11:49 AM, 16th January 2012, About 10 years ago
It’s a fact that more millionaires attain their wealth through property than any other type of investment, so by that virtue it makes sense for at least some of your investment portfolio should be in property. However, you need to exercise caution, people can- and have- lost huge amounts of money in property when their investment strategy was wrong.
Before we look at how to build a balanced property portfolio with no risk, we need to look at what property investment strategies are available.
Ignoring the speculating, hope and pray investment strategy, there are three main property investment strategies. They are 1: Buy and Hold, 2: Buy and Sell and 3: Cash Flow. However, being a self-professed “Property Maverick” I prefer an amalgamation of all three strategies creating a fourth strategy that I like to call “PIE”.
1: “Buy and Hold”
This strategy will be most difficult to implement in areas where property prices are the highest but it is the most simple and most common. Just buy a good property in a good area, rent it and wait for property prices to go up in value.
The key to this strategy is that the rental income must cover the mortgage and property expenses so the property must be able to pay for itself. This can be done in most areas of the country without great difficulty, however, in areas like the Southern counties and London it is often difficult for rents to cover all expenses.
Advantages – Good profit potential, steadily increasing cash flow and good tax deductions.
Disadvantages – High property management costs, cash intensive and a long-term investment cycle.
During the last property boom many investors foolishly invested in properties that had negative cash flow. This is not something that is recommended as generally if a property cannot provide a positive cash flow on day one with realistic expenses applied you should not buy and hold it for the long term.
Generally, properties that are lower in price create a positive cash flow much easier than higher priced properties because the rental yields are higher. An investor looking to buy in a more expensive area would have to look at more properties to make a deal compared to a lower priced area.
The Buy and Hold strategy will work better in some areas than others. Look for areas where prices are lower, but still offer potential for appreciation. My tip would be to look North.
2: Buy and Sell – Quick Profit
The key to this strategy lies in the buying of property well below market value. The objective is to buy at wholesale and sell at retail or just below. The buying of property well below market value facilitates a quick profit scenario. Generally you must buy at 20% or 30% less than market/real value.
Advantages – Great cash flow, returns in a short time frame and fewer hassles.
Disadvantages – High turnover, cash intensive, properties can require major repairs, and moving to a higher tax bracket.
I highly recommend that you sell property on a regular basis to keep your investment fund liquid. If you don’t sell any property you will soon become illiquid and no longer able to grow your portfolio. The trick is to sell property with high equity and low rental yield first. Don’t settle for a low return on a property containing substantial equity. Make your equity work harder and take advantage of the annual £10,600 personal capital gains tax allowance. Always check your potential tax liability with your accountant before selling.
So how and where do you find properties below market value? You need to find distressed sellers, ones that have to sell quickly. The quick nature of the sale necessitates a need to have your finances in place before you close the deal. Always check with your mortgage broker first before you make a low offer. See this earlier blog series to better understand how and where to find property bargains. But the simple answer is look North.
If there are far too few below market value deals to be found in your locality, you must look outside your area, or find someone to look for you. Never be afraid to step outside your area or comfort zone as reater success is achieved when we step outside our comfort zone.
Another variation of the strategy is to refinance after six months the property that you purchased for 20% to 30% below market/ real value. This enables you to take out the original amount you put in without selling the property. This still leaves profit/equity in the property to release at a later stage, hopefully selling at a higher price.
Selling or refinancing quickly (within six months) has become extremely difficult, almost impossible, since the credit-crunch. The vast majority of lenders now enforce the seller six months ownership rule as per the Commercial of Mortgage Lenders guideline. Now, with all but a very small minority of lenders you have to wait for six months to elapse before selling or refinancing. Reselling quickly within 1 year also necessitates borrowing on a no early redemption penalty basis to keep costs down.
You must account for a minimum of 6 months to resell a property in the current marketplace, and factor in your costs of finance accordingly. You could even install a tenant for six to twelve months and create a tenant reward incentive plan. Such a plan could allow marketing to begin after say 3 months. Why not offer a month’s rent rebate/ reward when the property is sold and tenant moves out, or something similar. Be inventive, tenants will work with you if you reward them accordingly.
Buying and selling with limited funds?
“What must I do if I don’t have the cash to buy and sell properties for quick profit?”
There are several solutions to this problem. One is to save the deposit money needed in true “Richest Man of Babylon” style. That is to save 10% of your earnings and reduce greatly your expenditures, and create an extra income stream at the same time. But, depending on your earnings ability, this may take some time.
Alternatively you can align yourself with other property investors that do have money. By doing that you can source property deals for them and participate in a “Joint Venture Agreement”. This agreement will stipulate the basis of the equity or quick profit split.
To download a sample copy of a “Joint Venture Agreement” please click here.
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