Property Maverick

Property Investment Strategies

It’s a fact that more millionaires attain their wealth through property than any other type of investment. So by that virtue it makes sense that at least some of your investment portfolio should be in property. However you need to exercise caution, people can, and have lost huge amounts of money in property when their investment strategy was wrong.

Ignoring the speculator strategy, a hope and pray investment strategy, there are three main property investment strategies. They are:

  1. Buy and Hold

  1. Buy and Sell

  1. Cash Flow

However being a self-confessed ‘Property Maverick’ I prefer an amalgamation of all three strategies creating a fourth strategy that I like to call ‘PIE’.

Let’s now discuss the three main strategies before we move onto the Maverick ‘PIE strategy. A strategy where you will see you really can have your pie and eat it.

1: Buy and Hold

This strategy will be most difficult to implement in areas where property prices are the highest. This strategy is the most simple and most common. Namely buy a good property, in a good area, rent it and wait for property prices to go up in value.

The key to this strategy is that the rental income must cover the mortgage and property expenses. The property must be able to pay for itself. This can be done in most areas of the country without great difficulty in a low interest rate environment. However today in the South and London it is often difficult for rents to cover all expenses.

Advantages of this strategy - Are good profit potential, steadily increasing cash flow and good tax deductions.

Disadvantages of this strategy - Are high property management costs, cash intensive and a long-term investment cycle.

During the last property boom many investors foolishly invested in properties that had negative cash flow. This is not something that is recommended. Generally if a property cannot provide a positive cash flow on day one with realistic expenses applied you should not buy and hold it for the long term.

Generally properties that are lower in price create a positive cash flow much easier than higher priced properties because the rental yields are higher. So an investor looking to buy in a more expensive area would have to look at more properties to find a ‘Positive cash flow deal’ compared to a lower priced area.

In conclusion the ‘Buy and Hold’ strategy will work better in some areas than others. Look for areas where prices are lower, but still offer potential for appreciation. The Property Maverick tip of the week is to look ‘North’ where price corrections have been overdone.

2: Buy and Sell – Quick Profit

The key to this strategy lies in the buying of property well below market value. The objective is to buy at wholesale and sell at retail or just below retail. The buying of property well below market value facilitates a quick profit scenario. “Generally you must buy at 20% or 30% less than ‘Real Market Value.”

Advantages of this strategy - Are great cash flow, returns in a short time frame and fewer hassles.

Disadvantages of this strategy - Are high turnover, cash intensive, properties can require major repairs to resell, and the moving to a higher tax bracket.

I highly recommend that you sell property on a regular basis to keep your investment fund liquid. If you don’t sell any property you will soon become illiquid and no longer able to grow your portfolio.

The trick is to sell any property with high equity and low rental yield. Don’t settle for a low return on a property containing substantial equity. Make your equity work harder, and why not take advantage of the annual £10,600 personal capital gains tax allowance.

“Always check your potential tax liability with your accountant before selling a property.”

So how and where do you find properties Below Market Value? You need to find distressed sellers, ones that have to sell quickly. The quick nature of the sale necessitates a need to have your finances in place before you close the deal. So always check with your mortgage broker first before you make a low offer.

See Value Investor Story to understand how and where to find property bargains, but the simple answer is ‘Look ‘North’. Alternatively let a property professional source or provide the deals for you.

If there are far too few below market value deals to be found in your locality, you must look outside your area. Never be afraid to step outside your area or comfort zone. Greater success is achieved when we step outside our comfort zone.”

Another variation of the strategy is to refinance after six months the property that you purchased for 20% to 30% below real market value. This enables you to take out the original amount you put in without selling the property. This still leaves profit in the property to release at a later stage, hopefully selling at a higher price.

In the case of selling or refinancing quickly (within six months), since the credit-crunch this has become extremely difficult, almost impossible. The vast majority of lenders now enforce the seller six months ownership rule as per the Commercial of Mortgage Lenders guideline. Now with all but a very small minority of lenders you have to wait for six months to elapse before selling or refinancing. Reselling quickly within 1 year also necessitates borrowing on a no early redemption penalty basis to keep costs down.

Therefore you must account for a minimum of 6 months to resell a property in the current marketplace, and factor in your costs of finance accordingly. You can like I do install a tenant for six to twelve months and create a tenant reward incentive plan. Such a plan could allow marketing to begin after say 3 months. Why not offer a month’s rent rebate/ reward when the property is sold and tenant moves out, or something similar. Be inventive, tenants will work and cooperate with you if you reward them accordingly.

Buying and Selling with Limited Funds

What must I do if I don’t have the cash to buy and sell properties for quick profit?

There are several solutions to this problem. One is to save the deposit money needed in true ‘Richest Man of Babylon’ style. That is to save 10% of your earnings and reduce greatly your expenditures, and create an extra income stream at the same time. But depending on your earning ability this may take some time.

Alternatively you can align yourself with other property investors that do have money. By doing that you can source property deals for them and participate in a ‘Joint Venture Agreement’. This agreement will stipulate the basis of the equity or quick profit split. To download a copy of a sampleJoint Venture Agreement.

Assignment of Contract

Alternatively you could use the simple technique of Assignment of Contract’. When done correctly you don’t even take title of the property. It works like this. You close a deal on a below market value property, then you sell or assign your right to buy the property to another buyer at a higher price. The difference in price is your quick profit.

Many property investing apprentices get started with the use of this technique. It offers flexibility and minimal cash requirements.

The key points here are to have enough time, say 60 to 90 days to remarket and close the property, not forgetting a list of other buyers standing by to quickly sell or assign the property to. But always make sure there is enough money in the transaction to warrant your time and effort.

