s nothing much wrong with Estate Agents despite their bad press. I think they aremuch maligned, well mainly, as most of them are fine. But there’s always the odd onewho latches on to you and won’t let go.I bought a property recently through a very nice Estate Agent who was charming andhelpful. I was extremely delighted when he introduced me to a property ahead of thecrowd and I was able to purchase it at a bargain price. I hasten to add that this doesn’tsuggest there was anything underhand on his part, I just think I was able to negotiate agood deal with the vendor.Anyway, shortly after that deal went through, he moved offices and another youngestate agent was obviously given his list of contacts. Since then I have received anynumber of phone calls offering me every single property that this particular estateagent’s office takes on. No matter how many times I have tried to explain the type ofproperty I am looking for and the price range that I am looking in, I get offered anythingthat they are instructed on.I also have the most bizarre conversations. An example would be where this youngEstate Agent rings up and says “We’ve just taken on such and such a property – areyou interested?” I’ll listen politely and then ask the usual questions like ”What is it?” and“How much does it cost?” and having established yet again that it is nothing like thetype of property I am looking for, I’ll explain that I’m not interested and why.Three days later the phone will ring and the same young Estate Agent will say “Iunderstand you want to view xyz Avenue at 3 o’clock tomorrow afternoon” to which I’llexplain “I never said anything of the sort”, but a bit less politely than before. 102
  • 100. Managing systemsRunning any business is like spinning plates, but especially the property business. Tohave a healthy, growing portfolio you will need to keep all your systems running at once.Planning is an ongoing requirement. On the basis that if you are not going forward youare going backwards. This goes hand-in-hand with reviewing, which we’ll look at later.For your business to grow, you will need to keep working on your planning systems, andthis requires priming your financing system.As equity in the properties increases, through capital appreciation and/or paying off theloans, you will probably want to re-mortgage and use the money raised to fund morepurchases.As your portfolio increases, the property management of your business will increasepro-rata, and as cash flow in and out increases you will need close control on youraccounting systems. None of this needs to be excessive, and is perfectly achievable ona part-time basis until your business grows to a size where you can become ‘employed’full-time.Management ‘gurus’ will tell you that the key is to be working on your business, not tobe working in your business.This is a matter of control, if you are in control of the business you are able toconcentrate on the things which enhance the growth and profitability. If you arecontrolled by the business, you will spend the whole time fire-fighting and dealing withproblems.Managing yourselfThis is possibly the hardest part of the management exercise.To keep on top of the business you will need discipline, especially if this is a part-timeventure.I’ve seen discipline defined as ‘doing the things you don’t want to do when they must bedone when you don’t feel like doing them’You will also need to be organised. This comes under ‘planning’: drawing up weekly,monthly and daily ‘To do’ lists is essential to keep you on track, as is regularly reviewingyour goals and business plan.Finally, you must not get emotional. Property can be a frustrating business, but youhave to make sure you don’t get sucked in.It’s a hard lesson to learn and I’m still trying to learn it but you mustn’t get emotionallyinvolved in property, at least not in a negative way. I think it’s fine to feel excited andmaybe even exhilarated when you do a deal, and perhaps even feel a little bit smug 103
  • 101. when things go really well, but when something bad or unexpected happens take a stepback and don’t get sucked in.It goes without saying that getting emotional and by that I mean angry or agitated orfrustrated or worried, or indeed any negative feeling, really doesn’t help any situation.The only thing which is going to help, is to keep a cool head and to look at mattersrationally so that you can come up with a solution to whatever the problem happens tobe. Anything else is a waste of energy.Having said that though, I quite understand how that is, and here are some of the thingswhich I’ve been upset about in the past: PropertyEverybody will tell you not to get emotionally involved in a particular property. Usuallythe idea behind this is that when the time is right you need to be able to sell the propertyquickly and efficiently and without remorse. If for any reason you’ve allowed yourself tofall in love with a particular property you may just delay your decision too long and losea good deal, or lose a deal altogether, or not get a deal at all if you’re asking far toomuch for it because of your rosy coloured specs.Another common mistake which a lot of investors make is to fall in love with a propertywhich they don’t actually own. In many ways there are remarkable similarities betweenthis and falling in love with a member of the opposite sex (or maybe even the same sexif you’re that way inclined) but finding that love unrequited. It can drive you crazy withdesire if you feel that you really want that property, but you can’t have it.This has happened to me. When I first started my property company and I was lookingfor my first purchase I fell in love with a gorgeous period property which at one time hadbeen the home of a royal. There were many things going for this property which made ita great buy for me personally. It had been converted into flats and they were all fully let,at good rents, but the asking price was at a level to make the yield enticing. It was in alovely location, and apart from anything else, it looked nice; it was wonderful, earlyVictorian architecture and to be honest I think my ego became more important thansimple investment principals. To be honest, I’m ashamed to say, I just fancied the ideaof owning that property. It was the bricks and mortar equivalent of a little red sports car.The inevitable happened. The vendor threatened to pull out unless I upped my offer. Idid, almost without hesitation and somewhat naively. The vendor was obviously veryencouraged by this and asked for even more. I desperately scratched around to see if Icould increase my finance. I couldn’t and that really hurt, but in the long run it was thebest thing. By that time the yield was plummeting and the deal was beginning to lookvery silly. However, the whole process took about a year and a half and that really hitmy business plan. It took me a long while to catch up and get back on track.Please don’t put yourself in a position where you have to learn this lesson yourself.Take it from me, that if you go into a property deal looking at it as more than aninvestment proposition, be very, very careful and be prepared to pull out quickly. Also, ifthe vendor starts playing games with you, get out immediately. If you start gettingsucked in on that sort of thing then you will lose. As a matter of policy I will not now 104
