The next generation of property investors

by Mark Alexander

11:12 AM, 13th December 2010
About 10 years ago

The next generation of property investors

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The next generation of property investors

By Mark Alexander.

The next generation of property investors will:

  • Have good jobs and surplus income
  • Have plenty of equity in their homes
  • Be unhappy with returns on other forms of investment
  • Be internet and social media savvy
  • Have access to far more information than the last generation

Gone are the days when speculators with little to lose could legally borrow 100% + of property values in the belief they would always increase in value.  This was possible up to about 18 months ago but it isn’t any more.  This article explains more.

As property values have fallen and mortgages have got a lot harder to obtain, especially for the self employed, many more people are choosing or being forced to rent.  As rental demand has increased, rent increases have followed.  The result is that people getting into the market now are making far better returns on their capital invested than they were before.  If and when borrowing does become easier, the demand for owner occupied properties will increase and this will drive up values.  The longer the Credit Crisis remains, the greater demand will become for rental properties.  People need to move homes for a plethora of reasons including expanding families, work relocation, divorce etc.  If they can’t buy they must rent.  It’s a win/win scenario for people who invest now.  Either rents or values or both can only head in one direction over the longer term.

It’s fair to say that there are nowhere near as many new entrants to the property investment market than we saw in the decade prior to ‘the crunch’.  That’s because it’s virtually impossible to own property without money.  The new entrants are those who have seen the opportunity in its true light.  They’ve usually lost faith in other forms of investment, are getting very poor returns and are realising that property is the answer.  Not all investors have other investments to cash in and fund deposits though.  Some have used their surplus incomes to pay down their personal mortgages over the years and as a result of this, and the long term increases in the value of their properties, they have plenty of equity.  The same people often have surplus income too and prefer not to save it in banks, building societies, pensions and other forms of investment as the returns are so low.  Therefore, they are using their surplus income to service a larger mortgage secured against their own home.  The extra money raised is being used as deposits to buy bargain properties with high rental yields.  Admittedly, this strategy isn’t without risk, however, sometimes people choose to ‘speculate to accumulate’.

With the right advice and guidance, the new generation of property investors are in a great position.  They should, however be very wary of anybody who tells them that they can buy properties without the need to pay a deposit from their own resources.  See this article.

The evolution is already occurring and we are already witnessing the following:-

  • Use of Social Networking to attract tenants, find tradesmen, source properties etc. (newspaper adverts and card in post offices will be a thing of the past)
  • Use of computer software to improve efficiency, e.g. management, book-keeping, diary systems (sell your shares in companies who produce pens and paper)
  • Larger groups of IT savvy investors, networking electronically to share best practice (either you’re into it or you are getting left behind)

Make no mistake, there are still several of the ‘pre crunch’ generation of Property Investors who are still investing.   They are also constantly evolving their working practices, throwing away their paper diaries and book-keeping records and using technology to streamline their businesses and their business decisions.

What other key differences do you think we will see in the next generation of property investors?



Comments

16:38 PM, 19th January 2011
About 10 years ago

I am writing to thank you for the regular Landlords News and i always enjoy your comments. I am sure many benefit from you remarks and we learn from each other. You gave two examples of your purchases recently and it was good to compare your strategy with what I am doing. It is only if we all contribute that we can benefit all.

There may have been a reduction in property prices but auction properties are as competitive as usual and, apart from flats, I have not found 25% reduction in prices since 2008. To be viable we have to allow 6% mortgage costs including various costs and vat.(That is 4.5% on the total purchase price if 75% LTV.) Add 10% for letting agents on the rental return and 0.5% for insurance and repairs. A break even position is about 5.5% rental return on capital.
Say a property cost £100,000
Rental income £6,000 /ann (£500/month)
Mortgage costs at 5.5% (5% + Costs of mortgage) £4,125 /ann
Insurance and maintenance costs £800 /ann
Letting agent fees £720 / ann (£600 + vat)
One month/year downtime and we are running at a loss.
In my opinion it is a good time to buy but we should only buy if we are able to make a profit after costs without capital growth. We cannot know when growth will return. We believe growth will return but we should not do a viability calculation without either a 20%+ discount on present values, after any upgrading costs, or a better than break even position allowing for a month downtime each year.
I would also be interested in your mortgage strategy. Do you have individual mortgages for each property and have to renew at the end of each fixed term as I do. One has always to be aware of added costs and if one changes a mortgage it may mean the equivalent of 1 to 1.5% additional costs with the various charges and fees. Often the lender will let one take out another fixed term without costs or new legal arrangements and that is a saving.
If taking out a fixed term mortgage I try to look at the company's standard varyable rate. The reason for this is that a rate of 4.99 fixed, then going to a SVR of 7% will cost more than 4.99% then going to a SVR of 4.8%. If one wishes to change mortgage from the former company because of the high SVR there will be considerable added costs.

Would you at present take out the cheapest rate ,say 3.5%+base, or would you fix at say 4.99% for 5 years fearing a base rate of say 2.5% by the end of the year and higher mortgage costs?

How about Coventry Building Society. One can take out £1,000,000 loan but if one has three £50,000 loans they will not consider a fourth property even with an unblemished payments record. Does that make business sense ?

Can I also say it would help if you could publish your recommended suppliers. I would not mind registering so the link with the Money Centre is maintained and your arrangements with them would continue but often we cannot access suppliers at the time we wish as the system seems to be for them to phone back.and the contact is sometimes not made or is made too late.

John

16:57 PM, 19th January 2011
About 10 years ago

It is only if we all contribute that we can benefit all. I completely agree. You might even be a bit psychic as I’ve used almost identical words in my new web-site.I would also be interested in your mortgage strategy. Do you have individual mortgages for each property and have to renew at the end of each fixed term as I do. I have a mixture of individual mortgages and aggregated mortgage accounts with a variety of lenders. I generally look to take further advances as opposed to refinancing to another lender. That said, some lenders I’m with have closed their doors so I may have to refinance away from them at some point and swallow the costs. When I choose a lender I try to ensure that the fixed or discounted rate reverts to Bank Base Rate or LIBOR wherever possible. I am very wary of lenders own SVR’s as they can raise them at their discretion, i.e. if they want you to repay them they simply keep jacking up the rate until to refinance or go bust.
How about Coventry Building Society. One can take out £1,000,000 loan but if one has three £50,000 loans they will not consider a fourth property even with an unblemished payments record. Does that make business sense? Not to me.Can I also say it would help if you could publish your recommended suppliers. Your psychic tendencies are revealing themselves again.

20:05 PM, 19th January 2011
About 10 years ago

Thanks for your comments Mark,

What is an aggregated mortgage account ? With a number of small flats I have often wondered whether I could bundle several together. Say four £70,000 flats in one mortgage bundle of £200,000. Can this be done ?

John

21:05 PM, 19th January 2011
About 10 years ago

Hi John

In principle, the answer to your question is YES it can. That's exactly what an aggregated mortgage is.

having said that, if you've got mortgages that you arranged a few years ago you're probably be better off leaving them where they are.

If you need advice please email me directly and I'll be happy to get my broker to give you a call, no obligation of course.

My email address is mra@themoneycentre.com

Regards

Mark


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