Due to recent Commercial of Mortgage Lender guidelines ‘Assignment of Contract’ at a higher price in frowned upon. So your payment or quick profit could even be a delayed one. Use a ‘Joint Venture Agreement’ where your profits share is contractually payable after say six months when the buyer refinances the property to pay you.

No Money Down

Without going into detail, I personally don’t know of a singleNo Money Down strategy available that does not involve some form of non-disclosure to a lender. Non-disclosure is deemed mortgage fraud; it’s as simple as that. Personally I have never used ‘No Money Down’ deals.

Finally, be prepared to make many below market value offers to be successful. What’s needed here is a shot gun approach. However since the credit crunch and the uncovering of some fraudulent no money down schemes, lenders now seek full disclosure of any buyer or seller incentives or sub sales. If in doubt consult with your solicitor to make sure you are on the right side of the Council of Mortgage Lender guidelines and regulations.

3: Cash Flow

A common misconception is that wealth is cash in the bank. It isn’t. True wealth is cash flow consistently coming in every month.Owning assets that other people pay you to own is real wealth.”

That’s why property should form part of everyone’s investment portfolio. Some of the best cash flow properties can be Houses of Multiple Occupation, better known as HMO.

House in Multiple Occupation refers rental property falling into one of the following criteria:

1. A house which is split into bed-sits

2. A house, or flat share, where each of your tenants has their own tenancy agreement

3. Students who live in shared accommodation

4. Bed & Breakfast accommodation and hostels which are not used just for holidays

Such properties are generally larger in size with regulations and licences aplenty. Investors are advised to seek proper advice before entering the HMO letting field.

Gross rental yields can be high for such properties, 15% is not uncommon. However with higher yields can come, greater voids, greater maintenance costs and greater time costs. It is recommended that such property purchases are kept within a reasonable driving distance of the landlord.

Advantages of this strategy – Are excellent cash flow and good tax deductions.

Disadvantages of this strategy - Are high property management costs, time and cash intensive, greater hassles, lower capital appreciation, larger deposits needed, and a long-term investment cycle.  

This is not an area I personally participate in so the HMO discussion will have to end here. Anyone wanting to venture into the HMO field is well advised to first read up on the subject of HMO properties and letting's. Also talk to several successful HMO landlords.

Good cash flow properties are not just restricted to HMO and shared housing situations. If one looks hard enough there are properties on bank repossession today in the £30,000 to £60,000 range that can offer an attractive 12%+ gross yield.

However unless the property is in sound condition the costs to maintain the property will be disproportionate to its value and the net yield will fall.

Finally, a new concept is emerging called Rent to Buy. This is where a landlord gives an ‘Option to Buy’ to the tenant and that option is actionable at the tenant’s future discretion.  The benefit for the landlord is that property maintenance responsibilities are passed to the tenant. Meanwhile the tenant secures a price at today’s market value as a future hedge against property value increase. For the landlord this means a much greater cash flow.  

4. PIE strategy

Now we come to the final property investment strategy. An amalgamation of all three strategies creating a fourth strategy I like to call the ‘PIE’ strategy. A strategy where you really can have your pie and eat it!

Over the years I have learnt the hard way what works and what doesn’t work with regards to property investing. I have had my winners and my losers. But as long as you pick 8 out of 10 winners you are doing fine. But with my techniques and added insight why not aim for 10 out of 10.

Combining the best attributes of each strategy you not only reduce your risk and increase your reward, you can also build a larger portfolio for any given investment fund.

So why ‘PIE’? The P stands for Profit, I for Income and the E for Equity. Profit comes from selective buying and reselling quickly. Income comes from selecting high yielding properties to keep long term for good positive cash flow. Equity is the increased equity that comes from building up a larger portfolio over time with ‘Below Market Value’ properties.

The strategy of buying and reselling for profit keeps the money turning over to replenish the investment fund. An increased fund means you can buy more property to hold and to sell. In absence of an appreciating market, without the selling, the fund would soon become empty thereby ending the buying and portfolio growth.

Advantages of this strategy - Are great profit potential, steadily increasing rental cash flow, excellent cash flow, good tax deductions, increased portfolio size and greater equity accumulation over time. Not to mention greater diversity leading to less risk.

Disadvantages of this strategy – Not many! Are high turnover and moving to a higher tax bracket. The latter can be solved with knowledge of property tax strategies seeUnderstanding and Paying Less Property Tax.

So now it’s your turn. Assess the property market in your area. Always research anything you do with property and make sure you understand the cash flow numbers at all times; see Property Analysis.

Now is the time to select your strategy or strategies from above. The most important thing to remember is that these strategies work best at the bottom or depression part of the ‘Property Cycle’ i.e. today! See chapter 4 ‘Understanding Property Cycles’ then develop a plan with long term perspective, but most of all take action.

“One, who acquires knowledge but does not practice it, is like a farmer who ploughs a field but does not sow it."

Ultimately, there are two factors that determine risk and reward in property investing, and that’s ‘Leverage’ and ‘Diversification’. You really can lower your risk substantially by diversifying across many properties and sectors. This and more will be discussed in Building a Balanced Property Portfolio with Low Risk.

Finally, investing heavily and aggressively assuming more risk when you are younger for greater equity gains; then investing conservatively when you are older for capital protection and income is all very text book stock market stuff. By comparison in the ‘Property Maverick’ school of property investment you can invest and realise substantial equity gains without the risk no matter what your age.

Equity gains and income gains should be made on day one of the investment so that you have the added protection that if values fall and interest rates rise your investment still hasn’t lost any money; so there’s virtually no risk and over time rental income will rise.

“In investing, what is comfortable is rarely profitable.” - Robert Arnott

Click To Read Next Article Print Article

Post Your Comments