Buying and selling for a profit used to be ‘easy’. Through the millennium you could buy a property and be guaranteed it would make money in a few years and in some cases, a few months. Some people (and mortgage lenders!) seemed to think house prices would continue to rise, others warned of a housing bubble, but didn’t seem to be able to accurately predict when it would burst.
However, burst it did, starting in the States and hitting the UK very hard. The recession appeared to start in the property sector and within months we saw sales drop by 50% prices fall by 20% from a 2007 peak. Rental income which normally rises when house prices fall, has suffered with year on year falls of 5% or more, voids have increased as have tenant rent arrears.
At the moment we seem to be in a strange state of flux. No-one seems to know what’s going to happen next. No-one can quite believe that such a sharp recession, within less than 12 months, can appear to be ‘over’. Yet, reports of green shoots in the property market and the wider economy seem to be talked about daily. The private sector is claiming their order books are growing again and recent figures even suggest unemployment is slowing.
But are things really starting to turn around? What about the huge debt we owe as a country, estimated at £13,000 per head of our population*? It is true that business has taken the brunt of the credit crunch and the public sector has yet to be heavily squeezed? If this is true, what effect would public sector job cuts and pay being frozen (or cut) have on our economy – and the property market – next year?
More importantly, as property investors, what does this mean for you? What’s the good news? What’s the bad news? And most importantly, if you have money to invest, are there any properties that are ‘safe’ to invest in? Are are short term profits from property possible, or is it only possible to make money out of property in the long term?
The good news
Many investors who had pulled out of the market back in 2006 (or before) have been buying heavily since October 2008. Those that bought within the first six months of the crash benefited by snapping up bargains from the huge over supply of property for sale and a massive rise in repossessions. Buying ‘below market value’ became the ‘favourite phrase’ of the property investment industry and canny investors were buying properties up to 50% below their true value.
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The bad news
The credit crunch however meant that investing in these bargains was only for cash rich buyers as buy to let, commercial and development finance became difficult and in some cases impossible to secure. The return of 25% deposit requirements, higher finance costs and recently a dramatic fall in the supply of property in many areas has made even ‘below market value’ deals have, in the last few months been difficult to fund and find.
Added to the financing difficulties is the six month re-mortgage rule which stops an investor buying a property ‘below market value’ and then re-mortgaging it immediately to take cash out to invest in the next property. Although some still claim this can be done, most investment experts believe it’s only possible if during the process, someone commits mortgage fraud.
So, if you can access cash, is this a good time to invest?
Currently there are two schools of thought. The first believes that we are in an ‘artificial’ state of recovery. Interest rates are artificially low, help from the government is currently stopping repossessions and we have yet to see the effect of reducing public sector costs. As a result one school of thought continues to predict property prices falling further and staying low for some years as the impact of unemployment and a return to normal interest rates continue to depress the economy.
The second school of thought is that although low demand and supply is causing the current signs of ‘green shoots’, the likelihood of lots of properties coming back onto the market is small. Some predict that interest rates will stay low for many years (CEBR estimate interest rates will only increase to 2% by 2014). As a result, their predictions are that property prices will remain stable, and in areas where there is a shortage of supply such as the South East and London prices may even show small rises.
Whichever of these scenarios you believe will happen, one thing is for sure, that spotting the ‘bottom of the market’ is impossible. You will only know it’s been reached AFTER it’s been recorded! For example, for those hoping to pick up repossession bargains, latest statistics from David Sandeman at the EI Group show that the ‘bottom’ of the repossessions market (ie when repossessions sold through auction houses were at their highest) was Quarter 4 2008 – nearly a year ago!
However, good investors will always be able to make money – in good and bad markets. And, although you may have missed some of the bargains that have been around in the 12 months, there are still plenty of areas and properties that are worth considering investing in, as long as you’ve:-
1. Carried out extensive research
2. Considered different ways of making money from property
3. Accurately valued the property you are buying
4. Identified potential future capital growth
Research, Research, Research
In my view few people carry out enough research when buying an investment property, especially in unfamiliar areas. Those that don’t visit a property before they buy shouldn’t be investing at all, unless they have previously tried, tested and trusted independent people who carry out valuations independent of any property clubs or sourcing businesses.
When researching an area or property it is essential to:-
1. Visit the street and surrounding areas, research current supply and demand from a buyers/tenants perspective.
2. If the property requires updating, make sure you have accurate quotes, and refurbishing the property will deliver a 20% return.
3. If you are planning to rent the property out, check the rental value from an agent that specialises in rentals, rather than an estate agent/letting agent that may have a conflict of interest or have only just started a lettings business to help survive the recession.
4. Check what properties are in short supply now for buying or renting. Areas that seem to be recovering from property price and rental falls already are likely to be the ones that will deliver good capital growth in the future.
