Saturday, 9 May 2009

My Property Payoff Prediction (PPP)

Property (bricks and mortar/housing) is a fascinating way to make money. In these times of economic turmoil, how can property pay off? It takes a brave person to attempt to judge the future of the property market at the moment, so after considerable research, here are my predictions of how I will handle the property market. This is a comprehensive article. This is my Property Payoff Prediction, or PPP for short:


Why invest in property:

Property is normally a part of any rich persons portfolio. Many people have become rich by buying property. Alan Sugar who features on the Apprentice UK had a company called Amstrad. He also bought the freehold properties for all his businesses. In time the value of the buildings grew to far more than the business and now the majority of his wealth is made up from property. That's the power of property.


Generally I think the way to invest in property is to buy as cheaply as you can. Asking prices are usually overinflated in the expectation that buyers will always want money off. As far as I am concerned, any property I see is at least 30k cheaper than the advertised asking price.


30% of homes in Britain are owned outright with no mortgage, so don't believe the doom and gloom in the media about everyone in the country struggling to pay their mortgage. Home ownership and profit is possible.


My property strategy

The same strategy I use when I'm shopping for goods on the internet; i.e decide what type of house you want and what you are going to do with it. Then search for and buy the cheapest property which meets your criteria. Use the Rightmove.com website to compare many similar properties.


Play monopoly

I think the best overall computer game about property and business, is Monopoly. Monopoly is a good game which teaches about the importance of making money from property. Its better to play a computerized game, as it takes away the need to do calculations as you play. The best overall version of monopoly I have so far found (in terms of cost and quality), can be played on-line here: www.pogogames.com and its free!


Monopoly teaches the skills of money management, and when playing, I always like to keep a lot of cash aside whenever I make a deal. I try to manage my money well and I do not do any big deals which will risk bankrupting me. It teaches negotiation, as you realize that you need to consider any deals offered, very carefully.


Books to read:


All of the above books have strengths and weaknesses, and no book is perfect, but each has something useful in it. I have purchased all of these books, and you can save even more money by using the marketplace feature on Amazon to get them even more cheaply.


Websites

www.rightmove.com – Look for houses you want by checking this site. Most estate agents in Britain display their properties on this site.

www.nethouseprices.com – free information about the actual price a house sold for.

Google Maps – Have a photographic street view look at a property before going there.

Google Earth – Have a photographic satellite view look at a property before going there.


Property developing

This is buying a property and renovating it before selling it, or just selling it on. This carries some risk, but many people have become rich doing it.


If I take the property developers option, I would hope to buy cheaply and sell at a profit. I don't like this option as I think it depends on a rising market, and upon being a speculator. In addition the banks have stopped lending out lots of money since the financial crisis of 2007, so property developing is a lot more risky and harder to finance than it used to be.


For more information on property developing, read the book: How to make a million from property-Gary McCausland.


Being a landlord

This option means buying a house and having tenants contribute towards some or all of the mortgage. This is usually a long term option as after a 25 year mortgage, you own the house outright. In my personal opinion it doesn't matter if the rental is less than the mortgage if you are prepared to make up the difference out of your own pocket. Many people divert some of their regular income into pensions all the time, so what's wrong with doing the same on an investment property? There is nothing wrong with having a negative cash flow on a property as long as you have a plan on how to make a success out of it eventually, such as paying off the mortgage in full, or selling the property.


If I take the landlord option, my strategy is to put down as low a deposit as possible, then pay the mortgage with the tenant's rental income. I would expect to see no great profit for 25 years, but if the market picks up within that time, then the property can be sold for a profit. Also the rental income alone may become highly lucrative one day, just like in monopoly. Simply by holding on for 25 years of the mortgage term (or less if I pay it off sooner), I will then own the entire property outright and all the rental income comes straight to me, or I can sell the house and bank the cash, everyone is a winner.


One of my millionaire mentors, Mr Piper, always lets his rental properties out at slightly below market value, to ensure he attracts and retains good tenants. Learn from this example and do not get greedy expecting the highest rents.


Mortgages

There's 2 main types: repayment and interest only. Repayment mortgages are the most common and are what I would prefer to use. Interest only mortgages mean the capital is not paid off so you will pay for the mortgage forever, but at lower monthly payments than for a repayment mortgage. Property developers like this mortgage because they do not expect to hold the property for a very long time, and expect to sell quickly for a vast capital gains profit.


For long term mortgages (25yrs), the rule of thumb that I always go by, is that however much money you borrow from the bank expect to pay back twice that amount by the end of the mortgage term, so if you borrow 100k, expect to pay back 200k over a 25 year mortgage. This is because of the interest that banks charge for lending you the money. Over time it all adds up. It is an incentive to pay off your mortgage as early as possible.


This year, it is 2009, and banks are currently are lending money for housing at a rate of 3.5 times your income.


Q: How do you know if you can afford the mortgage repayments? A: Use on-line mortgage calculators via the Internet. The best online mortgage comparison tool I have found so far is at moneysupermarket.com. You can specify your needs, and it comes up with all the relevant details for you.

Websites for banks usually have their own mortgage estimation tools, such as the HSBC mortgage calculator, This also gives you an “Agreement In Principle” with HSBC. An “Agreement In Principle” just means the bank will probably lend you the money, and this can be a good bargaining tool with potential sellers. Remember that nothing about the “Agreement In Principle” is guaranteed until you have actually spoken to a representative from the bank and they formally agree to lend you the money in writing after they have checked your finances.


Types of housing:

Freehold – You hold the property outright and you can do any thing you like to it. If you want to do major building work, you still have to apply to the council for permission. One of my millionaire mentors, Mr Popinski, says he only ever buys freehold properties, he likes to say: “I'm a freehold kind of guy”. Freehold property is normally a bit more expensive than leasehold, but you avoid having to pay ground rent and service charges.


