Your Life in Property - Investing in Property & Real Estate

8/14/2019 Your Life in Property - Investing in Property & Real Estate

1/102


2/102

1

Mat has been an acve property investor since 1993, for the most part whilst holding

down a career in the Royal Air Force. At rst, due to an overseas posng, he became an

accidental landlord for a small property in the town of Reading in South East England.

When work required him to move, he could not sell the house and was in negave equity

so was forced to rent it out. He rented that property and bought more each me the

military posted him to a new locaon.

It started through necessity but it became quickly obvious that this business, which took

very lile me, was making more money for his growing family than from his Royal Air

Force could ever do. Mat was in a posion to give up his day job by 2003 but lacked

the condence to make the leap unl 2006 when, having accrued a porolio of over 50

properes, he became a full-me investor and rered from the military. Enjoying his

new found freedom, Mat connues to grow his property porolio, now standing at 170

properes across Europe and USA. Mat now helps other investors meet their goals,

whatever they are, through property. A small team of like-minded investors make up

the team ProVenture and love meeng new investors and helping where we can. Our

current area of work and example properes can be found at:

www.ProventureProperty.com

Fourth Edion

All prices and rates correct as of March 2011

Copyright 2011 by Mahew Lileco

All rights reserved

About The Author


3/102

2

Contents

Introducon..........................................................................................................................3

Chapter 1 - Why Property? ..................................................................................................5

Chapter 2 - Outcomes for Property What Do You Want to Achieve? ................................9

Chapter 3 - The Locaon Hunter ........................................................................................14

Chapter 4 Purchasing Well Evaluang and Securing an Investment .............................20

Chapter 5 What to Buy and From Whom ........................................................................31

Chapter 6 People Not Bricks The Secret to Success ......................................................40

Chapter 7 The Management of Risks ...............................................................................45

Chapter 8 You are a CEO ..................................................................................................48

Chapter 9 Finance and Currency - Geng bang for your buck .......................................54

Chapter 10 Locaon, Timing, Locaon Bringing it all together ....................................56

Chapter 11 Selling Your Investment ................................................................................62

Appendix 1 The German Property Market ......................................................................63

Appendix 2 The UK Property Market ..............................................................................70

Appendix 3 - The US Property Market ................................................................................73

Appendix 4 About ProVenture Property ..........................................................................76


4/102

3

Introducon

What will you get out of reading this?

I pride myself in aiming to be the best landlord in the business, having bought the most

protable properes on the market, aer having undertaken the most comprehensive

research possible. Of course, there is always room to improve your performance in such a

uid business but I am always striving to minimise risk and maximise prot from property in

the most professional and, dare I say, ethical, manner. If you are the sort of person who sees

potenal in making money from property but is reluctant to take the gamblers approach in

the capital growth speculaon game, then read on. I like hard, logical facts and gures but

like to keep things simple; I need steady, signicant monthly income to feed my family and

keep my wife in shoes, and the capital growth comes as a pleasant addion, and my strategy

works. Lets hope it will work for you.

Thank you for seng your valuable me aside to read this book. I intend to repay your

investment of your me by discussing in-depth every aspect of property investment. Thisbook has been wrien to invesgate:

What makes property special as an investment class.

What kind of Investor you are and what you want to achieve.

Techniques to locate great property that ts your objecves.

The tools used to make sure an investment will make you money, now

and in the future. Why people are so important in a business involving bricks and mortar.

Geng your nances and tax posions right to maximise your return.

How to sell your property, eventually, for the maximum gain.

Thats a lot of subjects to cover, so I will get to the point very quickly in each chapter but

develop the ideas in a logical way. Of crucial importance are the exercises at the end of each

chapter. Please try to do this in full or at least consider the exercise in your mind before

moving onto the next chapter. In this way, you should arrive at a plan of acon at the end of

the book to go forward into or connue your property career.

Why I Wrote This Book

In the last 10 years how many books and ebooks do you think have been published regarding

property investment? Quite a few! How many were wrien during the 10 years before that?

Very few, and I know because I was looking for books to read around 16 years ago on the topic

of property investment. Now why is that? Well across the world during the last 10 years we

have experienced an abundance of easily-accessible credit that just had to go somewhere.

Books on all aspects of property development and investment were wrien (and indeed

countless others on a range of subjects on how we could spend our hard-earned cash orour unearned money from our property appreciang in value). Of the property investment

books issued in the last 10 years, most (not all) focused on building porolios of property by

a system of re-nancing current mortgages in order to take on new mortgages. They focused

on capitalising on the new freedom with which the banks had with the money which they

lent. I remember calling a mortgage broker in 2005 to apply for nance (on bended-knee)


5/102

4

for a property in Scotland. The response, on the telephone aer 5 minutes, was:

Interesng mes over the past

few years! Great mes if you

bought things that went up in

value with the banks money,

not so good if the things you

bought has gone down.

The more recent tomes on property

investment, now this glut of free

money has dried up, focus on the

ability to buy Below Market Value

if there is such a thing. The story goes

that if you can buy from someone

stupid (or desperate) enough to sell

their home to you for up to 50% of what its worth, then you can present the property to a

bank, gain a mortgage, and not need to provide a deposit as you bought it so cheap. I am

not going to even get started on this topic which is quesonable in logic and also in ethics. If

you make money in this area then I wish you luck.

So whats this book going to do for you that all the others havent managed? Well, I will be

honest, possibly nothing. You may have built up experience in business and investment to a

point where you will nd the ideas of this book of vague interest but perhaps not compelling

enough to change your own investment behaviour. In this case, I am sharing my stories andideas in business with you and I would love to hear yours. This is not a vague statement I

mean it! There are people reading this book that know far more than me regarding property

investment, perhaps its just that I have the me and inclinaon to put nger to keyboard.

Well let me know your stories and ideas and the good ones will be included in the next

edion, with your permission.

For others however, this book will hopefully prove of value at your stage of your personal

and business life. If it hits you at the right me in your life then some of the ideas that I

have collected in this book could be ofgreat value. And it is to you whom I am wring. Iam wring to the person I was 16 years ago who was looking for some guidance but found

very lile available that I found relevant or that I could understand. I would like to collect

my experiences of the last 16 years (not all posive!), mix them with some of the very best

ideas and approaches to investment that are out there, and come up with some easy-to-read

chapters on the topic of property investment. The chapters are designed to be read in order,

with a logical story developing through each chapter. At the end are some case studies on

some markets around the world, taken in context of the ideas within this book. Hopefully,

if I get it right, the book will be of equal relevance to the person I was 16 years ago, to all

investors since this me and for all property investors in the future. The ideas therefore, donot rely on parcularly favourable market condions but just sound principles that you will

hopefully nd compelling enough to take with you in your investment future.


6/102

5

Chapter 1 - Why Property?

You will no doubt have your own ideas about why to choose property over other forms of

investment to generate a cash ow or to provide an asset you can use at some future point in

your life. You would not be reading this book otherwise I suspect. So what would be on your

list as to why to choose property? Aer all, property can rise and fall in value as dramacally

as the stock market (OK, perhaps at the speed of months not in minutes as on the Stock

Market on occasion.) Property can also be a hassle. Roofs leak, heang boilers stop working

(always at the weekend) and carpets need renewing. What about your beloved customer

the rent-paying tenant of your property? Tenants can cause damage to your property

through neglect and somemes wilful damage. And what about the mortgage? That can

rocket at a moments noce and leave you way out of pocket. So why are you choosing to

take the responsibility of property on at all? Why not join the growing band of carefree

tenants and kickback and let someone else have the hassle? Well, that just isnt you is it? I

suspect our lists will look fairly similar, but there could be some new ideas:

1 There is No Opt-Out. Its an obvious point but perhaps the most compellingreason to choose property. Aer food and water, the provision of shelter is the most basic

of needs. People will live in property, as an owner or a tenant, or they will live in the park

under a newspaper. This gives a constant and steady demand for housing which other assets

dont have. You can opt in or out of shares in Apple at a whim, for example. One bad decision

from the CEO or a change in the market, and the shares can be sold unl they drop to zero.

