http://www.proebayer.com

own load your free eBay buyers guide and sellers guide from:

ttp://www.proebayer.com/tips.htm

Don’t get ripped off on eBay! D h Sign up for your free monthly newsletter for more eBay money making tips,

icks, reviews and much more

tp://www.proebayer.com/news.htm

tr ht

3

FORE WARNING

THIS PUBLICATION DOES NOT CONSTITUTE ADVICE WITHIN THE TERMSOF THE FINANCIAL SERVICES ACT 1996 (OR ANY SUBSEQUENT REVISIONS,ADDITIONS, OR AMMENDMENTS).

The contents are a general guide only and are not intended to be in substitution for professional advise.All readers are strongly advised to take advice from their solicitor, accountant and surveyor beforeproceeding with any property purchase.

4

Contents

Page

5 Introduction

6 We are what we think we are

9 Attributes of a successful property investor

16 Anyone can do it…

19 A laymans guide to valuation

33 Why you don’t need to be able to afford a whole property

37 Other peoples money and how to get it

50 A clever thing to do in a hot market

55 Buying at auction

61 Safe as houses – residential lettings

65 A long term idea – going for growth

73 An alternative idea – going for income

82 Stuff you have to know if you want to be a landlord

89 Patience is a virtue – residential reversions

92 Blocks of flats for £1000 ? Freehold ground rents

98 Garage mania

102 How holiday makers can pay for your dream cottage

103 Appendix One How a lodger could pay your mortgage

106 Appendix Two How to buy a £60,000 investment property for £22,500

125 ACTION STEPS TO GET YOU STARTED

5

Introduction

Whilst every care has been taken in preparing this report the guidance given should not beconsidered exhaustive nor does it attempt to give an authoritative interpretation of the law.

With one or two exceptions this report has not commented upon tax on the basis that eachreader will have a unique tax position. Any examples given within the text should beconsidered in the light of your own tax position and due allowance made.

Naturally the investment examples given assume that the world as we know it now willcontinue pretty much as it is. I have made no allowance for global or national economicdisaster, war, pestilence, plague, famine, earthquake or any other disaster, which willadversely affect the investment market.

In a report of this nature I can only offer general comments which should not be construed orinterpreted as advice. Each reader’s requirements, financial background, and tax status willbe different so I can only give a very general view on the way I see things.

Every reader is strongly advised to take his or her own independent professional advicebefore making any property purchase.

6

We are what we think we are

Property has universal appeal. Owning an investment property or renovating a property forprofit is something most people would accept as a worthy and understandable goal. I’veheard it said that more people have become millionaires through property than any other typeof business. This may happen for you, in theory, at least, there’s no reason why not if youhave desire and discipline. But even on a more modest scale there’s a lot to be said forowning property.

Four reasons readily spring to mind although as individuals we may be able to think of other,more personal, reasons:

it’s ideal for providing an income;

it can be used to grow capital;

in inflationary times it has traditionally been an excellent hedge to protect savings;and

it can provide a powerfully tax efficient way to build a substantial pension.

In this report I’ve concentrated on the first two reasons, which in the current economicclimate, seem to me to be the most relevant. But updated “modules” on the others,particularly the use of property to provide a tax efficient pension fund, will follow in time.

It seems that more people than ever before are thinking about, or actually, putting moneyinto property. On the face of it there has probably never been a better time; relatively lowinterest rates, close to full employment, increasing capital values, and the success of the Buyto Let scheme have given smaller investors the confidence to have a go.

Although the steps to building a profitable portfolio are relatively straightforward in theory,in practice there will inevitably be frustrations and obstacles along the way, even for theseasoned professional..

Most, if not all those problems will be surmountable with application. This is the first rule ofsuccess, not just in property, but in any field

“Perseverance is more important than talent”

I’ll say more about my perceptions on the characteristics of successful property investorsshortly. But when the going gets tough, as the song says, the tough get going. It has beensaid that “ a millionaire is a person who has tried just one more time”.

One key to success in property, which I’ll say a little bit more about later, is to seepossibilities where others would only see impossibilities. You’ve probably heard thedefinition of an entrepreneur as being a “problem solver”, someone who finds solutionswhere others see obstacles. Property entrepreneurs are ideally placed to profit from thisapproach. On the larger scale it may be over coming problems with contaminated sites or

7

planning restrictions. At the level at which this report is aimed it might quite simply bethrough raising the finance to get started.