  • 102. increase my offer once my original offer has been accepted. And if the vendor looks likehe is beginning to drag his heels then I will walk away also.The opposite to falling in love with a property is to hate a property. This is equally badand is again something I have been guilty of. This arose partly because of theaforementioned property I fell I love with.Having realised that I was now about a year and a half behind where I wanted to bewhen I drew up my original business plan I started chasing around like crazy looking forproperties to buy. In fact I went from the sublime to the ridiculous, from an ex-royalhome to a property which, in my eyes at least, having lived most of my life in the leafysuburbs of Surrey, looked like a slum. It’s actually a pair of flats in an inner city in thenorth of England.To give you some idea, the house next door is boarded up and the area it is in has beendesignated a special action area by the local authority because in the past it has beenconsidered to be an area of acute social deprivation. When I first viewed this particularproperty the upstairs flat was occupied by a lady who seemed a very reasonable tenant,and her baby, and the ground floor flat was let apparently to her estranged boyfriendwho at that time was in prison! I was told the Home Office were paying his rent but inany case the lease was due to expire very shortly, as it happens, the day aftercompletion, so whether this was true or not was really only of academic interest.Even so, the yield seemed good and the agent who was showing me around assuredme that at the price he was suggesting I should offer, it was a good buy and that ifanything ever happened it should re-let very easily.I bought it .The lady tenant promptly disappeared with the kitchen units, the lease to theboyfriend in prison expired and I was left with two empty flats, one of them virtually un-lettable. It was around this time I seriously began to wonder whether I am mad or justtotally gullible.Anyway, to make things worse, because of a mix-up between myself and the managingagents nothing happened for a few months. I was expecting them to organise therepairs to the kitchen of the upstairs flat, but they thought I didn’t want to spend anymore money and they didn’t bother. They were advertising to re-let it but all potentialtenants took one look and said no. When we realised that we were talking at cross-purposes, and after the relatively cheap repairs to the kitchen had been made, both flatslet quickly and at very good rents. In fact, since then, this has been a very nice littleearner, but it took about 6 months to get it going.And that’s not the end of it. In the meantime, because this property is located in a localauthority action area, the whole of the locality has been the scene of feverish activity asthe local council have transformed what was a pretty dire area into not a bad place tolive. So as well as having rent, I have also had capital growth. Any feelings of hate I’vehad towards this property which were really the outward manifestation of my own innerfear, have been completely unwarranted. All I needed was patience, and having made adecision, the courage to see it through. It would have been very easy to have bottled it,put it back into an auction, and lost a load of money. 105
  • 103. So the lesson is, treat property for what it is, it’s a commodity, nothing more and nothingless, and not worthy of emotion. TenantsRightly or wrongly, I make it a point of principle not to have any direct dealings with mytenants. My view is that if I am going to have grief in any case dealing with themanaging agents, I don’t want to start trying to do their job as well. After all, that is whatI pay them for. I therefore neither meet my tenants nor do I talk to them.Whether this is right or wrong I do not know, but it suits me. My friend, on the otherhand, who owns some investment properties, makes a point of introducing himself tothe tenants as soon as they move in and giving them his card with the instructions thatthey are to call him if the managing agents fail them in any way.If you think about property investment as being a customer-based service, like any otherbusiness, then his approach makes sense because all he wants is a happy tenant.In my experience, and don’t forget that I deal in properties at the bottom end of themarket, 98% of tenants are OK. The other 2% are a complete pain and think thatlandlords are fair game. Unfortunately, we’re not helped by the press who love to takeevery opportunity to tar all small landlords in the country with the same brush, as beinga thieving B……ds!Here are just some of the situations my tenants have contrived to wind me up with overthe last few years.Firstly, the favourite is to steal the rent. This is quite a simple process, and most tenantson housing benefit will be wise to the procedure. As I say, most of the properties I dealwith are at the bottom end of the market which are the natural habitat for tenants onhousing benefit. As you may know, a tenant may elect for their housing benefitpayments covering the rent to be paid direct to the landlord. I stress that it is for thetenant to choose.The landlord has no say in this at all. However, as a matter of policy, my managingagents will insist that payments are made direct. With this in mind, on day 1 they will godown to the local benefit office with the tenant to help them fill in the forms. Now insome areas of the country it can take 8 to 10 weeks before the housing benefit isprocessed and before the first cheque arrives with the landlord. So if nothing happensimmediately you have to reign in your emotions and try not to panic. However, on twoseparate occasions we have waited and waited, and still no cheque has arrived. Oninquiring of the housing benefit office, after the usual side swipe about it being none ofthe landlord’s business, it became clear that the benefit had been paid direct to thetenant after all.It appears that the tenant had waited until the managing agents had disappearedaround the corner and then popped back into the housing benefit office and changedthe forms, so that the rent went direct to them. What do you think happens when atenant receives a cheque equivalent to 4 weeks rent or more? Do you think the firstthing on their mind is that they must send it on to that nice landlord who has just spent 106
  • 104. several thousand pounds buying and renovating a property for them to live comfortablyin? No. Guess what? They spend it. Every last penny. To them it’s a fortune and thetemptation is too great.What sort of madness is it when the government actively encourage a system whichallows the tenants to nick the rent from honest and decent landlords. What madness is itwhen the attitude from the housing benefit office is “It’s nothing to do with the landlord –it’s for the claimant to choose how they pay and if they don’t pass the rent on to you,frankly we don’t care”.The second incident is one which was contrived mainly by the tenants, but with cameocontributions from the neighbours. What happened was this. The nice tenants moved in,and then promptly did a runner with most of the furniture. Because it was several daysbefore anybody realised what had happened, the flat was left empty and unattendedduring which time the local neighbourhood kids decided to use it as a play area, andeither broke or nicked anything that was left behind. After all this, my managing agentsthen forgot to put in an insurance claim