Buy When There Is Blood In The Streets

Buy When There Is Blood In The Streets

16:27 PM, 13th August 2012, About 12 years ago 4

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John D Rockefeller, the richest man who ever lived, once said “buy when there is blood in the streets”. Warren Buffet, no pauper himself, follows a similar strategy of buying when everyone else is selling and prices have crashed.

In fact it is a common link between the world’s richest people throughout history that they have invested in property and other assets at discount prices when the majority of people have sold.

History has shown us time and time again, that despite what the doom and gloom merchants proclaim in order to sell their newspapers, markets do bounce back and when they do those that bought at the right time see their wealth grow exponentially.

Take just one example – that of JP Getty who purchased the Hotel Pierre in New York, in the middle of The Great Depression, for the princely sum of $2,350,000. The economy recovered just a few years later and the market value of the hotel shot up to a massive $35,000,000 and that’s in the 1930’s!

Right now there is, metaphorically speaking, definitely blood in the streets. With some time and effort put into research we find repossessions through asset management companies, auctions and negotiating with private sellers who are selling their properties at hugely discounted prices from what they bought them at a few years ago.

Of course to some degree waiting for prices to rise is speculation (even if historically they have always done so over a reasonable period), so it is essential to buy properties that produce sufficient income after all expenses (including a contingency for voids and repairs) to provide positive cash flow every month.

We believe the best way to do that is find properties at the low end of the market which produce yields in excess of 10%. This gives ample room to cover any mortgage payments, allows you to build up a contingency fund for voids and repairs and should be generous enough to deal with any rise in interest rates.


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19:41 PM, 13th August 2012, About 12 years ago

Hi Frazer,
A great blog and excellent advice. I agree that now is a brilliant time to invest in property (or add to your portfolio) as motivated sellers struggle to find buyers. I've have added two properties to my portfolio this month at a combined £70,000 below market value (BMV).

My only concern (regarding the advice in your blog) is the 10% yield target. Great advice but almost impossible to achieve. In my area 2 bedroom houses sell for around £100,000 but rental income is restricted to £600/month delivering a gross yield of 7.2% (which is pretty good but nowhere near your 10% target). 1 & 3 bedroom properties create similar yields - but still not 10%!

A conversion of a 3 bed / 4 bed property into a 4 bed / 5 bed HMO would achieve 10%+ gross yields .. but with HMOs come the extra costs of utility bills and void periods and furnishings etc.

The two properties that I bought BMV are only producing yields of 8% and 5% respectively. I proceeded with the purchase tough because of the £70K equity that I have created in the purchase process ... but my gross yields fall woefully short of your advice!

11:27 AM, 14th August 2012, About 12 years ago

Hi Mark
Thank you for your comments. I agree it is very hard to achieve in most areas - especially if you live in the south of the country. Indeed, where I live In Cheshire it would be virtually impossible as the average house price is way too high. However, within half an hour drive of here there are several areas where such yields can be achieved. It requires a lot of work to find these - for every 10 offers we put in only one is accepted. But the deals are there to be found. They tend to be two bed terraces in reasonable "working class" areas priced at around £40,000 (they usually require some refurb work) and bringing in rents of £450-£495 a month.

In fact, in some places much higher yields can theoretically be earned though we tend to stay clear of those less salubrious places as actually being able to collect the rent is of course a wholly different matter from what the lease stipulates should be paid.

17:05 PM, 14th August 2012, About 12 years ago

People are basically stupid things. They think they have a 'feel' for markets or an understanding of them. Such a skill does not really really exist. We simply go off patterns. When the pattern downturns we mark it as a 'crash that no one predicted' purely because of its shape relative to the prior state of affairs. In fact the only crash is again within us - all of our reactions to it and the consequential further slips. One moment everyone is comfortable in their smug understanding of how they know all about a thing and how it is on the up and up and the next they feel themselves not be so clever in their fundamental understanding of life the universe and everything and alongside this are in a panic.
Relax. When the sheep bring the market down, buy their grass, then when they are all baa-ing happily again that they understand the world - sell it back to them.
There is no understanding nor light and dark at play - just random highs and lows. Know this and you won't fear purchasing in the troughs or getting carried away with the highs. Bubbles do not burst if for you there is no bubble - which of course there is not.

13:11 PM, 16th August 2012, About 12 years ago

I think Fraser is right. Markets do tend to overreact to circumstances - good or bad. Many people also make investment decisions based on what has happened or what is happening, rather than what will happen in the future. However, I would say the best time to buy is when the blood on the streets is starting to be mopped up. You may not buy at rock bottom, but you should still benefit from a rising market.

You are doing well getting a rent return of 10%. I can only manage about 6% in East and South East London. So I will only benefit if there is capital appreciation.

In my case, the problem with buying when there is blood on the streets is that you do not know how long the problem will last - there was blood on the streets of Satlingrad for years. In these days of double dip recession, we do not know how long there will be before a genuine upturn in house prices.

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