Property
1. Is property really the greatest appreciating asset?
The appreciation rate of property truly is mindblowing….
Since 1952, property has, on average, appreciated at 11% per annum. This compares with current savings rates of 6%.....
Property in the UK doubles every 7-10 years.
To be safe, do your calculations based on a rate of 5% - you will be pleasantly surprised then!
National figures may vary from regional figures; in the South East property capital appreciation tends to be higher.
To take an example, my parents–in-law bought our current house in 1959. The cost then was £15,000. The value now is approximately 1 million (yes I know, we are in an exceptionally lucky position….). The cost of that original mortgage seems like peanuts now, even taking into consideration the retail price index, doesn’t it? And nobody would argue with my suggestion that that investment was the best investment they ever made…..
Meanwhile, my own father, a tenant farmer, tried several times to invest in property, but finances are notoriously fickle in farming, and he had to uninvest. I now know this (not investing in property) to be the absolute downside of anyone who lives in tied accommodation, and recommend that anyone who is in this situation buys a buy to let – then at least they are also on the property ladder. I know a school nurse at a boarding school who has already cottoned on to this – well done her!
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2. Isn’t there going to be a Property Crash?
Of course, no-one can predict what is around the corner, and the current situation in the state with sub-prime foreclosures is worrying – to anyone except a property investor…..
The reality is that prices may go down in some areas, but are likely to go up in others. Usually when there is a property “crash” it is in fact no more than a reduction in the rate of appreciation of property. Do your homework, ensure that you buy at at least 15% below market value, and you have a nice cushion in the event of a tweak in the market.
And what effect would a property downturn have?
- You could buy more buy to lets at reduced asking price
- You may have to delay the planned re-mortgaging of your buy to let properties (see later) by a year or so (but you still have an appreciating asset)
- Keep putting your rentals up EVERY YEAR by less than it costs to move house….
3. Type of property to invest in
The type of property that you invest in will depend on several factors.
Do you want capital appreciation, income, or a combination of both?
What type of tenants would you like to be targeting?
Although it is very inspiring to invest in large houses and cottages, like my husband’s hankering after more country holiday cottages (in Devon this time, as our Sussex one, www.vanecottage.co.uk, is such a success), the return on investment (ROI) just doesn’t add up.
Rental returns on 1 bedroom flats are SO MUCH greater than those on 4 bedroom houses. In addition the rental market in 1 & 2 bed flats is much more buoyant, for the reasons outlined below.
ROI
- 4 bedroom house 6.3%
- 3 bedroom house 8.1%
- 2 bedroomhouse 10%
- 1 bedroom flat 12.5%
- HMO (house of multiple occupancy) 19.3% (but many extra legal and health and safety hoops to jump over)
- In addition there is capital appreciation averaging 8.5% (conservative estimate), with property doubling on average every 7-10 years.
In particular, I would recommend that you target investment properties in the below stamp duty price bracket.
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4. Trends in the rental market in the UK
We live in a different era to that in which we grew up. We grew up in the Industrial age, to cite Robert Kiyosaki (Rich Dad Poor Dad). In that age the winning formula was to work hard at school, get good grades, get a good job for life, buy a house (often in your 20s), and expect your company to provide you with a pension.
Times have changed. There are several demographics that affect the property trends in the UK and worldwide.
These include:
- A more mobile workforce.
- More jobs nowadays include being sent to different areas for short periods – and I am not just referring to junior doctors here either!
- It does not make sense to buy when on a 6 to 12 month placement
- Couples choosing to buy later
- First time buyers are now commonly in their mid 30s rather than their mid 20s
- Influx of workers and globalization of economy
- Medicine is by no means the only area where we see workers being attracted from other countries, such as Eastern Europe, for the good returns that they can earn.
- Such workers are usually planning to return to their countries of origin, so will rent
- Foreign nationals are unable to import their credit rating, so are often unable to buy for the first few years that they are in the UK, even if they are planning to stay (unless they link up with someone offering Rent to Own)
- Marital splits
- As more relationships split up, many families that were previously taking up one household are now taking up two – and this often involves renting, at least for a period of time.
- In 1996 there were 10 million married households versus 6 million single households
- By 2016 this is set to reverse (although in fact figures suggest that this has already occurred)
Despite Gordon Brown’s adventurous new building plans, there is no way that he will be able to keep up with the burgeoning demand for accommodation. In addition, the proportion of households in rented accommodation in the UK (11%) is well below that in the rest of Europe and America (20-30%), and is likely to be subject to a correction over the next 10 years.
