Property Investment FAQ

Welcome to the Property Investment FAQ page. Here I will answer frequently asked questions from investors. You can also submit your own question!

Here are some of the questions I received…

1. Alan, there seems to be a panic in the Lending Markets - do the lenders know what they aredoing, and how do you see it panning out?

2. Alan, for some of the Overseas deals I see the banks recommending we get mortgages in Swiss Francs – what are your thoughts on this?

3. Alan, there are so many choices out there and so called excellent investment opportunities – how do I decide where and what to buy?

4. Alan, Is this a good deal? What do you think of a deal I saw advertised recently – with a 2 bed apartment in London for 545k…completion in 2012 – 15% deposit required over first 6 months, remainder on completion.

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But first, here are the answers to the questions above...

1. Alan, there seems to be a panic in the Lending Markets - do the lenders know what they aredoing, and how do you see it panning out?

Answer: Very good questions, and I think almost all investors in the UK will have been affected. Any investor in the UK will have been hard pushed to haveseen such a rapid change before in financing optionsavailable to them.

It has been an incredible few weeks which gives us even lessconfidence our banks and surveyors know what they are doingthan normal...!

One thing I have always argued is, do not get too caught upin what a surveyor values a property as it should be adifferent value than you would give as an investor.

The biggest example of where investors have suffered was allthose who bought city centre apartments based on those RICSsurveyors who a year later would often value the sameapartments at 25% less and the market value was at timeseven lower.

In the UK as a buy to let investor the most importantfactors for me have always been the local affordability andthe rental demand if I can get property for around 4 timesthe local affordability and with a 6% plus yield I know Iwill do very well regardless of what any surveyor tells meor short term weekly.

What really has been concerning though in the fall out fromthe sub prime collapse in the USA which clearly has affectedsome UK lenders has been *the mad panic amongst lenders withno apparent business model or cool, calm strategy insteadjust mad panic amongst almost all of them as they pull outof markets and change their criteria! *

I find it astonishing and alarming many investors arecontinuing to spot excellent property deals followingsensible formulas and strategies that have made themexcellent profits up until now, but banks are making itharder to finance, without any clear reasons.

Fortunately some are still ok I also have a running account with my bankand they have not batted an eyelid fortunately and Icontinue to buy as many properties each month as ever beforebut many BTL lenders seem to have lost the plottemporarily!

And these fine institutions are the ones meant to look afterour savings, advise us on pensions and help with investmentadvice....?! It makes you wonder doesnt it?

I am glad I invest in property based on my own values andstrategies, and dont rely on any financial institutions tomake these decisions for me!

So has much changed recently?

Well market sentiment will undoubtedly be affected by themedia coverage in terms of actual statistics it looks as ifoverall this year the UK market may drop by around 5%. Nowit went up around 8% alone last year and has doubled in thelast 5 years so I would not put this down as a crash but acooling at the top end of the market which is to beunexpected.

We have consistently said that the overall UK propertymarket looks highly priced at an average of over 8 timesaverage salaries however *there are some great opportunitieseither in repossessions in some of these areas where localshave struggled to cope with the high prices and you can buyfor 15-20% below market comparables, or areas of the countrywhere prices are just 4 times average salaries and wellunder £100,000, with a lot of room for increases over thenext 5 years.*

I am sure the lenders will start to offer more productsagain soon, and relax some of their criteria at sensiblypriced prices essentially going for buy to lets where therental coverage is over 125% will continue to offerexcellent options for those looking for strong investmentsfor the next 5 years. *With interest rates likely to dropanother 1% over the next year rental coverage %s shouldincrease even further making cashflow even stronger and buyto let investments even healthier! *

For me this is great the uncertainty at the top end of themarket and in other markets, can ensure the property marketwhere I buy namely around the £75,000 terraced property endof the market will continue to offer excellent cashflow andstrong returns on investment you should comfortably be ableto see 30% returns on investment per annum by doing yoursums and choosing excellent opportunities, and not being tooput off by those lenders and surveyors, who unfortunatelyare not looking to clever right now.

2. Alan, for some of the Overseas deals I see the banks recommending we get mortgages in Swiss Francs – what are your thoughts on this?