There is no such opt-out with housing, and demand to live under a roof only really varies

with populaon levels and some social factors (such as levels of divorce creang more one-

parent households for example).

2 Property = Wealth. The ownership of land and property has historically madethe dierence between those who live hand-to-mouth (tenants or tenant farmers) and the

lord of the land (Landlord) who uses the asset to his advantage, generang wealth from this

asset which can be used to support his life and then be passed on to future generaons.

Most people on the Times Rich List made it through property and land. The other lucky ones

who had good business ideas and exploited those ideas to create fortunes have probably

exchanged or will exchange their new wealth into property and land in some way or another

as a method of retaining and building their wealth. The point of note here is that thesewealthy people oen buy and hold land and property for generaons and so do not rely on

the release of the capital value to support their lifestyle (although I am sure it helps their

credit rang!). Wealthy people clearly exploit the property or land by charging people to use

it and then give it back to them, in the same condion. It is this money, or rental yield that

provides for them and supports their lifestyle.

3 Property is just another Business. This is true and a useful idea. You as alandlord will be the CEO if you like of your own business. This idea helps to think of other

landlords as compeve businesses and makes you good at what you do. Not all Landlordsthink in this way and are actually very poor at what they do in my experience. However,

the big point here is that the business of property is fragmented like no other. There are

millions of property businesses. Most people in the property business, the private buyers

and sellers of houses dont even consider themselves to be in business and quite right too.

They buy and sell their homes according to circumstance and senment. Without these


7/102

6

drivers, you as a property professional have a disnct advantage and can take opportunies

as they arise, not just when you need to move. Equally, the business of property rental

is hugely fragmented with no one player (other than the council or social rented sector).

Most Landlords have less than 5 properes and many only have one. You as a property

professional can exert your knowledge and movaon to create a compeve advantage

over these property part-mers, even if you only have one property yourself.

4 Use of Other Peoples Money. It is oen sighted as the most important aspectof property investment. You can use other peoples money, usually a bank, to increase or

leverage the eect of your own wealth. It is common pracce, when banking mes are

stable, to be oered 80% of the price of an investment property by the bank and you as an

investor must nd 20%. This increases by 5-fold the price of a property you can purchase.

This sets property apart from other assets where you would usually require the full purchase

price to buy a stock or bond. Sounds good? Well it is, parcularly if you are reading this

book and do not have access to huge amounts of money but can prove to the bank that you

are solvent and a good risk. The typically conservave banks only make this excepon withproperty as it has been the route to the banks riches also over the centuries and is a safe bet.

The only point to make is that although your potenal prots are greatly increased through

the use of someone elses money, so is your exposure to making much bigger losses (there

had to be a downside!). Prots and losses are only generated when a property is bought and

sold and the ming of this will be discussed later in the book.

5 Property Goes Up in Value. Because of the scarcity of property and the reasonthat it cannot be opted out of, property tends to increase in value at least in line with the

rise of incomes over me. This is certainly true in areas where the ability to build on newland is limited and the populaon is stable or increasing (and the property is of good building

construcon that will last). Over the last 30 years, property in UK for example has increased,

in real terms over inaon at around 2.5% per year1.

There are huge uctuaons of course in values as the graph shows, for example buyers

around 1988 needed to wait around 12 years before the real value of their house returned to

the original price they paid. Those who purchased in the summer of 2007 may have to wait

a similar period of me, just to break even. So purchasing purely for expected short term

rises in prices can be foolhardy

in the extreme. In this book

we will focus on the long-term

performance of property and

the monthly returns from rentals

that you will receive. MONTHLY

CASHFLOW IS KING. It is the ability

to me the (fairly transparent)

property market and treat it like

a business that will ensure you

minimise your exposure to thedownward market trends and

make a prot each month. This is

what this book will focus on.

1 Latest stascs for UK are produced at hp://www.naonwide.co.uk/hpi/historical/


8/102

7

Okay, so we get a list. We could add more reasons. The point is to look at the list, make

your own list, and then understand and exploit each point as far as you can. If these are the

reasons to choose property then taking each reason to the limit will maximise how good you

get at this business. Equally, making a list of reasons not to buy property, and then hedge

against them is an equally useful exercise. Lets do an example:

Reason not to buy Property unplanned property maintenance

One common unplanned maintenance task for all types of property is roof repairs. It is an

aspect of a property that is dicult to inspect and generally the rst indicaon of problems

is a dripping noise. So how could you hedge yourself against this risk? You could suggest:

Taking adequate insurance to cover all losses.

Purchase only property with the best type of construcon (ie not a at roof).

Purchase only property which has been recently re-roofed, or is a newly-built property.

If part of a communal block, buy apartments below the top oor so if the roof leaks it

will not aect your tenant and you will not lose rent.

Again, the list could go on.

The nal idea I will leave you with is one that I developed around 8 years ago to convince

myself I was doing the right thing by invesng in property. It was around the me I was

considering leaving the comfort (and restricons) of full-me employment and I was trying

to reconcile the associated risks with the move. As I saw it, property could go up and down

in value quite dramacally. I had seen that with my rst property in Reading which slid intonegave-equity and stayed there for 5 years. How could I provide a sustainable income

from property if this was the case, never mind the costs of property ownership such as

maintenance and nance costs.

Is Property a Gamble?

The conceptual idea I developed was that I, as a property investor, was living the life of a

professional gambler sing in a high-class casino playing roulee. Just like the roulee

wheel stopping on red or black so property prices rise and fall and I am taking that risk.Sure, in property there tend to be more upmes than down, but sll like roulee. Perhaps I

should stay in my job! But then I thought about the gambling stakes and who was providing

the chips for each spin of the wheel. It wasnt me, it was my tenant. Every spin of the

wheel costs one mortgage payment but the rent my tenant paid bought me enough chips

for each spin of the wheel.

Indeed, when I got it right, the tenant paid

me much more than was required for the

chips and there was money le over to

buy drinks at the casino bar. I could now

aord to just keep spinning the roulee

wheel as the tenant was paying for the

table and also my drinks.

The risk of capital value increases and

decreases had therefore been removed


9/102

8

and, eventually, I was content to leave my job although I could have had the condence to

do it years early if I had read a book like this. For those versed in investment, okay the above

is a long-winded metaphor for what a cash-posive investment looks like sorry! Maybe

thinking of the principles in this abstract form rather than numbers on a spreadsheet can be

helpful though in focusing your energies, giving condence or helping to explain your way of

life to others. We will pick up on the idea here throughout this book.

Acvity 1

My suggeson at this point is for you to make a list of the advantages and disadvantages with

property ownership, to whatever level of detail you nd useful. Then, consider what you

can do for each advantage to maximise you benet from it and minimise your exposure to

all your listed disadvantages. I would then keep this list with you when property hunng. It

is very easy to get carried away when viewing a property but does it meet the fundamental

criteria you have? These should not be compromised.

Advantages Disadvantages


10/102

9

Chapter 2

Outcomes for Property What Do You Want to Achieve?

Lets stop talking about property for the moment and turn the aenon to you. What do

you want to achieve and why?

When entering any business or venture, it is of course worthwhile to set out a plan for what

you would like to achieve and when you would like to achieve it. Property investment is

no dierent in this respect. Working backwards, seng out a clear objecve (or set of

objecves) that you would like to achieve from property investment will be useful for the

following reasons:

Determine the type of property that you purchase.

Guide your decisions towards nancing.

Provide a measure of progress towards your objecves.

Will provide feedback when you have reached your goal.

There are a huge variety of reasons investors cite for starng with property investment.