until it was invalidated for being too late. Mindyou, in fairness they did compensate me for lost rent, and for the cost of putting the flatback in good nick, out of their own pocket.The third incident, which really wound me up, was the nice lady who moved into my flat,went down to the housing benefit office and signed the forms directing the rent to bepaid direct to the managing agents, and then promptly lost her right to housing benefit. Ithink this was because her working boyfriend quietly moved in on the sly. Anyway, forwhatever reason, she was no longer able to pay the rent. In fact she was only able topay half the rent. Her attitude? Well along the lines of “It’s not my fault and I fully expectyou to subsidise me and let me live in your flat at half the going rate.” It wasn’t even as ifshe said “Please”. She’d obviously been reading the papers and thought that “Alllandlords are thieving …. And it is my right to stay in your property even though I can’tafford to be there.”Here’s another lesson in madness. My managing agent was asked by a supplier ofdigital TV equipment to open up a flat because the tenant had rented a large andexpensive system but hadn’t made any payments. Interestingly, the rent, in the form ofHousing Benefit, had been arriving on time from the Housing Benefit office, so I have tosay I didn’t really give the matter any thought.The duly appointed day arrived and my managing agent went along with the spare keysto open up. The first thing they noticed was that the locks had been changed. Afterforcing the door the next thing they noticed was that everything was as it should beexcept there was a £1000 worth of digital TV equipment missing!And lastly, I have to say that this hasn’t happened to me but this has happened to afriend of mine. This was where the tenant, who was a seventeen year old unmarriedmother, couldn’t afford the rent. The problem was she really wanted to be in a two bedflat (as she had a baby this seems reasonable to me) but the benefits agency wouldonly pay the equivalent of a one bed flat. In case you think he’s completely heartless Ishould say that if she was going to end up homeless my friend would probably havetried to help her (at least while she got herself sorted out). But as her Mum only livedtwo doors away he knew she had somewhere to go. Anyway her Mum had originally 107
  • 105. agreed to pay the rental shortfall but had defaulted so in the scheme of things it seemedonly right that she should help out.The trouble with stereotypical seventeen year old female tenants is that they tend tohave stereotypical large and aggressive boyfriends, and this one was no exception. Sothey trashed the place on the way out (actually it didn’t look that much different thanwhen they lived there!)In the end there wasn’t lot my friend could do. He could have told the police but thenthat would probably have made the flat a target for future trouble. And there was nopoint trying to get them to pay for the damage because neither of them had any money.I’m glad to say that large and aggressive boyfriends were covered under his insurancepolicy and so things were put straight reasonably easily.As my managing agent would say “it’s all just the nature of the business”. Bad thingshappen and you can’t allow it to get to you.Even as I write I am having to deal (to be technically correct, encourage my managingagents to deal) with two sets of problem tenants. Both are causing problems, neither arecurrent with their rent, but for completely different reasons.The first are professional provocateurs. I can’t think of another way to describe them.They have been in my property for just under a year. Mainly the rent has been paid,largely because the bulk of it comes from housing benefit. But in that time they havecaused so much trouble through domestic arguments and violence, and by intimidatingthe neighbours, that the local council (who seem to field the complaints rather than mymanaging agents) has a file literally inches thick all about their anti-social behaviour.The final blow came when the housing benefit office decided they would no longer paytheir rent. I’m not sure why not but I don’t blame them. The trouble is that although myagents have served notice to quit under the Housing Act, to bring their AST to an end,they haven’t gone. So reluctantly, I have had to put the matter in the hands of asolicitor.Here’s where the story gets even more colourful. No sooner had my solicitor served yetanother notice to quit, than the tenants served a claim against the managing agents forharassment. What is harassment? These people fight each other in the street, probablydeal in drugs and don’t pay their rent. They must expect visits from my agents. You maybe wondering how these people can afford to take the case to court when they can’tafford the rent. You guessed it! These people get legal aid. To any politicians readingthis, how can you justify giving assistance which pays for these people to clog up thelegal system with spurious claims just to try to get a quick buck, while neither mymanaging agents or myself, the real victims, get anything.And how are they able to run this? Because a solicitor who should know better agreedto assist.Aided by their misguided lawyer they took my managing agents to court, claimingdamages for harassment. What they didn’t know was that my agents caught on quite 108
  • 106. quickly to the way this was going, and kept diary notes of when and why they visited theproperty.They were also able to show that a lot of the claims and incidents claimed by the tenantwere fictitious. For example, the managing agent was accused of doing things while hewas away on holiday.However, the best piece of evidence was a note posted on the window of the property,which was just a torrent of abuse directed at my agent. He took a photo of it.When the judge saw that he just threw the case out, and tore a strip off the tenantssolicitor for even running the case.So was that the end of the story? No way. My action for possession is still a few weeksaway and in the meantime, no doubt encouraged by their solicitor, the tenants are nowrunning another action against my agents. This time they are claiming £5,000 damagesfor them not having honoured the repairing terms of the tenancy. Watch this space.There are some similarities with the second tenant. She is behind in her rent, she nolonger gets housing benefit, and the agents have served a notice to quit on her whichhas expired and has not been enforced. But in almost every other respect there is reallyno comparison.She is behind on her rent because she lost her right to housing benefit. Why did shelose her right to housing benefit? Did they find out she’s smuggling drugs? No. again,politicians please note. She lost her housing benefit when she got a job. It’s not a verygood job, and it’s not a very well-paid job. In fact it doesn’t pay enough to cover her rent.But she was honest and declared her meagre earnings, assuming she would get aidwith the rent she otherwise couldn’t afford. Are you kidding, there’s no help for peoplelike her. So now she’s having to go back to her mother’s. She’s a proud lady and she’spromised to pay me back what she owes me, bit by bit, when she’s got the money. Ireally don’t want to chase her for it but she’s insistent, she doesn’t want to owe anyone.I ought to say, just to keep a balance that some of the worst tenants are those in suits.Affluent young males can be a real pain, especially when they’ve had a few lagers, andaffluent young women who think they know their rights, are the worst.It’s the same with students. Although most students are as good as gold really, whenthey do have a blow out, boy, do you know about it. They don’t mean any harm “it’s justa bit of fun”. That’s why if you are in that market you must insist on parents guaranteesand warranties. That should help to keep them in order.As an aside my managing agent has a lovely way of dealing with errant tenants. Theyare probably expecting a show down and slanging match, maybe with some threatsthrown in but they don’t get it. Instead he acts all hurt and says “I must be really failingyou as a landlord because you’re not paying your rent and that shows that you must beupset with me. If you were happy with my service you’d have no worries in paying, so Ijust want to apologise. You deserve better than me so I’m going to help you findsomewhere more suitable for you to live. I’ve got the local paper here and I spotted this 109