5. Secure feedback on potential sales value from estate agents and an independent RICS surveyor who is acting on YOUR behalf.
6. Check out the future supply of other properties that might affect demand for your property. If you are buying a two bedroomed flat, what if another 1,000 are planned to be built? What planning permission has the local authority already given?
7. Find out about the future population changes. If you are buying a large property to rent out to students, will there be enough families who can afford to buy a big property when you want to sell?
8. If you are buying a three bedroomed property and are planning to turn it into a five bed, make sure the cost of the additional space will be covered by a real rise in the value of the property.
Consider different ways of making money from property
Many people just look to buy to let or renovation to make money from property. However, you can also invest in:-
1. Buying land and build to let or sell.
2. Commercial as opposed to residential property.
3. Develop mixed use property, for example buying a shop and a flat above and renovating to then sell or rent at a profit.
4. Property funds and syndicates.
5. Working with developers to buy properties below market value via a ‘part exchange’ scheme.
Accurately Valuing Property
When we used to value properties at a professional part exchange business, we used to spend approximately three full days and use five professionals to help value the property accurately. And we had to. To make money from part exchange you have to buy a property at a discount of between 10-20% and then sell the property (typically via agents) within a three month period, or you’re likely to start losing money.
To value a property you need to:-
Understand what is happening in the local market
Use Hometrack and then visit local estate agents that have been selling similar properties. Hometrack will show you how many weeks and how many viewings properties require to sell, as well as what the average offer price is versus asking price. Use this information to check with local agents how accurate it is and what their experience of the market is currently.
Identify previously ‘sold property prices’:-
1. Go to a property portal for example Rightmove and click on ‘sold prices’.
2. Put in the property’s postcode.
3. Select a distance first time of 1 mile, then if few or no results select up to 3 miles.
4. Put in your type of property.
5. Put in 10% below the minimum price of the property valuations you currently have.
6. Put in 10% above for the maximum price of the property you have.
7. Then tick the box that says ‘include sold, under offer, subject to contract’
8. Find properties that have just gone under offer/sold and then follow up with the agent who sold the property.
Find comparables of similar properties which have recently been sold
A recent comparable is vital in understanding a property’s likely value, and is defined as a property that has sold recently in a similar location, ideally in the same road or a very similar property in a nearby street eg 1930’s semi, detached or Victorian terrace.
Other Valuation Methods
You can use the ‘on-line’ automated systems, such as Zoopla but be warned, these are never as accurate as carrying out your own research and their figures are typically based on ‘past’ not future prices.
Finally if you are sure you have a property that is worth investing in, and especially if it’s in a terrible state and difficult to value, call in a local RICS surveyor to give a professional valuation which includes the likely costs of works and check these costs with local tradesmen.
Identify potential future capital growth
Up until the credit crunch, terraced houses have outperformed other types of residential investments from a capital perspective for the last ten years. Both investors and first time buyers competed to buy this property type and it led to an increase in the value of these typically two bed properties.
Over the next five years, with a large public debt and recovering from a recession may mean people’s income doesn’t increase much and with a fall in the number of people able to invest, property prices are unlikely to increase much. In fact some reports (such as Knight Frank) suggest it will take until 2014 for prices to recover to their 2007 levels.
So, if you want to buy property now and sell it at a profit in the future, you’ll need to start predicting which property types in your area are likely to sell in the future and appeal to as many buyers as possible.
It’s unlikely that there will be a ‘magic’ answer to this. It’ll depend on local property supply, demand (which will vary according to the population and availability of finance) as well as how well the local economy recovers. To help you do this you’ll need to search for information on:-
1. Likely population changes.
2. Planned increased supply of new builds and social housing.
3. Transport changes that shorten or ease the time it takes to get to towns and cities.
4. Areas and property types that will remain in short supply now and in the future.
For example if the area you are investing in has an ageing population, then maybe there is a shortage of bungalows with manageable gardens. If another area has a shortage of two bedroom apartments within easy reach of a train station, shops and work and a relatively young population, then this type of property may be the best to invest in.
In summary there are ‘no short cuts’ to make money out of property in the future. You’ll need to have cash for deposits and financial fees and carry out extensive research about the viability of an investment property now and in the future.
Finally, with the government wanting to find lots of ways of paying of their debt, you will also need to ensure you secure good legal and tax advice so you buy the properties in the right way and minimise any tax bills that may be due now and in the future!
I am one of the UK’s top property experts being regularly quoted in the press including the Telegraph, Independent, Times, Daily Mail and Express and have appeared on BBC2, featured on BBC Radio 4, Channel 4 and a number of local BBC Radio stations.
I have been a consultant to the property sector for a number of years and renovating properties for over 20 years. I have also written a number of books, including four for Which? – Buy, Sell, Move House, Renting and Letting, Develop your Property and the Property Investment Handbook.