From the investors I have known and worked with, typical reasons have been:

1 To provide a passive income to supplement current income streams2 (i.e. wages).

2 To provide a passive income to replace current income streams.

3 To provide an income stream in rerement.

4 To provide capital to draw on in rerement.

5 To speculate on potenal capital growth to provide a short term cash ow.

6 As a tax-ecient shelter for savings.

7 As a tax-ecient shelter against income.

8 To exploit low interest rates or favourable currency rates between locaons.

9 As security to provide a home in mes of uncertainty in resident country.

10 To provide an asset which can be passed-on to future generaons.

Understandably, all the movaons are for nancial reward or security in some regard. It sll

surprises me that potenal investors very rarely make menon of the core of the business

that they are about to enter, namely the provision of housing for people or premises for

business. Of course it would sound just a lile unbelievable if an investor said:

Yeah, I am geng into property so I can give people a decent roof over their heads

But perhaps it is by doing exactly this, and doing it beer than anyone else, that the realnancial rewards come. More of this in Chapter 5.

2 The Rich Dad Poor Dad series explain this concept well: www.richdad.com


11/102

10

Taking the reasons for investment further, we can examine the eects this will have on your

likely investment strategy. In graphical form:

And making some aempt to posion each of the movaons on the chart:

1- To provide a passive income to supplement current income streams3 (i.e. wages).

2- To provide a passive income to replace current income streams.

3- To provide an income stream in rerement.

3 The Rich Dad Poor Dad series explain this concept well: http://www.richdad.com/


12/102

11

4- To provide capital to draw on in rerement.

5- To speculate on potenal capital growth to provide a short term cash ow.

6- As a tax-ecient shelter for savings.

7- As a tax-ecient shelter against income.

8- To exploit low interest rates or favourable currency rates between locaons.

9- As security to provide a home in mes of uncertainty in resident country.

10- To provide an asset which can be passed-on to future generaons.

Where do you think you t best on the chart? Which number or combinaons of numbers

best describes your investment movaon?

Most investors should be able to idenfy with one if not more of the investment movaons

listed.

So far, so good. We have an understanding of our movaons to invest and some thoughts

about the yields sought, the me taken to gain a return on our investment and the associated

risk. Most of you would already have this worked out in some form or another, perhaps this

just introduces you to a new way of expressing your intent. However, it is very surprising

to me how few investors have got an overall plan for how they will meet this intent, in realterms.

So, What does a Plan Look Like?

Business Plan wring soware is abundant and is extremely good at producing plans

running to at least 100 pages, with graphs, that will bamboozle any Bank Manager. For

some, producing a long and detailed plan may t with how they approach the business

and the individual investments. Everything is captured and, hopefully, uncertainty modelled

suciently. Such a plan would include items such as:

Execuve Summary

Descripon of Business

Product Summary

Business strategy

Financial Summary

Market Research

Market Trends

External Research

Market Esmates

Business Locaon Business Organisaon

SWOT Analysis

Compeve Analysis

Customer Segments

Customer Demographics

Sales Strategy

Pricing Strategy

Markeng Plan

Adversing Plan

Objecves & Plans

Resource Allocaon

Budget Allocaon

Startup Budget Forecast Prot & Loss

Forecast Balance Sheet

Forecast Cashow


13/102

12

And so the list goes on. Perhaps this is why people dont tend to set out a plan for what they

want to achieve.

Beyond the need to set out a plan for the purposes of nance, I would argue that if a business

aim and strategy can be captured and dislled down as short as possible then a plan which

sases this can be correspondingly short, and certainly less than than a whole page.

Back in November 2002, it become clear to me that we had the opportunity to become full-

me property investors and give up full-me employment (so I am a reason 2 from the list).

We had built up a small porolio of property and had it under successful management and

seemed to have the skills and discipline to run the businesses eciently. It was me to scale

the operaon. At the me, I had in the following overall concept in mind:

Aim: To create a passive income stream through property sucient to service our

lifestyle.

Strategy: Purchase property that achieves 12% rental yield, or more4.

Based on the above, I arrived at the following plan (I sll have it, on a small scrap of paper

in my desk):

Monthly Income Stream Required: 4,500 pcm

Number of Properes Required: 30

Net Income Per Property: 150 pcmTypical Property: 1-bed for 30,000 (perhaps with some work to do in beer areas)

Finance: 80% Loan-to-Value

Target Date: Nov 2006

There were a few sketches on my plan, which I am embarrassed to share, but other than

that the above captures what focused our acvity for the next 3 years. It may seem over-

simplisc but the plan captured exactly which properes we should search for, how we

should nance them and gave feedback on when we had reached our objecve. The planalso highlighted to me the need to generate around 180,000 (plus costs) in cash over the

3 year project to nance the purchases. This was a huge sum of money to us then, around

3 years wages! It really focused our eorts and highlighted the need to keep working for

this period (and save, save, save!), buy, develop and sell some properes and ip some

properes o plan to raise the nance required over the 3 year project. Some exibility

was required on our part towards then end of the project as purchasing 1-bed property for

30k become increasingly dicult but other than that we stuck to the plan and achieved it a

few months earlier than the target.

Keeping my aim and plan very short and pithy enabled me to take the plan everywhere in my

head and even in my sleep for the 3 years on which it was executed. It was possible to judge

every acon undertaken in those 3 years very easily against the plan and how it contributed

to it. Now, lets be honest, I kept the plan in 2002 short because I was lazy. I was very lucky

4 Why 12%? See Chapter 4


14/102

13

I did though as it provided a constant focus that a 100-page mulmedia epic business plan

would have failed to do. Of course, for some the more comprehensive plan on paper will

be the way forward as by going through the process condence and knowledge of the plan

is built.

Acvity 2

Think about what sort of investor you are and what your investment aim and strategy should

be. Make a plan (as long as you like!) to include:

What type of property you will buy

Prices and / or yield required

When you are going to complete the plan

If you want to get the most from this book, it is wise to do this acvity even if only in

a very dra form before proceeding. You can then develop the plan as you read the

rest of this book and refer to it in the future.


15/102

14

Chapter 3

The Locaon Hunter

Once you have made the decision to consider property as an investment vehicle for your

future and you have a rough plan, the next step will be to conduct some research into the

areas which could t your objecves. You are very much like a hunter at this stage, looking for

your own parcular prey and using your own weapons. The more weapons in your armoury

(and the sharper they are) the more likely you are to be successful of course. Addionally, if

you select prey which have fewer hunters stalking them then you stand a chance of making

a kill. Perhaps this is why you are reading this e-book.

I would like to break down the hunt into two areas, rst the broad locaon of the hunt

(which may yield a number of results) and second the detailed search, on the ground tree-

by-tree so to speak. Enough of the hunter metaphor? Sorry, I am enjoying it.

What to Hunt?

At this point, before the search, we should dene what each of us is looking for in broad

terms. Dierent investors in dierent stages of life (with dierent cash posions or life goals)

could be looking for very dierent property. We will cover this subject in more detail in thefollowing chapter. However, at this stage, I am going to make the assumpon that we are

all looking to make money from the investment, it just depends on how quickly we want to

make this money and how much risk we are prepared to take to make it.

Finding Where to Hunt

Unless you are fortunate enough to live on the doorstep of a rich hunng ground that ts

your objecves, then remote research via the internet and publicaons are likely to be your

rst weapons. Indeed, I would argue that even if you are adamant that you are living in themiddle of a property hotspot that is waing to explode, it would sll be prudent to look

around you just to be sure you are seeing the wood for the trees. Communicaon links

coupled with cheap and accessible travel opons mean hunng grounds further aeld are

available.

So how far are you prepared to go? Some investors I have worked with say that the best


16/102

15

place to buy is on your doorstep as you know the detailed breakdown of an area and where

tenants are likely to choose as a preferred locaon. This is undoubtedly true. However,

each of the locaons I have invested in were relavely new to me and if I had taken heed of

the local knowledge too much then I would never have invested a bean. Reputaons and

legacy issues connected to an area or suburb may have been relevant years ago (and sll in

the mind of locals) but are not relevant today. This will be obvious to anyone coming from

outside, new to an area and applying some general principles. One example of this from myexperience was when I was invesng in the city of Aberdeen in north east Scotland in 2002.