  • 107. nice two bed flat at about the right kind of rent. Let’s give them a ring and go around andhave a look”.He tells me that most of the time they are completely stunned and go as quietly aslambs. The authorities (mainly the housing benefit agency)I’ve already told you about the ease with which a tenant can get the rent paid to themdirect, and the total disinterest of the housing benefits office when they blow it on boozeand fags. If you ring and complain, the stock answer is that it is nothing to do with thelandlord.But, and this what I don’t understand, if the tenant is claiming that money to pay theirrent but are using it for something else, isn’t that fraud? Shouldn’t that be treated likebenefits fraud?And if they don’t pay it over to the landlord and then stay in occupation, isn’t thatstealing and trespass.Aren’t the Benefits Agency, by their lack of interest, accessories to these three crimes?Don’t try telling me it isn’t politically motivated. The GovernmentIt’s not just that the Government are responsible for Housing Benefit and so areultimately responsible for the pathetic situation I have just described. It’s their wholeattitude to the private rented sector.Yes, I agree that there have been and still are some bad landlords. However, thingshave changed, especially since Buy-to Let started. For the first time in five generationsprivate individuals owning properties for rent is commonplace for the “average” person.It’s not just the rich and wealthy who are property investors, many landlords today arenormal people who want or need to supplement their pensions or income.The trouble is that attitudes and prejudice take longer to break down and theGovernment will overlook this at their peril if they want the support of “Middle Britain.”Unfortunately there are some who dislike private property in principle, but I think theirpower base is quite weak. The thing they don’t understand is that the Government nowneed private investors to provide social hosing and asylum seeker accommodation. Thisis a real tangible service which is meeting a real tangible need.As I said earlier, it’s a real symbiotic relationship with both sides benefiting. The landlordgets a ready supply of tenants, and when the benefits system works, money backed bythe Government. On the other hand the Government gets cheap accommodation forsocially needy groups, but without having the hassle of ownership and all that goes withit such as the trouble and cost of maintaining the housing stock.As I write we are waiting for the Government’s next brain wave which is licencing of 110
  • 108. private landlords by local authorities. In principal I have nothing against this as long as itis used for the purposes we were told it is being introduced for, to sort out the badlandlords. However, if it becomes a political tool for left wing councils to take out theirfrustration on private property owners, we could be in for a hard time. Yet another thing Iwill have to keep my cool about.Management of the propertiesYou will need to decide whether you: • manage the properties yourself • appoint managing agents to manage the propertiesAll systems are important, but management is critical. If you don’t get this right yourbusiness will collapse.There are various sub-systems within management which will need your close attention: • letting the properties • collecting the rent • doing repairs and organising routine maintenance • tenant managementThere are loads and loads of good books on subjects like “How to let out your property”and “Landlording for beginners”, so I don’t want to go into detail about the nitty-grittyhere.What follows is my opinion about what is really important and some of the traps anddifficulties you can get into.The first thing you need to decide is whether you want to manage the propertiesyourself, or do you delegate to a managing agent. There are cases both for and againstdoing it your self.This is where one of those strange inverse laws applies. Whereas I’ve been warningyou not to get emotionally involved in your properties, it often strikes me that it would befar better if the managing agents were more emotionally involved. Quite frankly, I don’tcare how good you tell me your managing agents are, I am convinced that 99% ofmanaging agents couldn’t give a stuff. Be under no illusions, they are not looking afteryou properties for love, it is merely a way for them to make a living.You shouldn’t have to manage your managing agents. In an ideal world you’d be able tobuy properties, hand them over to your managing agents and all you’d have to do thenwould be to pocket the residual income. And even that would be done for you byautomatic payments into your bank. 111
  • 109. If only. Although my portfolio is relatively modest, at least two thirds of the time that Ispend on it are spent with me managing the Managing Agents. The other third is mainlyspent looking for other properties.This is worth bearing in mind when you decide whether you want to do your ownproperty management.The case for doing your own property management • It will save you costs. Typically for a full management service (for residential property) you’ll be charged between 12½ % and 15% plus VAT. This is a lot of money relative to the rent, so if you can save this you can significantly boost the return on your money invested. Going back to our earlier example we can calculate exactly what the effect is on our return. Let’s assume a purchase price of £31,000, and a loan of 85% for 20 years under a repayment mortgage. The current variable rate offered by my lender is 5.75%. The rental value of the property is £350 per calendar month. Rent £ 4200 Less Mortgage repayments £ 2088.76 Management £ 525 VAT on management £ 91.88 Insurance £ 135 Repairs @ 10% £ 420 2 week initial letting period £ 160 Total costs £ 3420 Balance £ 780 The return on my money invested, i.e 15% of the purchase price, is 16.7% Let’s see how the same property performs if we do our own management. Rent £ 4200 Less Mortgage repayments £ 2088.76 Management £ 0 VAT on management £ 0 Insurance £ 135 Repairs @ 10% £ 420 2 week initial letting period £ 160 Total costs £ 2803.76 Balance £ 1396.24 The return on my money invested, i.e. 15% of the purchase price, is now 30%, almost double. 112