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5. The beauty of leveraging the banks’ money
Most buy to let mortgages are based on a deposit of 15%, and are interest only mortgages.
However, the entire property appreciates at 8 to 10% per annum, not just the portion that you have paid the deposit on. So you are gaining an appreciation on the bank’s money – more than the cost of the interest.
To make matters more interesting, you can buy at 15% below market value, tweak the property to bring it up to market value, re-mortgage it at the new market value, and remove your deposit again! Any appreciation beyond this point is at a return on investment of infinity percent, as no more of your money is in it – now how interesting is that?
When setting up a buy to let mortgage ensure that there is no early redemption penalty, which would reduce your gains if you wish to remortgage and remove your equity. Consider carefully if you plan to take out life insurance that pays off your mortgage when you die – this simply increases the amount of inheritance tax paid by your estate.
I have heard people imply that they won’t get a mortgage because of their age or whatever. However, anything is possible, and I know of an investor who remortgaged her house at the age of 80…..
One way to get started is to remortgage your own house. If it is your own residence, then it is understandable that you do not wish to risk this important asset (although if you read Rich Dad Poor Dad you may begin to see that this is a “Doodad” rather than an asset, as it is in fact costing rather than making you money….)
You could remortgage 50% of your house at a fixed rate interest only mortgage for 10 years (knowing that property doubles in value every 7-10 years, so it will be worth double the original value and your mortgage will be a less significant portion by then). Put aside the mortgage repayments for the first 7 years, leaving you with equity to start building your buy to let portfolio. However, always seek the advice of a mortgage broker when planning this; I am not a financial adviser and am giving you information on which to base your own decisions.
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6. Know your local area
For most people, it makes sense to invest in their local area. However, the balance of rental prices and house prices, as well as capital appreciation, are important in selecting where to invest.
When you have selected an area according to your investment strategy, get to know a 1 kilometre square of this area really, really well. Get to know house prices intimately. Watch how quickly houses that are for sale go. Find out what the going rental is in the area for different types of property. To find out what type of property rents well in your chosen area, ask letting agents what type of property they would be able to rent out immediately. Walk, jog or cycle through the area regularly so that you know the subtle things about it. Watch out for planning applications so you know about new developments. Be aware of larger plans for the area – in Peterborough a new university is planned, giving massive scope for buy to let property for many years.
You can get a really good feel for trends and prices by looking on the internet – look up www.upmystreet.com and monitor what is going on locally.
In summary, in an area you are watching look out for:
- Expanding transport links, commuter population with good transport
- Good schools
- Planning permission
- Planned regeneration and development
- New universities and hospitals
- Subtle sings of an area improving such as scaffolding on increasing numbers of properties
- Trends in local population figures
- A neighbouring area that has an increasing desirability – this is likely to spread
- Average rather than high previous growth, especially if it appears that the current price range is below average for the area
Hmmm – it sounds a bit time-consuming for the average doctor, doesn’t it?
If you are taking all the action, you will make more money – but sometimes it pays to delegate!
If you are managing your own property, you will need to:
- Get to know regulations
- Electricity
- Fire
- Gas
- & ensure that you have the relevant certificates etc
- Have regular meetings
Agents
Clients
Seller
I can point you in the right directions to do all this yourself, and I may well plan to do this over thenext two years – so I can keep you posted as to how time consuming it REALLY is…..
But meanwhile, why not go with the passive approach?
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8. Developing a Passive property portfolio
Would you like to find out why I chose to invest in Passive Investments?
I have a lack of time, in common with almost every doctor I know!
When I joined the moneygym coaching programme, I had no intention of becoming a property investor. I joined with a vague idea of being able to give more money to charity and to create a website that would help me to explain to patients more than was possible in my 10 minute NHS consultations.
However, the first of the two day seminars on the moneygym programme, in February 2007, was on property, and on that first day Nicola Cairncross (of the Moneygym) and Greg Ballard (of Passive Investments) opened my eyes. By the end of the day I could see not only that it was foolish for anyone to NOT be investing in property, that ANYONE could be a property investor, and that you don’t need to have loads of money to do it – but also that, for a fee, even I could invest in property in a big way, time pressured as I was.