The received wisdom of all leng agents and estate agents was to buy properes in the best

areas and avoid like the plague some less well-developed areas of the city. I followed this

advice for about 6 months and acquired 5 ats in good areas for around 30,000 which gave

a good yield of around 12%. Prey good, but I found my limited funds drying up very quickly

and was sll drawn to areas (Torry in parcular, if you know the city) where properes where

around 15,000. To me, the properes looked the same and the rents were very similar, so

a yield above 20% was possible. Taking the advice of a very good contact and friend who

knew the city very well I decided to take the plunge in this more risky but lucrave area.

Over the next 2 years I was lucky enough to purchase another 20 ats at this lower level

and found the rents were sustainable, if well-managed. Looking back, it was these cheaper

properes that really allowed our business to take o as their capital values increased at a

far higher rate than the more established areas. At the peak of August 2007, the values of

the more established areas had increased by around 300% but the riskier investments had

actually increased by 500%. For me, at my early stage of invesng, it made more sense to

take the higher perceived risk for the higher potenal return which resulted, counter to the

advice that many locals were giving. So scking to received wisdom may not always be the

best method, your investments must t with your own personal objecves.

In terms of distance to research, I would consider your me available, your proximity to

transport links and costs of those links. As we will discuss in Chapter 5, it is likely that you

will want to visit your area of investment on a regular basis and it would be an advantage

to be able to do this quickly and cheaply if an emergency arose. For me, this is of great

importance. Even though I have a good control of me at my disposal, I do not want to

feel I cannot control my investment (and therefore business see chapter 7) in an eecve

manner if I am too remote or seen as too remote from those involved with my investment. So

for me, being based in Europe, I will [mainly] sck to investments that are available in Europeas long as they are available. We are blessed with quick and cheap air travel across Europe

which means aending your investment from anywhere to anywhere can be achieved in one

day or with just one overnight stop. Thats not to say I have not been tempted to investment

further aeld.

So having considered distance to travel, where should you start to look?

What about consulng the media or talking to other investors that have success stories

from locaons you would never have considered? This approach will certainly broaden your

horizons and may open your mind to pastures new. Indeed, I will include some areas frommy research in the Appendices which will do just this. But a word of warning here. Are these

stories of a successful historic hunt a good indicaon that the hunng ground will remain

ferle in the future? Is there anything le for you, that ts your objecves? This is a really

tough and important point. Past stories of success (and somemes failure!) are easy to nd

and will come to you without eort, being printed in the media, displayed amboyantly


17/102

16

at exhibions or spoken about around tables at dinner pares. These stories are of great

interest to any hunter of course. How did they select the area? What methods of purchasing

and nance did they use? etc. But are there genuine reasons to copy the acons of the

hunter in the story in the same locaon or has me moved on? This is highly likely and

appears to be directly correlated to how loudly / oen the story is told as the number of

successful hunts over me increases. In contrast to this, the pro-acve 2 stage approach

we will lay out in this chapter involves some eort, be warned. By following this approach Iwould say your chances of success are greatly increased.

Let the Hunt Begin Stage 1

Okay, you have selected a number of areas (perhaps countries or parcular cies or regions)

in which you would like to carry out some detailed research. What next? As it is likely you do

not live in the locaon (or even if you do) it is me to sit down in front of the computer and

do some work. Here are some sources to use that are likely to yield some results:

Google carry out a search with terms such as property market in ... or property stascsin..... More detailed research with terms as property for sale in.. will lead you direct to

selling agents but it would be good to keep things more general at the beginning. Of course,

like any search on Google, you will be presented with natural lisngs on the le hand side

of the page based on relevance and also paid for adversing links in the right hand side (and

perhaps at the very top of the le in a shaded secon). Again, it may be best to sck to the

material in the natural search which Google has deemed most relevant at the start of your

research and use the whole of the results page as your research progresses.

General Area Research To nd out stascs on an area such as populaon trends, incomelevels and housing trends. Good sites could be:

OECD: www.oecd.org

EU: europa.eu/index_en.htm

Governmental sites (city councils etc)

Buy Associaon (some good podcasts): www.buyassociaon.co.uk

property.mesonline.co.uk/tol/life_and_style/property/overseas/arcle2227766.ece

Blogs and Forums - To get (hopefully unbiased) feedback from other investors in an area.There are thousands of these. Heres a couple that I have found useful:

www.propertycommunity.com

www.overseaspropertymall.com

Property Portals A fantasc way to research and compare large areas or regions in a veryecient manner. Portals are everywhere now and cover complete areas, regions, counes

and even global coverage. If you know an area, you will know which portals people of that

area use. If not, why dont you nd out? Blogs and relevant forums should help with this.

Heres one that I have found useful in the past, there are many more:

www.themovechannel.com


18/102

17

Specic Area Research Hopefully from unbiased sources which can give the low-downon parcular areas. The printed press have good on-line presence (.com for example) and

can be a useful, easy to search source of independent informaon.

Heres a link I have found useful in this area:

Global Property Guide (very good!): www.globalpropertyguide.com/

Of course, not everything can be achieved on-line even at this early stage of the research.

Perhaps you would consider meeng other investors face-to-face at a property club or

seminar that is in your area. What about aending a property exhibion that has exhibitors

that are relevant to your area of research? As with the research conducted on-line, it is

always worth considering the level of bias in the opinion given and the persons movaon

for giving the opinion.

Results So Far

The aim of the work so far has been to generate an area or a number of areas that merit

further research. Hopefully you have found somewhere that cks all your boxes. Those

boxes may include:

Proven rental income that t your investment criteria.

Investment objects in your price range, aer gearing if applicable.

Sustainable rental income due to such factors as inward investment, job creaon and an

equilibrium (or shortage) of supply of rental housing vs demand for rental housing.

Populaon trends which are favourable to the area (hopefully increasing).

A robust local legal system to ensure and protect your property rights.

Finance in place from local or internaonal banks to the level of gearing you seek, if

applicable.

An acceptable level for nance interest rates.

A tax regime that you can live with (remember that paying tax means you are making

prot a good thing!)

Acceptable travel routes in terms of cost, me and frequency.

You will undoubtedly have some more boxes of your own which must be cked as part of

this inial research.

Depending on your criteria and objecves this inial phase may have resulted in a number

of potenal areas or no areas at all. If you cannot nd any areas, do not be discouraged. If

your objecves are set correctly then you must take your me and develop your research

techniques. It took me 12 months to nd my last area for investment before I began invesngand I consider myself to be quite spontaneous! If you nd yourself searching endlessly with

no progress then maybe your objecves are set a lile unrealiscally or maybe that property

investment is not for you (in the areas which you would consider) at this me. Hope fully

the process has sll been valuable and can be followed up at a later date, maybe when your

circumstances or the market condions have changed in your favour. If you have found

some potenal areas lucky you! If you have found many potenal areas then it maybe that


19/102

18

your objecves could be reviewed or the areas designated a priority order to enter the next

phase of research.

Finally, well done for doing this work. It is by applying the eort at this stage, before talking

to agents or others who will make money from your investment decisions, that will have the

greatest impact on the lifeme success of your investment and your success in this business.

Detailed Phase Stage 2

Although some more detail can be carried out on the internet (by vising property agents

sites for example), it is probably now the me to hit the ground in your area(s) of choice from

the early research phase. If praccable, on your rst trip it would be best to do this with the

minimum of input from sources on the ground that have excess bias and will make money

from your investment. If this is not praccable, then using a number of sources should level

the bias out to some extent. The aim of this phase (which will involve a number of trips

perhaps) is to:

Determine if the area conrms the results from your earlier research.

