The story of a Value Investor – Part 4

by Kelvin Kingsley

9:10 AM, 25th November 2011
About 8 years ago

The story of a Value Investor – Part 4

Make Text Bigger
The story of a Value Investor – Part 4

Late in 2008 I noticed that property prices had tumbled in Manchester city centre and a wave of bank repossessions had hit the market. I therefore made plans to return to the UK. Returning in early 2009 I hit the streets of Manchester running.

I quickly formed links with local estate agents, viewing and making offers on many properties. It only took a few months to notch up four property purchases, the best being a large two bedroom apartment in Prestwich. A copy of the land registry title deed revealed to me that the original investor had paid £230,000.

What madness on the part of the investors and the surveyors to sign off on such ludicrous valuations like this and others. Even at the peak of the market this property was never worth more than £180,000. If any one party must take the most blame for the property bubble burst it has to be the surveyors. For they were the ones that failed to assert their authority and true sentiments concerning valuations. Instead they bowed to mortgage lender pressure to sign off on valuations at virtually any purchase price put forward or face being removed from a mortgage lenders panel. But why should they care? After all they were on the same gravy train, getting paid £200 a time to just add a signature and glance at a floor plan. It was nothing but money for old rope! Others may have a different opinion on this, but the one I’ve put forward is shared by many other property people.

I paid just £102,500 for the property in question, a big drop from £230,000. The mortgage lender would have written off at least £100,000 on this property. With just a repaint and minor repairs I secured a tenant for £650 per month. Not a spectacular rental yield, but with 900 square foot of luxury floor space and underground parking it was sheer value. A year later my departing tenant paid £130,000 for a smaller apartment on repossession in the same building that had no kitchen and needed much work. Sometimes timing can be everything.

It didn’t take long before other savvy investors came back into the market. Soon I found myself competing, being gazumped and losing properties just prior to exchange. This became a costly exercise and is something for you to bear in mind when chasing bank repossession properties. A property is not yours until you have exchanged. You mustn’t hang around, exchange contracts as quickly as possible. Also ask if the estate agent can serve the “Notice of offer” in the local newspaper instead of on Right Move; a notice of offer on Right Move makes your accepted offer a sitting target. If your relationship with the estate agent is good, you can always ask them to dissuade others from viewing the property. Otherwise, being substantially gazumped at the last minute could easily cost you £700 in wasted costs.

Around the same time I noticed that some developers had completed developments after the credit crunch without selling them first. They were now in big trouble; prices had crashed and they were bleeding badly. It was time to change tack and go after brand new properties at bargain prices.

Pooling my resources with other investors and contacting National Home Builder, many discount property deals were struck that over the last two years. It enabled me to substantially increase the size of my property portfolio. In most cases the discount purchase price secured was at least £10,000 or 10% less than a comparative second-hand property sold by bank repossession that was in need of repair or TLC. Wouldn’t you prefer to buy a brand new property that’s cheaper than a second-hand repossession property in need of repair or TLC? Of course you would.

So right now that’s where I’m at. For me, it’s now all about the “Instant Equity” gained on day one of purchase coupled with a positive rental yield. I call it “Double Protection Investment”. If interest rates go up, a good rental yield can easily cope, and if prices should fall further? There’s no worry when you are buying “Instant Equity” on day one!

For more details on “Instant Equity” Property Deals see propertymaverick.co.uk/

The typical gross rental yield achieved on new build property is around 8% for houses and 9% to 10% for apartments. Remember we are talking brand new property stock with warranty so there’s big savings on maintenance costs for years to come. Compare this to 2007 when you would have been lucky to achieve a 5% rental yield on new build property.

Why are some National Home Builders selling new build properties at bargain prices? The answer is simple; to meet their sales targets they do selected bulk deals with investors. Does it really matter to them if they sell a small portion of properties effectively at build cost? No it doesn’t. They too have to balance their books just like the rest of us.

By now you can see it’s safer to look at property in terms rental yield as a basis for determining if there value or not. After all, you wouldn’t want to buy a listed company stock if it wasn’t making any money would you? So why buy a property that is not making money/ exhibits a negative cash flow? Always look for value; the value is located in the rental yield. Today your rental yield targets are 8% or above for houses and 10% for apartments.

Finally, if you haven’t figured out as yet where you can find the best property bargains today, the answer is look “North”. I personally favour villages, town and cities either side of the M62 corridor from Barton upon Humber to Manchester. Properties can be sourced and purchased there at a mere 60% of their peak value. That has to be good value in anyone’s book!

If you favour bank repossession properties over instant equity new build properties use Right Move to locate such properties. Usually the property price versus the property photograph will give the repossession fact away. Also in the internal property pictures you should see the “Do Not Operate” red and white tape surrounding the gas and bathroom equipment. So good luck and good hunting, but if you don’t have the time to source properties for yourself Instant Equity can source them for you. We offer a “No Fee” on “Instant Equity” new build property deals.

For more details on “Instant Equity” Property Deals see propertymaverick.co.uk/

So there you have it, several schools of buy to let investment thought. In the end it’s up to you to decide which school of thought best serves you and your situation. Maybe it’s some and some or investing half way between the low cost and high cost school of thought? You decide.

Whatever you decide, just make sure the investment decisions you make are a product of your decision and not someone else’s!

Today’s property market necessitates the need for you to play it safe. Look for value first and foremost; think “Value Investing”. Remember if there’s no positive rental cash flow and no built in equity from day one, just ask yourself why am I buying? If you can’t answer that question properly then maybe it’s best to walk away or offer an even lower price. Never be afraid to renegotiate a deal if in hindsight it isn’t quite right for you. He who dares wins, but never subscribe to the it’s all about me club.

In the next episode of the “Property Maverick” we will talk about some of the important property investment formulas and calculations that you can use before and after to evaluate your Buy-to-Let investments. Not forgetting my favourite the “Property Snowball Effect”.

Until we speak again. “If you do things well, do them better; be daring, be first, be different, be just, be a Maverick”. See the Bigger Picture. It’s not the destination, but the journey that counts. Unless you’re stuck in traffic, then it’s the destination. But whatever you do, tune in for the next episode of the “Property Maverick”.

read Part III



Comments

Leave Comments

Please Log-In OR Become a member to reply to comments or subscribe to new comment notifications.

Forgotten your password?

OR

BECOME A MEMBER

How do we select the best tenants for us?

The Landlords Union

Become a Member, it's FREE

Our mission is to facilitate the sharing of best practice amongst UK landlords, tenants and letting agents

Learn More