The way in which Passive Investments manage this is by knowing:
- the area that they focus on (the South East Coast, Worthing to Hastings)
- the type of property that rents out most readily locally
- which areas are being developed
- which mortgage brokers to go to locally
- where to go to for valuations
- local tradesmen who will get on with a job, and do it well, rapidly and inexpensively
- the best local letting agents
- their local bank manager very well
- the local services regulations inside out, so that they can systematize and standardize the process of getting the relevant gas certificates etc
- the local rental rates
- how to increase the value of a neighbourhood by adding quality to the local properties & making them more desirable
- how to be an exemplary landlord so that the agents around will always go to them first
- to make sure the rent goes up every year – this is business, after all.
So, to cite the One Minute Millionaire, by using Passive Investments I am leveraging other peoples’ knowledge and experience to my gain. And they are leveraging my money for theirs – a win win situation!
It was even better that Passive Investments actually invest near my home, although the seminar was in London!
My first buy to let, a one bedroom flat in St Leonards, exchanged in February 2008, and this is the first of 5. In 5 years time I will be the proud owner of 5 buy to let flats (by then with a total value of approximately £650,000, with none of my own deposit left in). I will also be in a position to remortgage them, year on year, one at a time, to raise me a passive income of £50,000 per annum from that point into the future – that is a better pension!
So – why stop at one passive portfolio?
Click on the link to the right to find out more about Passive Investments; don’t be put off by their sales page – it works in a global market – and try out Andy Shaw’s book, which tells you step - by step how to invest in buy to lets.
Other Passive Options:
Progressive Property have a similar scheme to Passive Investments, based in Peterborough. They are less well-established, but are doing a great job with property, mainly two bed houses, in Peterborough, which is a great up and coming area, with great expansion planned, new university, and still within commuting distance of London. The advantage they have over Passive is slightly cheaper fees, cheaper local property prices (larger property for similar deposit) despite their commuting possbilities, and (because of their smaller client base) shorter waiting times to your first property. My next cash injection is probably going their way! Click their link to the right to see their website and their book
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9. Son or Daughter at University? This is an ideal opportunity…
Now, many of the doctors that I have spoken to are a little ahead of me on the investment and family front. My kids at 7 and 11 are at the “Oh God, why did I choose public school (unlike most of the other GPs I know)” stage. Many of my colleagues’ kids are at the “oh my god, what happened to grants and free university fees” stage. This is even more of a problem when our kids have a higher than average rate of signing up for longer courses, such as medicine or veterinary medicine.
Now how can we match this together?
When I was at medical school in London, I noticed a few of my colleagues had very canny parents – worldly wise unlike my own (sorry dad). They spotted this possibility before I did! They bought a house for their son or daughter to run, collecting rent off his or her colleagues. Ideal.
If your student has to move out of halls of residence after the fresher year, into shared digs with friends, and also needs to supplement his/ her savings with a job at weekends…..Why not bring in the buy to let?
Buy a buy to let in your name, buy it 15% below market value, refinance it after doing it up to market value (so you now have no money left in), have an interest only mortgage, and give your daughter or son the responsibility (surely it is time) of running it. So instead of your student paying rent to a landlord, or you paying an agent, your student daughter or son works for his/ her rent.
As long as the property has 4 or less students in it sharing a bathroom, it does not qualify as an HMO (house of multiple occupancy) with all the extra fire and health and safety regulations that that involves.
Your youngster can research the area while in his/ her first year, get to know local reliable letting agents and tradesmen, get to know the area so that, between you, you can spot the BMV properties that come up.
And you have an appreciating asset, monetizing the bank’s money!
You are also contributing big-time to your son or daughter’s financial education – while you are about it, buy them Rich Dad Poor Dad for Teens , subscribe them to Martin’s Moneytips Email and read Rich Kid Smart Kid (I’m reading it at the moment & can’t put it down!).
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10. Recommended Reading
The Moneygym Wealth Workout by Nicola Cairncross
This fantastic and easy to read book was the first step that began to open my eyes to the potential of property.
Money for Nothing and your property for free by Andy Shaw
You can download the first 5 chapters of his book for free from the Passive website. Personally I was not too impressed by the layout, but the book outlines what Andy and Greg discovered that led to them becoming multimillion pound property investors – and why they were drawn to help us to do the same!
Property Made Simple by Peter Stanley
The 44 Most Closely Guarded Property Secrets Reveals: The Quickest, Easiest & Most Proven Way to Become a Multi-Millionaire Without Work, Time or Money Now by Mark Homer & Rob Moore – a bit over-chatty for my liking, but set out well and gives you the information you need to invest in property yourself – or do it passively.
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