Find out if the area is somewhere where you would like to do business.

Evaluate dierent micro-locaons for potenal against your objecves.

Decide if travel to the area is a realisc opon.

This can be a lonely me if you travel by yourself, and are in a country or region that you

have never been to before. Be brave! When in this phase I like to stay in a variety of places(and levels of comfort) to nd out more about dierent areas and what levels and standards

locals expect. When travelling around I will prefer to use the public transport and watch

how well it is used, which areas are parcularly busy and what kind of people are geng

on and o the transport. When walking the streets, I am looking at the type and number

of cars parked in the street as an indicator of relave wealth. I look for signs of opmism

in an area. This would include recent or ongoing new-build projects, acve refurbishments

(skips and scaolding) or sights designated for imminent future development. Another good

indicator at street level is the number and type of commercial outlets in an area. If it is a

region which has a large number of local stores (i.e. not dominated by out-of-town retail)what do these stores sell and what level of the market are they servicing, compared to other

areas locally, not your home town. Other good indicators at the street level are outlets for

locals to spend their disposable income for example pubs and restaurants, theatres and the

like. Do these outlets match the kind of tenants you are seeking and is there a trend for new

outlets opening or are things on the decline?

Looking at potenal investments in the area, do they match your expectaons from your

searches on the internet? What is the typical condion and level of refurbishment of

buildings in the area? Do properes show signs of being comparavely well looked aer by

owners and residents? The state of the communal areas of properes and the surrounding

land can be a good indicaon of this. On an individual property level, are the means of

access to the building (if mul-family) well-secured or can passers-by gain access easily?

This may sound trivial, but I would consider it to be a very telling signal of the aenveness

of owners and residents. This is of parcular issue if the property is located in an area that

is frequented during the evenings at pub, clubs and the like.


20/102

19

Once you have done this work, and you are content to proceed, you will need to engage

withlocal sources to take your work right down to potenal investable objects. In doing so

you will:

Rene your knowledge down to the micro-locaon level.

View example properes that meet your objecves.

Determine what tenant sector(s) are serviced in your area of choice and the current

level of demand.

Evaluate the typical demand for tenancies in the area and average void periods.

Decide if the property can be eecvely managed, parcularly if you are remote from

the investment.

Gain an indicaon as to your ability to nance the investment, if you seek nance locally.

Determine the costs associated with the purchase and management of the investment.

At this stage you will be working with a number of people on the ground, all who hold the

keys to this nal aspect of your search but will be making a charge for their services in some

way. More about this crucial people dimension in Chapter 5.

Lets leave the idea of the property search there for now. We need to get some more tools

together before we can go into any further detail. Hopefully, already you have seen the kind

of work you as a property investor will be doing to make your investments and get ahead

of the pack. It is this work, before any purchase is made, that will determine if you are

successful to the greatest extent.

Acvity 3

Carry out stage 1 of the locaon hunt. If you already have a locaon in mind, try to evaluate

the area from a fresh perspecve using the ideas in this chapter. Try to come up with a

number of potenal locaons that you could take forward to stage 2 of the locaon hunt.

Now keep these locaons in mind as you read on.


21/102

20

Chapter 4

Purchasing Well Evaluang and Securing an Investment

Connuing on from Chapter 2, the plan that you have drawn up should provide some

guidance as to what type of property you are to select. Chapter 3 hopefully provided somethought for the locaon of such an object. We are now going to put these ideas together

and discuss how to secure the investments.

Timing the Purchase

I hear me and again from seasoned investors that the crical success factor in any property

always goes back to the purchase price paid. Pay too much and you will be either chasing

unrealiscally high rents to cover nance payments or achieving rents that do not put you inprot each month, aer all costs. Get the property at a good price and the term of ownership

becomes a less stressful experience as the rents you need to make a good prot are easily

achieved in the market place. Indeed, you may be able to charge slightly lower than the

market rentals and therefore encourage longer residence me from tenants and so achieve

a win-win. OK, so far, so logical. But really what is a good price and how is it achieved?

Three Crical Factors - Yield, Yield and Yield

It is probably me we spoke about yield as

it is the crical rao that investors use to

categorise and select investments, indeed it is

arguably to keystone upon which all the other

work is placed. Many other raos have been

devised to describe investments and returns but

for my money, nothing beats simple yield.

What is Simple Yield?

I am not going to turn this into a maths lesson, I promise.

Simply stated, the yield on a property investment is:

Annual Rental Income Generated

Value of Property

The idea of yield is important when evaluang new investments

and also the investments already held in your porolio. Come to think of it, if this is the

cornerstone of the property investment world, this is really simple! I will make it even

simpler in a moment.


22/102

21

For the me being, lets look at the equaon and examine what it says (and what it doesnt).

First o, looking at annual rental income, there are a number of ways of expressing this. Do

you quote the gross or net gure here and what is the dierence? For me, I like to capture

the expected annual rental income with any deducons which must be made to make theinvestment work. So, for example, I would deduct the cost of any roune maintenance

(boiler, li for example) and also the cost of employing a factor or managing agent if this

is applicable. I would also deduct the cost of insurance as this is unavoidable. I would notinclude unplanned maintenance at this stage or indeed the cost of a leng agent. The

work of a leng could be conducted by yourself for certain properes so at this stage is not

included.

Secondly, the value of the property should be the current market value of a property you

intend to buy or hold in your porolio. It is not a fantasy gure you have about what a

property could achieve, but what other similar properes are achieving in the prevailing

market.

Anyone who has met me knows that, within a few minutes and regardless of the situaon, I

would have menoned the word yield probably 5 mes or more. This makes me extremely

dull company, I know. However, it is refreshing (for someone as dull as me anyway) to hear

more and more investors discussing yield and the resultant cash ow more frequently now

when discussing property. For some reason we forgot this in the years of booming capital

values5.

Every investment made has an associated risk (more in Chapter 6) and will also require

some work for which you should be rewarded as an investor. Property investment is nodierent. Indeed, invesng in property is very hands-on in terms of tenant and property

management and the investment is very illiquid. That is to say you cannot cash your chips

in on a prot as easily as you can, say on the stock market. So what should this reward be?

Well clearly, depending on the type of investor you are, the rewards you seek will be higher

the more that you require a monthly cash ow to support your lifestyle. It is therefore logical

that the higher rewards are made for the investor taking higher risk.

At the very lowest level of risk, large investors and funds purchase commercial property to

provide a level of return on their cash holdings. A widely-held approach is that the level ofreward here is around 2%above the prevailing 10-year bond rate issued by their government.That is to say, as opposed to buying safe government bonds, commercial property of a good

standard is aracve once a 2% reward is in place to cover the more intensive and riskier

ownership of property. So, as I write this page, government bonds issued by the US, UK and

EU governments stand at around 3%. Therefore, an investor in commercial property could

take a posion in a project when yields reach or exceed 5%. Commercial property of less

than premium quality would perhaps require a corresponding increased yield.

Due diligence into the project would reveal the risk level and the fair value reward required.

5 Actually, the reason is extremely well-laid out in The Property Clock by Ajay Ahuja a mustread.


23/102

22

So, in gures, a 1 Million AAA-quality commercial investment might stack up if:


Value of Property

50,000

1,000,000

Yield = 5%

What about residenal investment? The cold view of the commercial investor is widely used

in some residenal markets around the world where owner-occupaon level is historically

low. However, it is has not been used so widely where compeon exists from owner-

occupiers where the hunt for a home rather than a return on investment is the objecve.

I would make an esmate as a Yield to Break-Even Point (YBEP) for residenal investment,funded by nance as follows:

Unfurnished Property = Finance pay rate +2%

Furnished Property = Finance pay rate +3%

Houses for sharers / students = Finance pay rate +4%

This loading makes account for void periods and costs associated with ownership (including

property tax and leng agent fees but not income tax).

