This week in succession I had two investors come to see me, who had scattered investments all around the UK, from Wales to Essex. They had bought properties which had been recommend by either agents or sourcing companies; the properties had been bought haphazardly, driven primarily by the discount offered off the market price.
The other enticement with these areas is you can purchase properties very cheaply, this means every time you have a small amount saved up you’re able to purchase something, and you feel like you’re progressing and building a portfolio. Sometimes the purchase doesn’t even require savings, as you can borrow the deposit and get a mortgage for the rest. A nice feeling to have no doubt, the pension pot is building up and it will even cover your children’s university education….in time. Or so you hope.
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The reason why both of these individuals came to see me after having invested in properties all around the UK isn’t a new one, I have seen it many times.
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The profile of the properties are that they have been bought for 25% to 40% off ‘market price’; sometimes with no money or very little money down and the rent is higher than the mortgage payments which means you get a positive cash flow.
Sounds very good……on the surface.
The under current is what you have to watch out for, not the outside packaging. In certain locations these properties are fuelled by only one type of tenant, that’s for whom the government pays for, so your rental stream is totally dependent on this segment. If the government changes the policy or reduces the rent the market for your property drops, perhaps to zero; or the tenant doesn’t pass the rent on as they need the money for drinks so you’re stuck.
The other point is many earn money but the type and quality of the tenant is reflected in the amount of money they pay, might sound elitist but it tends to be true.
The properties tend to be sourced by agents who advertised far and wide to capture anyone who is having issues selling their property, asking these people to contact them in exchange for a quick deal. This makes the spread of these properties very sporadic which make them difficult to manage.
The void periods cannot be filled very quickly as the number of tenants are often from one or two sectors; and after all this trouble your properties do not rise in value or tend to rise very little.
There is a reason why you get properties this cheap, in these locations, it’s because no one else is purchasing them. There is no certainty the property will not decrease from the price you have paid for it the following year.
It’s very rare if not impossible to get a property discount to the tune of 25% in Central London. The reason being the demand is very high and buyers are flush with funds, in fact funds are chasing property in prime locations.
There are many companies which serve to entice low and middle wage earners on to expensive property courses which give them the promise of making money through investing in property.
These courses claim you can purchase property for free through a few different tools; one being lease options. What this means is you agree to pay a person’s mortgage for them with the option of purchasing the property at a later stage; this is an option so you do not have to exercise this, in the interim you make money on the rentals. The theory is sound, and it can work in principle. However there are some issues, for example: what if the management is more hassle than the rental income is worth?
As these properties are of small value, the rental income is small too. If for example the boiler is stolen, which can happen in certain locations, you will have lost your income for the year.
The other point to note is in property the bulk of your money is made from capital growth. Assuming you exercise your option, the property may not rise in the future and the yield you will be getting is small in comparison. So if you’re focusing on the yield you’re missing the real growth potential of property.
Even if you have no money trapped in the deal you could end up losing if the property goes down in value.
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Given the above it is no wonder why these clients, despite their portfolios and breadth of experience in the property market, still came back to the basics of property investment, which is location, location.. . and you guessed it. ..location!
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It is location which ensures you have a diverse range of demand from many differing sectors. This is why when the bank bonuses dried up the property prices in Central London carried on rising; when the government announced a cut in housing benefits in Westminster the property prices and rents remained largely unaffected; and the demand comes not only from the UK but internationally and from diverse sectors within the London market from students to those looking for alternatives to hotels in the short let market.
CBRE describes the London property market as the gold standard in property:
‘London is a property market unlike any other in the world. Nowhere else offers such a diverse range of properties, challenges, opportunities or dynamic activity.’
The recent financial turbulence has been a doubled edged sword, its impact on the Central London investment market has been markedly positive, as London continued to capture overseas capital flows due to its safe haven status. This was reflected by a 67% market share for overseas investors, helping drive investment volumes throughout the year.
Clearly these investors are dissatisfied with the level of returns and shape of the returns they are getting from their current investments choices.
When investors come to us, the first deal is obviously a tester. They both want to test us, and the London market. Not just in purchasing, but in purchasing and selling; so that they can realise a profit. The proof of the pudding after all is in the taste.
We are not the only ones confident in the Central London market, the most prominent commentators on the market are saying the same. Once investors have tasted the Central London property market it is very difficult to go back outside again; you become hooked on this drug, and you will not be able to get this dosage in any other market.
The Real Deal
Property in Belsize Park
Purchase Price: £905,000
- A superb and large two bedroom lateral raised ground floor apartment
- Share of freehold
- Residents Parking
- Priced at £809 per sq ft
- Recent properties sold in this location were in the range of £1000-£1050 per sq ft
Call us now to reserve!!
Suresh Vagjiani
Sow & Reap
A Property Investment Company
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!Tips of the Week
The idea of investing in property is good, but always remember the mantra of property investment – Location, Location, Location!
Most expenses, such as repairs, agency fees, etc., can be off-set against tax therefore reducing your liability. The HMRC website has a good amount of helpful information.
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