Answer:
This is a very good question! At the moment it looks good. If we graph the Swiss Franc against the Polish Zloty we can see the Polish Zloty is continually strengthening. This is very good for investors borrowing in Swiss Francs, although of course things may change.

In summary - where 4 years ago you needed 3 Polish Zloty to buy 1 Swiss Franc, you now only need 2. So if getting 1500 Zlotys in each month in rent - before this would pay off 500 Swiss Francs a month, now this will pay off 750 Swiss Francs a month....now that's very attractive! And looks like will continue to do so, by looking at how steep the graph is. So borrowing in Swiss Francs and getting rent in local currency is very good currently – although as I emphasise, is no guarantee will continue indefinitely – although graph does look good..

And when you come to sell you gain bringing back to the UK as well.....as £ continues to weaken against these emerging economies.

Hope this helps – I know it can take a while to understand and currency changes are a critical area to keep an eye on.

3. Alan, there are so many choices out there and so called excellent investment opportunities – how do I decide where and what to buy?

Answer:
Excellent question, and with so many offerings how do you decide?Whenever I am looking to buy, whether in UK or Overseas, I always think about my exit strategy, even if plan to hold onto the property for 5 years or more.

So for example if are buying in a low value area, for strong rental yields – and locals are not buying, you want to be sure there will be continued national or international demand. If are buying in an expensive resort Overseas – and no locals are buying, who will provide your exit strategy?

This is always a key question to ask regardless of where you are buying. I would always recommend developments where locals provide the majority of buyers – we have recently recommended developments in Poland and Czech Republic where the locals have snapped up over 70% often a full year before completion – that is a great sign of strong local demand and local affordability – is a few years since the UK enjoyed that sort of demand!

In the UK – I always again target areas with strong local demand – so less competition for rentals, and a clear exit strategy.

As highlighted on the Deals newsletter recently, the 2008 Demographia International Housing Affordability Survey recently highlighted Durham and Middlesbrough as the most affordable places in England with property prices twice as affordable as the national average - so clearly excellent room for further growth over the next 4 years in thse parts of the world.

These should be questions you ask before committing to any investment:

• Who else is buying here?
• Who is likely to buy my property from me in the future?
• Who is likely to rent my property?

For example if the answers are:

• Who else is buying here? - All UK Investors
• Who is likely to buy my property from me in the future? - Maybe an investor or holiday maker?
• Who is likely to rent my property? - Hopefully holiday makers

This does not give great encouragement that will see strong capital growth or rental demand to me. If the answers are:

• Who else is buying here? - 70% Locals/30% Investors
• Who is likely to buy my property from me in the future? - Local demand outweighs supply and salaries are increasing by 10% per annum.
• Who is likely to rent my property? - Local market - there is a shortage of good quality of housing for the rental market.

This is always one of the key reasons why we are aganst the large city centre developments in the UK, and Overseas resorts marketed solely to Brits and Irish - as we fell there are better investment opportunities out there. Always ask these questions before you invest, and be happy with the answers and you should make some excellent investment decisions!

4. Alan, Is this a good deal? What do you think of a deal I saw advertised recently – with a 2 bed apartment in London for 545k…completion in 2012 – 15% deposit required over first 6 months, remainder on completion.

Answer:
My first thoughts were – how much?!

There is a guaranteed rental of 6% for first 2 years and free furniture pack.

I would forget the furniture pack and guaranteed rental and look at what true market value is now and actual market rent. From quick research it appeared that current market value may be nearer £450-475,000 and the rentals looked on the high side.

When you take running costs and service charges into account this would be negative cashflow – and a couple of months voids would hit hard, with interest repayments of £2,500 a month. I personally would not be comfortable doing a deal like this – the stamp duty alone is over £16,000 – that's two deposits in the locations where I buy houses!

The price seems very high now – and I would not be confident on getting much capital growth. However the rental guarantee has attracted some investors – who have not looked at the bigger picture and looked at what this could cost them going forward – this can be very dangerous – and is so important to fully analyse before committing to any deal.

You are also tying up your 15% deposit for 4 years – of over £80,000! In the same time if bought into 4-5 properties already completed at a more affordable end of the market – this money could be worth 3-4 times this amount by the time of completion! This would give a huge difference in your return on investment.

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