The gures are based on the actual holding of my own in UK and Europe since 1993 and

the holding of fellow investors, to provide a guide. Current investors may work o slightly

dierent gures, as may holders of varying types of commercial property.

With nance pay rates for investment nance averaging around 5% over the last 5 years this

would mean a YBEP for the respecve properes:

Unfurnished Property = 7%

Furnished Property = 8%

Houses for sharers / students = 9%

Now, the above is only a guide but it has served me well as a basis for my investment

decisions in the last 5 or so years and will connue to do so. So, what does it mean to you

as an investor?

E V E R Y T H I N G

Going back to chapter 2, we examined what kind of investor you were and what returns you

seek as a consequence. So, lets look at that list with this in mind. For those that require

some level of income from the investment from rentals, the yields achieved will need a

margin above the YBEPs before. For those holding property for reasons other that creang

an income, the levels above may be sucient and would generally result in the purchase of

less risky properes, other factors being equal. Lets look at couple of investor types:


24/102

23

Investor Type 1 Supplemenng Income

For an investor looking to merely supplement income, a margin of perhaps 2% may prove

sucient over the respecve YBEP. In gures, for a 100,000 unfurnished property, you

would require a yield of 9%.

Annual Rental Income Generated = Value of Property x Yield

In this case:

Annual Rental Income Generated = 100,000 x 0.09 (9% or 9/100)

Annual Rental Income Generated = 9,000

So, this investor would be seeking property generang 9,000 (or 750 pcm) in rent for

every 100,000 property they purchase. Their supplementary income would be the 2% or

2,000 per annum. Lets call this margin the Yield Reward. Not a kings ransom in thiscase, but posive income which can be scaled if further similar properes are in the market

and nance available.

Investor Type 2 Replacing Current Income

For an investor seeking to replace their current income with a passive one generated through

property things, jusably, get more challenging. Nothing is easy in life and if you are looking

to say goodbye to working for someone else, eort is required.

This is the category of investor that I fall into and the category of many of the investors my

company works with. There is some variability as to the level of return above the YBEP I seek

which depends mainly on the prospects the property oers in terms of sustainability of yield,

ability to nance and a view on future capital growth6. In general, I look for deals that will

reward me with 4% above the YBEP and oer stable yields without excessive maintenance

with good tenant demand. So, for a furnished property 100,000 this me, I want toachieve a yield of 12%.

Annual Rental Income Generated = Value of Property x Yield

In this case:

Annual Rental Income Generated = 100,000 x 0.12 (12% or 12/100)

Annual Rental Income Generated = 12,000

So, I would be seeking property generang 12,000 (or 1000 pcm) in rent for every

100,000 property I purchase. The supplementary income, or yield reward, would be the

4% or 4,000 per annum. It was invesng in this way that I achieved the goal of generangsucient income in the 3 year project outlined in Chapter 2. Higher yields are of course

somemes available great, you may reach your goal that much quicker. But can the deals

be nanced to the same level? Are these deals more management / maintenance intensive

or are longer void periods likely? What about the tenant sector? Are you relying on low-paid

6 Just like crystal ball gazing in its accuracy perhaps! Be warned of models relying on capital growth


25/102

24

or social tenants that may have more sporadic rental-payment atudes? All factors to be

considered.

I will make a confession here. Didnt the maths look a bit easy in the last example? Looking

for 12% deals is easy (well, easy to spot them when they are there). We needed 1,000

per month in rent to make the 100,000 property t our objecves in this case. So, when

searching for property under these criteria, just remove the last 2 zeros from the purchaseprice and you have a target monthly rent. This is easily done, in any currency, and can be

done by just glancing at an estate agents window (who oers both sales and lengs) and just

slowing down the walking pace a lile as you pass. On a web-based search, enre websites

can be evaluated in seconds. And so the confession. My whole business has been built on

this idea. The only clever bits have been nding and then managing the investments and

I will share my thoughts on this throughout this book.

Hopefully, from the above you can idenfy the kind of investor you are and the type of

income or yield reward that you require. From this, we have everything, We now know whatkind of property to look for and how much nance we are going to need to be successful.

Please note that no regard has been made to projected capital growth in this

model. We have been discussing generang income from property. In truth,

the real rewards in property are the capital appreciaon of the asset held over

me. However, this paper prot or indeed loss does not put food on the table.

However, when realised through selling or re-nancing an appreciated property,

this growth can provide useful injecons of cash to support lifestyle or nance

subsequent deals.

Finding the Deals

If you have spent any me looking for deals with yield to the higher levels discussed, you

will know that it is hard work. This is the work that determines the success you will make

as an investor. A quick search of your local market will probably provide an abundance of

potenal investments, most of them around plus or minus 2% the prevailing nance rate. For

example, I have just been on the net this week and found an oer near to a property I own

in Grantham so I know the area well. It is a brand new 3-bed house with garage oered at

109,000. It will rent for 500 pcm. I have been oered the property for 95,000 for a swi

compleon, based on one phone call, such is the market. The same houses were 150,000

24 months ago so sounds like a good deal. Perhaps it is for long-term capital growth as you

could take a view that it must return, at some point to its 2007 price level. However, lets

analyse it quickly in terms of rental income. Will it bring money into my pocket or remove it?


Value of Property

6000

109,000

Yield = 5.5%


26/102

25

Current nance rates, if you can get it, are around 5.5% on an investment product so the

YBEP for an unfurnished let would be 7.5%. This is typical of deals available in the market

when supply and demand is in equilibrium or supply exceeds demand. The YBEP is reached,

if that. This house will need to be 60,000, and ready nance in place, before it becomes

viable. This is unlikely to occur.

And this is the point. In a market that is in equilibrium or that has excess demand oversupply, it is unlikely we will nd property that provides the yield reward we seek over the

YBEP. So when is the best me to buy? When supply exceeds demand, as in the Grantham

case above, we may get closer to YBEP and may even beat it but it is likely due to market

principles that capital values are falling. The capital losses, in the short term, will dwarf

rental income.

The me to arrive in the market therefore, with your superman cape on, is when a at period

occurs over capital values have dropped and the rental incomes (due to wage increases)

have recovered to a point where the yield reward is in place. This condion does occur butit lasts a relavely short period of me, parcularly when banks recover their condence to

lend again to a good level.

On the next page is a graph showing the yield reward rst for a typical 2-bed unfurnished

rental property property in the south east of England and second for a 1-bed furnished

property in north east Scotland between 1990 2011 Q1. I have chosen these areas because

my investment history was in these areas and data is readily available from governmental

websites.

For me, this graph tells the whole story. Let me repeat that! This graph captures perhapsall my thinking on property investment in terms of when and what to buy. There is nothing

else, thats why I keep looking at this graph, or graphs based on other locaons, nearly every

day. So what do we see? First for south east England, the results show that the purchaser

buying using the Yield Reward criteria would have been very busy around 1995-96 and

could have been tempted back into the market around 2002-2003, seeing rewards above

2% at these mes. I remember back in 1996 that yields of 12% were quite common, even in

London which seems remarkable when considered today.

The market was quite dierent for Scotland with yield rewards above 3% (for a furnished

property) from 1996 2004, with spectacular rewards of around 7% between 2000 2004.

Buying at these mes would have ensured a steady cash ow was achieved and is sll being

achieved from the properes.

From a capital gain perspecve, it is interesng to note that mes good for the Yield Reward

investor these were also mes when capital values saw steady increases or were just about to

experience strong growth. This is unsurprising when we consider the interest that investors

would have, regardless of owner-occupier senment, at the mes of high Yield Reward. This

interest from investors when Yield Rewards are high (oen at a me of low owner occupiercondence in the market) provides a oor to values and provides an addional demand

element.