  • 110. • You are able to keep an eye on what is happening. You will have more control, and unless your agents are very good, you are likely to stay on top of problems and deal with them quicker. • No one cares about your investment like you do. So when things need to be done, the chances are you’ll get it done better.The case against doing the management your self • If you are not going to use managing agents the geographical area in which you can buy property will be limited. Obviously the nearer home, the easier it will be to manage them yourself. If you have a team comprising an electrician, plumber and builder who you know will cover you in an emergency call out, that will help. But there’s no point being unrealistic. What you will need to decide is whether the type of property you want to invest in is found within easy travelling distance of your home. If not, you will have to appoint a managing agent. • If anything goes wrong, you are on your own. Firstly there’s the issue of how you feel about being called out in the middle of the night to deal with burst pipes. Or how about being called out to unblock the toilet? • Then there’s rent collecting. How will you be knocking on doors? And how would you cope with tenants who mistreat your property?So, if you’re going to use managing agents, you have got to expect repairs not beingdone or not being done quickly enough, properties becoming vacant and not being letquick enough, insurance claims not being made, or being made out of time, patentlyunsuitable tenants being put into properties with the expected results, and, Oh yes, theone I really love, where they “just forget” to pass you on the rent at the end of themonth.On the other hand, there is a lot that they do which I do appreciate, particularly dealingwith the day-to-day, face-to-face stuff with the tenants. There are times when collectingthe rent or placating a seriously distraught tenant can be very difficult, and it’s at thattime that I realise they are fully worth their fee. Also, because I have decided to buyaway from home where the yields are much higher, it would be totally impractical toeven attempt to manage the portfolio.So, whenever something happens or doesn’t happen which should happen, and whichcauses me irritation or grief, I take a deep breath, clear my mind and remember howgrateful I am for all nasty bits and pieces they do for me. 113
  • 111. Section NineThe Accountancy systemIn this section you’ll learn: • The number one reason you could lose your property business • Why you need proper book keeping and accounting systems • Essential records you should keep • What about VAT? • Can I avoid Capital Gains Tax? • Why you shouldn’t do your own accountingThe number one reason you could lose your property businessAccountants have a reputation for being pretty dull, but I’m sure it’s not their fault.Accountancy just isn’t thought of as being exciting. The truth is, if you neglect this sideof your business, you’ll end up in real trouble and things could get too exciting.In my opinion, the number one reason why you will lose your business is • poor cash flowAnd the two main reasons for poor cash flow are, in my opinion, • poor accounting practices • poor record keepingIf you don’t know how much money you’ve got, or worse still if you can’t forecast aheadand see, let alone plan for, when cash flow is going to be tricky, you’re not going be inbusiness very long.There is nothing sadder than seeing an otherwise profitable business go bankruptbecause it hasn’t managed its cash-flow properly. I think the saddest example of all iswhen a business goes to the wall because it hasn’t put enough cash aside to pay its taxbill.However, the main reason why cash flow becomes stretched for property investors is… 114
  • 112. Overtrading and overextendingThis is an easy mistake to make. It can happen for two reasons: • trying to buy too many properties too quickly • going straight into big deals before you are readySome investors have got away with both, and have been very successful. A largernumber haven’t.The temptations behind each are obvious. If owning property fits your overall strategy,then surely owning as many as possible, in the shortest amount of time, makes sense.But, no matter how much homework you do before you start, you will get better andbetter at doing deals as you grow in the business.For a start, the more properties you buy, you’ll find it easier to spot what matters andwhat doesn’t matter, as your due diligence becomes more effective.However, if your business is doing well and bringing in profits there will always be thetemptation to over trade. Perhaps in some ways the temptations and the opportunity aregreater in property than in most other types of business. Why is this?Mainly because once you are up and running you will be offered great deals. The oldsaying ‘the best way to get new business is to do business’ is true in property. As youget a reputation for being a buyer who can act quickly (assuming of course you can – ifyou get the reputation of being a time waster you are unlikely to attract new business)your reputation will undoubtedly spread far and wide. Count on it.Always be straightforward in all your dealings with everyone you come across. And withthe minimum off fuss, you will find deals coming to you. Agents in particular like to‘place’ properties with investors they know will perform.If you try to run with too many purchases at one time, or with deals which are beyondyou financially, you cash flow will suffer: • if you are using finance, you will have to find the deposit. If you have no ready cash you may be tempted to raise this ‘unconventionally’. These funds will need to be financed and you will need to budget for this. If this is short-term finance you will need to pay it back quickly and so a disproportionate amount of any extra income arising from the properties may have to go towards this. This can seriously change the maths and turn a banking investment into an ‘alligator’. 115
  • 113. If you don’t need extra finance to cover a deposit, there are other traps you can fall into. • Upfront you will need to be able to cover valuation fees, solicitor’s and search fees, insurance premiums, and depending upon the value of the property, stamp duty. • the bank will start taking payments on the mortgage the same month the loan is drawn down. This is OK if the property is already let. However, if it is not let, you will need to budget for a void period while your agent looks for a tenant. In my experience the managing agent will pass on the rent at the end of the month in which they let the property. • You will need to budget for refurbishing the property, or doing essential repairs, or buying furniture • You can add another month to the void period while you do repair and improvement works.The reason why you may be tempted to overstretch yourself like this is if you think youmay miss the deal of a lifetime. Some deals are so good that you feel you can’t possiblyturn them down. There is an exception to every rule but my advice is - don’t getpanicked into buying. The deal of your lifetime will come along once a month, if not oncea week, if you go looking for it. This sounds trite but it is true.What I am about to say also sounds contrived but is true. About two months ago I wasoffered a small portfolio of three properties which were the deal of a lifetime. However,the sale fell through last week. The deal was so good the seller decided to keep them. Iwas devastated, and I was about £500 out of pocket in abortive legal fees.This afternoon while I’ve been writing this, I have been offered five properties, two ofwhich are better deals than the three which slipped through my fingers. Add to that theproperty I was offered last week, and I have six more properties on better terms thanthe three I desperately wanted to buy.Is this just luck? No, I don’t believe in luck. I just happen to have made it my business tolet a number of key agents know that I am actively looking for bargains, and that I canact quickly. By close of play tomorrow I should have all six properties under offer.Why you need proper book keeping and accounting systemsYou need proper book keeping and accounting systems so you can: • Keep track of your current cash flow • Forecast your future cash flow • Calculate your tax liability 116