Leasehold – This can be houses or flats. One person or company holds the freehold, and splits each unit in the building into leases. If you breach the conditions of the lease, the freeholder has the right to apply to take the property back from you at no charge, and you could lose everything. The contract of the lease says you hold the property for a limited time, usually 125 years, then it goes back to the owner. Each property has a different amount of years remaining on the lease and if there are not enough years on it, the banks may not lend you any money for the property. There are normally conditions on the lease which restrict you from doing things such as: building work, having pets, making loud noise, redecorating, renting the property out, reselling, so always check!!. Also, you have to pay a yearly ground rent charge and a service charge to the freeholder. This combined charge can add up to around £1k per year, but it varies, so always check. An article in The Times showed that leasehold properties may carry extra charges that you are not prepared for.


Shared Ownership – you pay a reduced mortgage and some rent. My research shows they are not worth doing as: they are too complicated as you have to pay for rent, mortgage and service charge in varying amounts.


The only benefit to shared ownership is that they are (alledgedly) lower monthly repayments, so it is the only way a lot of people will ever be able to get into the property market. My research tells me to avoid the shared ownership option like the plague; for example, in April 2009, in an area I was looking at, I found a shared ownership leasehold 2 bed flat for 250k, yet in the same area I found a freehold 3 bedroom house with its own garden, and garage, for 200k!! In this example, the shared ownership property is clearly a con when compared to what else you can buy in the same area.


If you sell a shared ownership property, the builders may expect 50% of any profit you make!


Another problem with shared ownership is that the rent, service charge, or mortgage can increase drastically in time. This is an unknown risk I would rather not enter. This type of property is also notoriously difficult to sell on, and you have to give the developer a percentage of any profit you make when you sell on. If these properties were cheap they might be a good bargain, but they are usually overpriced compared to similar properties in the area.


House: According to a big BTL landlord Fergus Wilson, most people would rather live in a house than a flat. I think this is because there is less hassle from not having neighbors placed closely together.


Flat: Part of a bigger building which has been divided into different units of living space. Neighbors are close by, and so there is an increased risk of neighborhood disputes and of having bad neighbors. Many people will avoid flats simply for this reason, so you need to take this into account when trying to profit from property.


Studio: A small living space put together to provide basic living accommodation. They are a cheap way to get into the property market, but allegedly lose value quickly in hard times., and supposedly are hard to sell. I love to buy things cheaply and I feel it is inevitable that I will add a low cost studio flat to my portfolio. A one bedroomed flat would probably be more desirable than a studio.


Location

People always talk about location, and its true that some areas are worth far more than others. My own research shows that generally every area has good transport and shops, so don't stress over trying to find the “perfect” location. As far as I am concerned, cost is far more important than location. For example Buckingham Palace is a brilliant location, but buying it would bankrupt you as you probably can't afford it.


When is the best time to buy

It is currently mid 2009, we have just witnessed one of the worst financial crises the world has ever seen. I think that prices will drop further, due to affordability. I think for the next 5 years, people will be saying the market is going up or down, and there will be much confusion. It will not be until 2012, until we will see a firm idea of which way the market is going. I think from 2012 it will start to level out. I think January 2010 is the best time to start negotiating to buy a house. Always negotiate and never accept the original asking price. Drive hard and try to go for at least 30k off. I still don't think property has dropped as much as it needs to yet, sellers are still stubbornly refusing to lower their asking price. I think January 2011 may be the start of the real bargains, and the time to buy.


Auctions

There are some good bargains to be had at auctions. I've been to a few this year, and the best bargains seem to be the properties sold off by banks as repossessions, or by the relatives of a house owner who has passed on. At an auction, once a sale is made the deal will go through due to auction law, whereas when dealing with non-auctioned properties, you can waste a lot of time trying to deal with homeowners who want more for their house than you are willing to pay. If the price is right, I would rather buy at auction. Always check the property out in person first, and read the legal pack. Ensure you stick to your budget.


Conclusion

Everyone needs a place to live. They are not making anymore land in Britain. Most people would rather own their own home. Houses will always be in demand. Britain is a strategic point in Europe as a gateway between America and the rest of the world. Maybe Britain will become the Monte Carlo, Monaco, Palm Jumeira, or South of France ,of Europe, i.e. an exclusive, expensive little island. Don't give up on British property just yet. Houses and land in Britain will always be expensive. Right now the problem is availability of bank financing. Maybe in about 5 years, foreign banks might step in and loan money to UK home buyers, because the British banks wont do it. Houses will always be expensive to most people, and while prices will fall, after the big drops have passed, British property will be cheaper than before, but still be expensive. I predict the average UK house price to be around 200k for a 3 bedroom house. This will be affordable by couples earning 50k between them, who also have a big deposit.


I predict that house prices will continue to fall until 2012, then stay level until 2017, then start to rise noticeably (slightly at first) from 2017. At the moment, prices are not falling sharply enough as many homeowners will not sell below a certain price, due to things like pride, and negative equity. January 2011 will be the start of the bargain houses, as people start to realize their house will not rise in value any time soon. I think that January 2011 is the earliest time to start thinking about getting into the property market. I suggest you bide your time and strengthen your financing until then, and buy property within 2011 to 2017. Exactly when, will be up to your own judgments and assessments carried out within this period. This is the plan I intend to follow.


Buying into property is a good way of saving on rental payment, and of increasing your wealth. The less it costs you to buy and redecorate for, the better deal you get. My rule is that any property I buy must be as cheap as possible (including possible renovation costs). The banks are lending less than before so buying property cheaply, if you can, will keep you within your budget and make you more likely to get a big payoff from owning property.

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Straight from the horses mouth