27/102

26

From my own perspecve, I look at these 2 graphs with interest at my own investment

history. My rst property I purchased (my own home) was in 1990 in SE England. These

were woeful mes and I fell into negave equity, coinciding with the point on the graph

when yield reward was below zero. I became an accidental landlord in 1993 and aer a year

or so found myself making money from the rental of that property all the way to when it

was sold in 2000. I enjoyed capital growth of around 100% during this period of high Yield

Reward. In Scotland, I was perhaps late to the Yield Reward party, entering in 2002. Ipurchased using the idea of Yield Reward right up to 2006 when deals became harder to

nd. Again, this was a me of high capital growth and the properes have all been cash ow

posive every month that they have been owned.

Looking at the graphs, it is also interesng to see what happened to investors buying at

mes below the Yield Reward criteria. For example, 2006-2007 were years when the Yield

Rewards were near or below zero in both markets. The Yield Reward investor would have

missed out on some spectacular capital growth during these periods, as values soared by

owner-occupiers with ready nance taking the market to unbelievable levels. However, weare now seeing a correcon in this market with all these gains being lost. For the speculator,

ming is everything and money can be made when lady luck is on your side. For the Yield

Reward investor, a steady cashow is ensured every month and the points when property

is purchased is rarely when values are about to collapse. These ideas can be applied to any

property market around the world when carrying out your analysis.

And now a very painful confession. I have strayed from the Yield Reward path only twice in

my investment history, both mes when greed and expectaon of capital growth took over.

The rst me was in 2006 when a property in Berlin caught my eye. A 1 bedroom property in

the centre of a capital city for 30.000 Euro seemed too good to be true surely it must go up

in value! Buying with a yield reward of only 1% was not so clever and the property has not

gone up in value signicantly and taken money out of my pocket every month since I owned

it. The really embarrassing one was a purchase of a new build at in August 2007, just before

Northern Rock collapsed and speculaon was rife. Again, the Yield Reward was a whole 0%

and the property has gone down in value from the day I bought it, around 25,000 as we sit


28/102

27

here today in October 2010, if I could nd a buyer at all. I will learn from these mistakes, I

hope. Why dont you pick up the lesson for free?

We spoke in Chapter 3 about locang property. In the appendicies to this book, I will examine

parcular markets to discover where in the world the yield rewards can be found for a range

of investors today.

One further method to analyse the market you are researching is to look at aordability, either

from a buyer or tenant perspecve. Should the rent levels be cheap compared to wages

then this is a possible indicator that rents have some upward pressure, other factors being

equal. Dierent marketplaces and tenants will bear a higher proporon of their take home

pay going towards their housing costs than others. For example, tenants in London can pay up

to 50% of their take-home-pay towards their rent and associated costs. In Berlin, 25% is more

typical. But it is the comparison of this gure over me that will reveal any latent upward [or

indeed downward] pressure in rents. A similar aordability index can be researched for owner

occupiers, ie how much does their housing costs soak up of their net income. An interesngfeature will be if you discover that owning a property is far cheaper than renng, as this reveals

latent demand for owner occupaon [just another way of stang yield reward].

Finally, a measure to reveal any potenal pressure in capital values is to look at the House

price to Earnings rao. Below is a graph showing this index over the past 30 years.

It is clear, from the graph above showing average house values, that purchasing at any point

when the index was far below trend was not such a bad idea.


29/102

28

Closing the Deals

Just a short note here, on the topic of

negoaon. There are lots of good books

that cover this topic to a far greater level

than I could dare. However, I am going to

look at a parcular aspect of negoang ina hotspot for a yield investor.

Lets say we have found an area abundant

in property that meets our objecves. It

is likely that, parcularly for the higher

yield deals, you are early in the market

and fully welcomed by estate agents and

sellers alike. As the market develops, other

investors (and owner-occupiers) will join you and demand increase. So, what should yourapproach to negoaon be?

My experience with many investors is that a deal must must done i.e. some mark o the

asking price must be achieved, regardless of condions. The approach in a Moroccan Bazaar

if you like. This could be a valuable approach, parcularly if you are truly alone in a market

or seeking only a limited amount of property. But as demand increases, this approach may

have a disastrous eect.

So a story:

When I was purchasing in Aberdeen, Scotland I was fairly lonely in the market with the only

real compeon from owner-occupiers in the beer residenal areas. Prices for the 1-bed

ats we sought ranged 20,000-30,000. Our early deals were closed very successfully and

we achieved a few thousand o the asking price in each case, applying Moroccan Principles.

It felt good, even though purchasing at the asking price we sll generated in excess of the

12% yield we sought. But aer 6 months we started losing deals and this lost us me in the

developing market. Quickly, we changed tack to paying what the owner wanted or even

slightly more to secure the deal. To the owner, it was great as they sll remembered the bad

mes of the last 5 years of falling or stagnant prices. To us we sll achieved 12% yield and

were growing. To the estate agents, well they loved us as they knew we were good for the

money and paid top dollar.

Now the point is, I knew a band of investors that came in and were doing just the same

as I was and who can blame them. However, they seemed to be xated on doing a deal

and shaving a few pounds o where they could. The result is that I beat them nearly every

me in securing property in the developing market and grew very quickly at a rate of one

purchase every 3-4 weeks, my maximum really as I had a full-me job at the me. They, on

the over hand had a very frustrang me losing deal aer deal to me or owner-occupiersand picked up only the poorest quality property that no-one wanted.

I somemes pull the sales expose which I keep out of my ling cabinet to look back at what

happened. At the peak of acvity, a typical deal for 30,000 I may have paid 32,000 (rent

for 325 so dont cry). Fellow investors found this to be foolhardy at the me. However, with


30/102

29

the benet of perspecve, these properes peaked in value in 2007/08 at around 105,000.

The deciding success factor was not if you could save a few pounds at the point of purchase

but how many properes you could secure while the market ed the yield objecve. The

investors I consider to have lost ended up with poor-quality properes which are hard to ll

and they connued to purchase as the market moved up and away from them and overpaid.

A useful lesson if you are looking to purchase mulple properes over a me frame that

includes an increase in market acvity.

Acvity 4

Determining Yield Reward is an interesng exercise to carry out for a market you know well

(perhaps in your area) or a market you are researching. You need to know nance rates,

rent levels and property prices for a given year, thats all. If this data is not to hand, the

data for property in todays market is easy to nd and should help you make investment

decisions. So, nd out some typical Yield Rewards in your area over a given me and some

Yield Rewards (today) for an area you are researching. The results could be surprising.


31/102

30

Chapter 5

What to Buy and From Whom

In previous chapters we have looked at your reasons for investment, locaons to support

your investment and ming in your entry into the market, based on yield criteria. We now

turn to what types of property are available that can produce an income and the pros andcons with each type.

A general list of property that could fall into the income-producing category are:

Long term rentals, individual ats or houses or apartment blocks.

Commercial rentals leng to businesses.

Short term accommodaon leng property on a nightly to monthly basis. Leaseback schemes.

Fraconal ownership.

Purchase of land.

Purchase of development property.

Lets look at each type of investment now, and discuss how each may t into your investment

strategy.

Long term Rentals

The most common type of investment, servicing the area of greatest demand. Typically,

your tenants in this sector will be based and employed near your investment and have

expectaon to occupy the property for 6 months or more. The variability due to local market

condions tends to centre around if property is typically oered on a furnished [a more

migrant populaon] or unfurnished basis and the typical residence mes for each tenant.

Both factors demand close inspecon as they will aect your cashow and also the stability

of the investment. Lets take a few examples.