  • 114. Proper record keeping is essential. You’ll find there is a lot of paper work involved,partly because of the way you receive financial information. If you don’t deal withproperly, you can be overwhelmed.For example, when you get a monthly statement from your managing agents it’ll showthe rent collected, their fees plus VAT, any amount deducted for repairs etc. That’s OK ifyou only have one property, but when you have two or more these figures will need tobe apportioned out and recorded separately if you want to keep an accurate record ofthe profitability and performance of each individual property.This can be very time-consuming. I recommend you get a decent accounting packagefor your computer. This doesn’t have to be too elaborate, I have used Microsoft Moneyfor the last year and this works fine. If you don’t feel you have the need for a bespokepackage yet, or if you think the number of properties doesn’t justify the expense, youcan do what I did when I first started and create your own spreadsheet.On the assumption that at some stage your business will be big enough to justify askingan accountant to prepare proper accounts, make sure that as far as possible allexpenses and receipts go through your bank account for that business.Also make sure that it is easy for your accountant to relate your spreadsheet orcomputer package printouts to figures on individual bank statements. Otherwise he orshe will waste a lot of time reconciling the figures and you will pay for it.On the subject of bank accounts, without wanting to plug anyone else’s business, I haverecently changed from a traditional business account with a Big Four high street bank,to an internet account with Bank of Scotland.I changed for two reasons: • They are much cheaper. For example I was charged £150 a year for having a overdraft facility whether I used it or not. Now I get a free overdraft, and I only pay interest on the amount borrowed • They pay interest when I’m in credit, the other bank didn’t • I don’t get charged for paying in cheques, using my cheque book, or setting up standing orders and direct debits.I find the only way to keep on top of book-keeping is to do it weekly. This comes downto self-management and discipline which we talked about earlier. It might seem over-the-top doing it so frequently, but I believe that little and often is better than “when I getaround to it”.You will need to keep accurate records of your receipts and expenses. Your accountantand tax office will want physical evidence, preferably from receipts from suppliers, butalso bank statements, cheque stubs and paying-in books. You need a system forkeeping and recording receipts, you can’t just throw them in a shoe box. 117
  • 115. Essential records you should keepInland Revenue booklet IR150 “Taxation of Rents – A Guide to Property Income”requires accounts “drawn up in accordance with government accounting principles”.It also states that profits between tax years will have to be apportioned if you don’t useApril 5th as the end of your tax year.You might want to take advice on when your end of year should be.Even if you don’t intend to use an accountant, I recommend you speak to one when youset your accounting systems up.Here are some of the records you will need to keep. • all business receipts, which can be income, lump sums, or even payments in kind • all business expensesYou will need accurate records to calculate you tax liability.Business expenses are defined for income tax purposes as “expenses incurred inearning the income” as long as they are wholly and exclusively for business purposes.These can be deducted when working out your taxable profit. However, the definition ofexpenses will not include “capital expenditure” so you can’t deduct or depreciate thecost of the property, or a loss on the sale, against income tax.However, although capital expenditure does not qualify for income tax allowances, youstill need to keep a careful record of all spending on each individual property. Capitalexpenditure such as the cost of purchase or the cost of improvements will be allowablefor Capital Gains Tax calculations if you later sell the property.There are complex rules on what can and can’t be deducted as legitimate expenses forincome tax, and I strongly recommend that you talk to an accountant or the tax office sothat you put the right systems in place, and keep the right records.Here is a brief description of a few of the major points, but this is not intended to be acomprehensive explanation, and is not intended to replace independent professionaladvice.Where you let a residential property furnished you can claim a deduction for either: • A wear and tear allowance of 10% of the net rent to cover depreciation of furniture, carpets, fridges etc; or • The net cost of replacing a particular item of furniture, but not the cost of the original. 118
  • 116. Once you opt for a particular basis for furnished property you must stick with it, youcan’t chop and change each tax year.If you own furnished and unfurnished property, the 10% wear and tear allowance isallowable only on the rent from the furnished properties.To be classed as furnished, the tenant has to be capable of living in the property withouthaving to provide a bed or a cooker etc. Partly furnished properties do not qualify for the10% allowance.If you decide not to opt for the 10% wear and tear allowance you will have to calculateyour deductions based on the cost of renewal, as individual items become obsolete.Regardless of whether the property is furnished or not, you can claim the net cost ofrenewing or repairing fixtures which are an integral part of the property, such as baths,toilets, central heating etc. Remember this is for replacement and repair, you can’tdeduct the cost of installing a central heating system where there previously wasn’t one.Any replacement claimed has to be on a like for like basis in terms of cost and quality.In addition to wear and tear of furniture and fittings you will be able to deduct the cost ofordinary repairs to the property.Interestingly, under the current rules, replacing single glazed windows with doubleglazed units is treated as an improvement, and therefore not an allowance deductibleagainst income.However, since April 1st this year the new Building Regulations say all replacementwindows must be double glazed. As there is now a lack of choice, I assume the InlandRevenue will have to back down on this.What about VAT?From my experience talking to other property investors there seems to be quite a lot ofconfusion about VAT, particularly when dealing with rental properties.I’ve spoken to Customs & Excise on two separate occasions about this. VAT is adifficult subject but I think this is what they were trying to tell me.If you own residential property which you intend to let out, you cannot register for VAT.Therefore you cannot reclaim any VAT which arises on any of your expenses.At first sight this may appear a little harsh, but it is probably something of a blessing indisguise. You see, if you were allowed to register for VAT and to reclaim VAT on anyexpenses occurring in respect of letting the residential properties, you would by thesame token be obliged to charge VAT on any of the rents you charge.That would not be at all helpful because the rent you would be charging on yourproperties would be 17½% higher than the rent charged by any competing landlordswho had not registered for VAT. In effect you would be pricing yourself out of the marketand would be making your properties relatively less attractive. 119
