10:43 AM, 17th January 2012, About 10 years ago 5
Following on from yesterday’s Property Investment Strategies part one.
Assignment of Contract
With “Assignment of Contract”, when done correctly, you don’t even take title of the property. It works like this. You close a deal on a below market value property, then you sell or assign your right to buy the property to another buyer at a higher price. The difference in price is your quick profit.
Many property investing apprentices get started with the use of this technique. It offers flexibility and minimal cash requirements.
The key points here are to have enough time say, 60 to 90 days to re-market and close the property. Not forgetting a list of other buyers standing by to quickly sell or assign the property to. But always make sure there is enough money in the transaction to warrant your time and effort. Your payment or quick profit could even be a delayed one made contractually payable after six months when the buyer refinances the property to pay you.
No Money Down
Without going into detail, I personally don’t know of a single “No Money Down” strategy available that does not involve some form of non‐disclosure to a lender. Non-disclosure is deemed mortgage fraud; it’s as simple as that.
Finally, be prepared to make many below market value offers to be successful. What’s needed here is a shotgun approach. However, since the credit crunch and the uncovering of some fraudulent no money down schemes, lenders now seek full disclosure of any buyer or seller incentives or sub sales. If in doubt consult with your solicitor to make sure you are on the right side of the Council of Mortgage Lender laws and regulations.
3: “Cash Flow”
A common misconception is that wealth is cash in the bank. It isn’t. True wealth is cash flow consistently coming in every month.
Owning assets that other people pay you to own is real wealth.
That’s why property should form part of everyone’s investment portfolio. Some of the best cash flow properties can be “Houses of Multiple Occupation”, better known as HMO.
What is an HMO?
The term House in Multiple Occupation refers to a rental property which falls into one of the following criteria:
Such properties are generally larger in size with regulations and licences aplenty. Investors are advised to seek proper advice before entering the HMO letting field.
Gross rental yields can be high for such properties, 15% is not uncommon. However with higher yields can come greater voids, greater maintenance costs and greater time costs. On that basis it is recommended that such property purchases are kept within a reasonable driving distance of the landlord.
Advantages – Excellent cash flow and good tax deductions.
Disadvantages – High property management costs, time and cash intensive, greater hassles, lower capital appreciation, larger deposits needed, and a long-term investment cycle.
This is not an area I personally participate in so the HMO discussion will have to end here. Anyone wanting to venture into the HMO field is well advised to first read up on the subject of HMO properties and lettings and also talk to several successful HMO landlords.
Good cash flow properties are not just restricted to HMOs. If one looks hard enough there are properties on bank repossession today in the £30,000 to £50,000 range that can offer an attractive 12%+ gross yield. However, unless the property is in sound condition the costs to maintain the property will be disproportionate to its value and the net yield will fall.
4: The “PIE” strategy
Now we come to the final property investment strategy. An amalgamation of all three strategies, creating a fourth strategy that I like to call the “PIE” strategy. A strategy where you really can have your pie and eat it!
Over the years I have learnt the hard way what works and what doesn’t with regards to property investing. I have had my winners and my losers, but as long as you pick 8 out of 10 winners you are doing fine. And with my added insight why not aim for 10 out of 10.
By combining the best attributes of each strategy you not only reduce your risk and increase your reward. You can also build a larger portfolio for any given investment fund.
So why PIE? The P stands for Profit, I for Income and the E for Equity. Profit comes from selective buying and reselling quickly. Income comes from selecting high yielding properties to keep long term for good positive cash flow. Equity is the increased equity that comes from building up a larger portfolio over time.
The strategy of buying and reselling for profit keeps the money turning over to replenish the investment fund. An increased fund means you can buy more property to hold and to sell. Also in absence of an appreciating market without the “Selling”, the investment fund would soon become empty; so ending the buying and portfolio growth.
Advantages – Great profit potential, steadily increasing rental cash flow, excellent cash flow, good tax deductions, increased portfolio size and greater equity accumulation over time. Not to mention greater diversity leading to less risk.
Disadvantages – Not many! High turnover and moving to a higher tax bracket. The latter can be eradicated with sound knowledge of property tax strategies see “Understanding and Paying Less Property Tax”.
So now it’s your turn. Assess the property market in your area. Always research anything you do with property and make sure you understand the cash flow numbers at all times.
Now is the time to select your investment strategy or strategies from above. The most important thing to remember is that these strategies work best at the bottom or depression part of the “Property Cycle” Then develop a plan with long term perspective, but most of all take action.
“One, who acquires knowledge but does not practice it, is like one who ploughs a field but does not sow it”
Please do enter your thoughts and views on Property Investment Strategies. Maybe you have an unorthodox strategy of your own that you would like to share with others?
Ultimately, there are two factors that determine risk and reward in property investing, and that’s leverage and diversification. You really can lower your risk substantially by diversifying across many properties and sectors. This and more will be discussed and revealed in the next “Property Maverick” blog “How to build a balanced property portfolio with No Risk”.
Until we speak again. “If you do things well, do them better; be daring, be first, be different, be just, be a Maverick”.
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