Long Term Tenant in UK

The tenant market in the UK, much like markets in most of the developed world, service

tenants that for whatever reason are unable to purchase property. The purchase of property

and the general appete for owner-occupaon in this market is high and is oen achieved

by those in work and a stable locaon. Therefore, typical tenants will be students, young

professionals, migrant workers and people between houses due to a job move, divorceand the like. Whilst owner-occupaon is on the decline in UK and has been for 5 years or

so, these tenants are the mainstay of the market and will connue to be so. Consequences

of this are that the average residence me is between 7-13 months in the UK, depending on

locaon and many units are oered on a furnished basis. So what does this mean for the

investor? Well, in terms of cashow, any units oered on a furnished basis clearly take more


32/102

31

me and eort to get right. A 10% allowance on the gross rental is made by the taxman for

running such investments, and it is likely to cost around this in reality. Therefore, as pointed

out in Chapter 4, the rental income needs to be reduced as a consequence. Addionally,

the shorter residence me will inevitably lead to some unplanned voids albeit these may be

short in acve tenant markets. Finding new tenants and to move previous tenants out also

comes with a cost. All in all, around 1-2 months rent should be expected to be lost each

me through vacancy and management input required to nd new tenants and conduct themove. With residence mes perhaps just short of 1 year, this reduces the eecve yield

further by 10-20% per year. You will have your own gures to work with here, but make sure

you apply them, and dont gloss over.

Nuances within this market could be leng of property to sharers [so called Higher Mulple

Occupancy or HMO in UK] and rentals to tenants within houses. The HMO structure has been

a real growth area in the UK, and where tenant demand dictates, it can be a very successful

model. The watchword here is eecve management. The property will inevitably takeincreased wear and tear through the tenancy, dispute can occur between tenants and it can

be dicult to keep control of the occupants as they come and go. I have 2 HMO properes

in UK and have found them to be higher yielding than a standard let, perhaps by 3-4%. The

increased workload and maintenance has in truth eradicated most of this upli, so are they

worth it? If you are able to manage the units without undue stress, I would say a resounding

yes. Geng the rents to a much higher level makes the properes more aracve to

investors and so increases their capital values when they are eventually unloaded. Just dont

underesmate the work!

Finally within this secon, there is the rental to tenants in houses, typically families. This

can be a very lucrave market, if the purchase prices are right in the rst place. At one end

of the market, you could be renng a 2 or 3 bed terrace to a family that are unable to access

the mortgage market. If well-referenced, they could be very good tenants and their stability

gives a stable return. On top of this, the longer occupaon me should, though not always,

result in the tenants really looking aer your home. Some of the best rental stories I have

heard fall into this category. The tenants and landlords have a great working relaonship,

and oen managers in between become unnecessary. At the other end of the market,

auent migrant workers who do not want the bother of going through a house purchasecan be found when the locaon is right. These tenants could be paying 2,000 or more each

month, and expect a quality property in return. Tenancies in auent parts of UK have this

feature, but it is so oen the case that the purchase price of a property in the area results in

a paltry yield of 3-5%. In addion, the demands of the high-paying tenants can be high, and

this can reduce the apparent yield yet further. It is hard to get this end of the market into

cashow posive territory, although extensive research could unearth what is perhaps the

best nd in the industry. Let me explain. In Aberdeen, as you know from previous chapters, I

was looking for property that yielded around 12%. This usually meant me hunng in the less-

favoured areas of town and taking lower-paying tenants to make it work. In 2005, I stumbledacross something of a sweet-spot in the market, but ignored it as it was o brief. What

an idiot. The properes in queson were newly-built 4 bedroom, 3 story town houses in an

increasingly popular part of town. Demand was below supply at the me and prices had

been reduced from 250,000 and could be had if you bought 3 houses together at a price of

200,000. The really interesng bit is that wages are very high in the area and characterised

by a high proporon of wealthy migrant workers servicing the oil sector. Rents of 2,000


33/102

32

pcm where achievable. The holy grail of 12% being achieved in a very low maintenance unit.

So why did I not buy? My consideraon was that this part of the market was fragile and

dependant heavily on one part of the economy. If I lost a tenant, my yield turned to zero and

I had a big mortgage to service. It was too risky in my mind, from a cashow perspecve.

Do I regret not buying? Yes I do. Properes of this sort really must come up very rarely, as a

series of circumstances needs to be in place for it to occur. I feel in retrospect I was correct in

assuming the voids were an issue and cash ow may not have been as good as the tried andtested 1 bedroom at market. But from a capital gain perspecve, these units by their very

nature are a cking me bomb for growth. 5 years on, aer the biggest crash in prices in the

UK for a generaon, the units are prices at 420,000 even today. The lack of a few months

rent due to voids along the way seems and is irrelevant for once. Hindsight you might say.

But it is a trick that will work me and again should the yields and purchase price be in place

anywhere again. I will learn from this mistake.

Long term Tenancy German market

Most markets in the developed world bear close resemblance to the UK story outlined above,

but I will introduce the features of the German market as these are suciently dierent.

Due to lower rates of owner occupaon across the country, typically between 15-45%, the

tenant market is turned on its head compared to that of the UK and many countries across

the world. What we nd in Germany, and some other markets around the world of low owner

occupaon rates, are longer length of the typical tenancy, tenants covering the spectrum ofthe populaon and a market typied by instuonal investors purchasing on bulk. So what

does a typical tenancy in this market look like? As a contrast to the shorter tenancy periods

in the UK, tenants in this market can be students, migrant workers, professionals, families

and even rered workers. The average tenancy is more like 5 years, with some tenants

staying for 30 years or more not being uncommon. Now that is stable! Tenants consequently

treat the rental as their home and unfurnished property, even down to the provision of

kitchen and other xtures down to the tenant. In addion, depending on the part of the

country in queson and the state of market, units can be bought as a mulple so the whole

apartment block or a number of apartment blocks. Investments are bought on a far morecommercial basis and priced for investors, based on yield. When I rst entered this market

in 2005/ 2006, I found it all a lile too good to be true. Not only were the features above in

place, and management of a complete block of 20 apartments more straighorward than

the management of a single apartment in UK, the ancillary costs of running the property

were calculated in a far more transparent way. Eecvely, all the side costs associated with

the running of the investment such as: House management, buildings insurance, ground tax,

boiler and li maintenance, etc were eecvely paid outwith the rental yield of the property

by the tenant, directly to the management company. There really are few deducons being

the collecon of rent [around 5% of net rent] which need to be factored in. Sll all sounds

too good to be true? Well, it is not a gi. The useful due diligence in terms of property

condion and locaon as in previous chapters needs to be conducted, as well as eecve

management in the next chapter. I have met many investors who have entered the German

market based on low capital values alone and who have either lost their shirt or at best

temporarily misplaced it. I remember well the meeng with an investor from the UK who

came to our oces in Leipzig with a Lidl carried bag full of keys from a development in a


34/102

33

small town in East Germany. He had bought 120 units for around 5,000 Euros each at an

aucon in London. There of course was a reason the seller needed to take the property to

aucon in another country! There were around 10 units rented when he bought them, and

the costs needed to get the others in a rentable condion was around 30,000 Euro per unit.

He was cashow negave from day 1 and there was no way out for him, apart from take his

Lidl carrier bag back to London and see if he could pass the parcel with the problem. A sad

case. But overall, the German market oers a real opportunity for an investor to access themarket quickly, invest in a signicant number of units and get managed in a truly arms-length

manner. With yields of 8-12% not untypical, it is a marker which demands further research.

Commercial Tenancy

From the outset here, I will confess to a limited experience in this market. Having invested in

only a few smaller units myself and only having introduced a limited number of investors to

such property. This is perhaps a blindspot, due to the huge sector which it represents. The

reason behind my lack of exposure to commercial property probably lies to the signicant

dierence in this kind of asset and the manner in which it is purchased and managed.

Commercial property ranges from a small shop or oce unit below a residenal block right

the way through to supermarket complexes and large industrial spaces. What they all have

in common is that the risk of the investment lays not only in the occupied state of the unit

but also in the ongoing success and viability of the business that occupies it. Determining

this risk is clearly a crucial part of the due diligence process that residenal investment does

not involve, with macro-economics being more the factor there. That said, commercial

investments can be a very

Documents

Your Life in Property - Investing in Property & Real Estate