  • 117. Admittedly, if you were dealing with large company lets, or very high value propertiesthis may not make an awful lot of difference to potential tenants. However, at the lowerend of the scale where you’re dealing with flats to young professionals, or even studentsor tenants on benefits, it could make a big difference.Can I avoid Capital Gains Tax?One of the most tax-efficient way of making a profit from property is to combine youractivities with your own living accommodation. Your principal accommodation is exemptfor capital gains tax. If you own two or more properties, you can elect as to which one isyour main residence for tax purposes and that will be exempt from CGT. I understandthis is true even if you don’t live there.This is why so many people take the route of buying a run-down property andrefurbishing it while they live in it. Then by selling on and buying a bigger but equallyrun-down property and repeating the process they can work up the property ladder insteps till they get to a point where they can sell the property and pocket the whole lot asa tax-free lump sum.Why you shouldn’t do your own accountingI don’t see any reason why you shouldn’t do your own book keeping, that is, keepingrecords of expenditure and receipts in a form you can use to keep track of where youare, and in a form suitable to pass to your accountant to prepare your accounts.But I would always recommend that you engage an accountant to prepare properaccounts and help with your business tax returns.When I was talking to one of my managing agents last year I was surprised to find outthat I am only one of two clients who claims renewals allowances. He knows thisbecause he invariably arranges and oversees the refurbishment work on all his clientsnew purchases, and we are the only two who request a proper breakdown of the works,and the costs of the fixtures and fittings.I assume his other clients are missing out and paying too much tax. My accountantmore than pays for himself and covers his fee by (legally) keeping on top of this sort oflegitimate allowance.Having the accounts prepared properly has also made my mortgage broker’s job a loteasier when persuading my lender to be more “flexible” and “responsive” to my needs. 120
  • 118. One last recapLet’s summarise where we’ve got to now: • You have set realistic financial goals with target dates • You have concluded that property is the best way to achieve them • You have started to formulate your strategy by considering whether your aim is to create ♦ Cash generation through Retailing Renovating Wholesaling ♦ Cash flow through Buying investment properties ♦ Equity through Holding properties for increases in capital value Using the rent to pay off mortgagesYou may consider one of these, or a combination of any two or all threeYou have decided between residential and commercial propertyYou decided the business system through which you will operate.You have established a system for financing your properties…and a system for buyingYou have set up systems to use innovationYou have a management system for the business and the propertiesYou have an accounting systemYou are now ready for the last system, which is… 121
  • 119. Section TenA system for reviewingIn this section you’ll learn: • Why you need to review your systems regularlyIf you read any book on goal setting they will tell you that regularly reviewing your goals,and your strategy to achieve them, is essential for two reasons: • First, unless you consciously set your sights on where you are going you are almost certain to drift • Second, even if you do know where you are going, if don’t check from time to time that you are on the right road, you could easily lose your wayOn a more practical level I learnt that: • one’s personal needs change and therefore the goals and strategies you formulate will be overtaken by events as they become no longer relevant • as my understanding of property investing increased through hands on experience, I could see that certain aspects of my strategy were not appropriate • as I grew in experience, I was able to incorporate new goals and elements into my strategy, which I had felt were beyond me when I first started my property investing businessReviewing your strategyReviewing strategy on a regular basis is essential. As they say, nothing ever stays thesame.In property, things change all the time. Markets change, interest rates change, taxstructures change, politics change, and your own personal circumstances and needschange.And as you learn and do more, you change. 122
  • 120. This is what Bruce Norris says: ”Most people get to a certain level in their chosen profession and then linger at that forever. Many buyers tell me they have ten years experience. However, in just a short discussion I can tell they have one years experience repeated 10 times. What did they do with the nine years? They just repeated the same processes over and over again. They have become complacent and think refinement doesn’t matter.”So how has my strategy changed since I woke up to the realities of being a landlord?Because I still have my day job and have the luxury of not being under pressure to takeincome from the properties, I have been able to adopt a much longer long-term viewthan I thought I would at the start.In effect, I’ve been able to review my goals. Rather than have ‘income now’ as my goal Iwas able to substitute this with ‘capital later’.As a consequence, I’ve also been able to review and adapt my strategy.You may remember that I intentionally financed my early purchases on an ‘interest-only’basis to create cash-flow and to expedite the accrual of a cash fund. This I then used togear up to buy more properties. When the portfolio was large enough, and cash flowwas pro-rata increasing in line with the number of properties, I was able to reviewwhether this method of financing was still appropriate.With an interest-only loan all of the capital is repaid as a lump sum at the end of theloan period. By taking a repayment loan there are three principal ways of repaying thecapital. • by putting aside and saving part of the rent (profit). Home-owners with interest-only loans traditionally do this with endowments and there are now also PEP/ISA and pension mortgages • sell some or all of the properties at the end of the loan period. If you have purchased the properties to provide income this may not be your preferred option. It may also have complications related to CGT • refinance and use the new loan to pay off the old, effectively deferring the need to pay until the end of the new loan termI chose not to use any of these approaches.As a quick aside on interest-only loans, I am often asked whether these are the loansnew investors should take out. This depends on: • What you are investing in • How long you intend to hold the properties 123
  • 121. There is school of thought that if you buy decent property, in a decent area, and wherecapital values grow in line with, or better than the national average, after 20 years thevalue of the properties will dwarf any outstanding loan. This is even if you have takenout an interest only loan, and haven’t paid it down at all.This is an interesting view, and I know this how some professional investors operate.Back to my review. By recalculating the monthly repayments on a repayment mortgagebasis, I could see that although cash flow would be reduced, it would still be positiveand sufficient to accrue a ‘cash pool’.So two years into my business I converted all loans from interest only to repayment.I then reviewed how I prioritise the disposal of any rent received. Naturally, the numberone priority is to pay the monthly repayments on the mortgage, and to make anyessential repairs which arise from time to time.Also to pay insurance premiums on the property. This protects my financial position andthe business. If all else fails I will have outright ownership of these properties in 20years and at that time a substantial income will kick in as the last mortgage payment ismade.Any surplus over and above this will then be used as followsMy company currently has a facility with the bank agreed for the purposes of acquiringnew properties. This is on the usual terms. The bank will lend 85% of the purchasemoney meaning that the company has to raise 15% for the remainder from non-borrowed funds. Until the facility is fully used (remember from our discussions ongearing the practical effect of using finance to acquire property) the next priority will beto use surplus funds to put towards new purchases.I will then also create a hybrid emergency fund and a sinking fund. This will coverexceptional items such as unforeseen and major repairs, and will also accumulate tocover regular refurbishment of the properties say at five year intervals along withreplacing furniture. In the highly unlikely event that I suffer multiple voids or protractedvoids this fund will act as a float to cover the mortgage.In the first instance the fund will be established by setting aside say 6 month’s profit.Once the fund is at a critical mass it will be topped up with smaller regular payments ona monthly basis, and the remainder of the surplus fund can then be allocated to makeadditional lump sum payments against the mortgages. This will reduce my gearing andexposure which will make me feel a lot more comfortable, and will reduce either themonthly repayments, or better still, the term of the loan and the amount of interest paid.When I am satisfied with all of the above I can then go full circle and review whether Iwant or need to take any surplus as income, reinvest it in new properties, put it aside fora rainy day, or pay off more of the mortgage.As well as reviewing the means of finance and the disposal of any profit, I was able toreview my purchasing criteria. I was able to see that as income was no longer the 124
  • 122. priority I was freed up to purchase more properties capable of producing capital growth.In practice this means buying more expensive properties, in better areas, and whichproduce lower rates of return from the rental income.As my business develops I will continue to regularly review the different systems andprocesses, and my overall strategy and business goals.For example, when I have spent the facility I have with my current lender, I will reviewmy financing system. As I said earlier, part of this will be to approach my number twolender to see what terms can be agreed for funding the continued expansion of thebusiness.However, at the same time I will review whether there are other lenders with new orbetter products which I should be considering.Similarly, at the moment my business strategy requires the establishment of a sizeableresidential portfolio. When the income from the portfolio reaches a predetermined level,I shall review whether it will be beneficial for the company to be become an activeinvestor in commercial property.If the answer is yes, then I shall review and redraft my plan and strategy, and thevarious systems I have established, and change them as necessary.Even without a major change of strategy, constant reviewing is essential. As BruceNorris said earlier, we need to be constantly refining how we do things. We areconstantly learning, and often there are better and more efficient and more profitableand productive ways of doing any of the things that make our businesses tick.I recommend that you take a few hours at the end of each month just to: • Remind yourself of your goals • Remind yourself of the plan you have for achieving those goals • And to look at the systems you have set up to see if you can do things betterIf you discipline yourself to do this, you will greatly accelerate the success of yourproperty business. 125
  • 123. And lastly…...Property seems to be the ‘in vogue’ investment at the moment. With property pricessurging, and the ready availability of finance, that is inevitable.On the face of it, a lot of people look as if they are going to be very successful, after all,property is a dead cert, isn’t it?Or is it? I fear that the truth is that a lot of people who are currently throwing themselvesand their money into property are going to come unstuck and find themselves infinancial trouble. I hope for their sakes I’m wrong, but we’ve seen it all before.It isn’t that the overall idea is wrong. Far from it, the expression “as safe as houses” isbased on rock-solid fact; over time property has proved itself to be the best performingand most solid of all investments.No, they have the right idea, but what they don’t have is • A clear idea of what they are trying to achieve, other than vague ideas about security or wealth • A plan to achieve their ideas • Or the right systems to keep it all togetherIn this e-book, I hope I have equipped you to be able to make a success of property. Asthey say “knowledge is power”. Actually, knowledge in itself is not power, it is the abilityto use that knowledge properly which gives real power.By showing you the systems that I know you will need to make your property business asuccess, I hope I have given you the knowledge you need. Now you need to do your bitand put it into action.And I hope you have enjoyed reading this e-book. More than that I hope you have foundit a useful resource and have used it to go to the links that are liberally scatteredaround.I strongly recommend that you take the time to make your own searches to find websites of interest. I know there are many sites out there which I either have not found orhave not had the time or space to list. Try searching through a number of searchengines to see what they come up with – different search engines will find differentsites.I am very much looking forward to hearing how you get on as you build your propertybusiness. In the meantime I wish you well in your venture. Peter Jones 126