Allied to this is attitude. Attitude and perseverance go hand in hand. If you want “it” badlyenough, you’ll get “it”. All problems can be solved eventually with enough effort. You couldrestate the rule above as

“Attitude is 80% of success, aptitude is just 20%”

For a smaller, private or relatively inexperienced investor, the first hurdle can beoverwhelming. I think that this is partly due to the scale of property. Even “cheap” propertyis relatively expensive, and if you have funded it through a loan, you can feel veryvulnerable and accountable if things don’t run smoothly.

This is why early in the report I look at the mindset of a successful property investor so youcan decide whether this is really for you. I hope that it is. I honestly believe that there isnothing magical about success in property, and that with perseverance and common senseanyone can make a go of it.

When the whole thing is underpinned by other people’s money, for some the risk can be veryuncomfortable. I would never advocate recklessness. The purpose, as I see it, of involvementin property is investment, not speculation. But often the risk is only a perception and not areality. As we’ll see, the best route to making large returns is usually through borrowing, butonly after due consideration of the implications and the downside.

Starting any venture without tuning into the three preconditions for success is almostinevitably going to be fruitless. Before you start, you must ask yourself whether you have:

the belief that you can succeed in property;

a passionate desire for improvement in your life through your involvement inproperty, whatever form that improvement may take; and

an awareness that your situation will change only if you take the right actions.

Our greatest limitations are often created in our own minds, and unfortunately in the mindsof others if we allow them to impose their own doubts on us. If we see ourselves as “unable”,then we “won’t”. The self-improvement brigade will tell you that “what you picture yourselfas, you become” and I can see the truth in that.

Couple belief with passion and you are starting to get somewhere, especially passionatedesire for change. If you had enough money to work just for fun, would you still be doingyour current job, or would you get out as soon as you could? If you’d quit as soon as youcould, then you are in the wrong place. Is property the answer? Perhaps, but in the short termyou still have to cover your overheads so don’t do anything hasty. The more importantquestion is whether you can feel that passionate about property, or what property willprovide. If you think it won’t give you that pleasure and fulfilment, then don’t even start.Without passion you will be wasting your time.

Then add the third part, the awareness that things will only change if you take action to makethem change. Building a property business, or even maintaining an existing portfolio, is not

8

static and requires constant action. I’ll talk later about goal setting and planning. If you keepdoing the same old things then the only thing that can happen is that you will get the sameold results. To get new and different and better results, you need to do new and different andbetter things. Being prepared can reduce a lot of the fears that inhibit the right actions andstop us from doing something “new”. Don’t forget that one of the best remedies to fear is totake action. To achieve any level of success in property you will have to regularly go beyondyour comfort zone. Otherwise, you are not going to move ahead any further than you arenow.

Finally, before you start, deal with your doubts and the doubts of others square on. What arethe two biggest doubts that probably hold back more potential property entrepreneurs thanany other?

Number one, “I have no capital”. OK, it’s not the ideal starting position, but it’s not unusual.Conventional wisdom says that you need money to be successful in property, but it doesn’thave to be your money. If you have a sound enough proposition there is someone,somewhere who will fund it. I’m not saying it will be easy to find them, although it mayprove to be easier than you first thought, but with perseverance if you knock on enoughdoors and ask enough people you, you will find them.

Number two, “ I’m waiting for the ideal time”. There’s no such thing, but by being awareand flexible you can adapt to market conditions and plan accordingly. If you’ve got a goodidea, or have uncovered a promising situation, you have to press on with it but just beprepared to fine tune along the way. I believe in the “ready, fire, aim” philosophy in thiscontext.

Remember that no one is too old or too young. There are plenty of old and young notablesuccesses in property, and in many other businesses as well. Just look at the number ofinternet millionaires in their twenties. Don’t get into the “if only I had started earlier in life”trap, things can still happen very quickly if you want them to.

Whatever you have done, and achieved or failed in, during the past, give yourself a breakand wipe the slate clean. If you dwell on your past mistakes, you’ll scare yourself intoinactivity. Everybody fails, the successes just learn from their mistakes and keep on going.Learn to forget your failures.

Finally, remember that any success that is going to come your way is totally down to youand nobody else. You have the responsibility to make sure that you have what you need tosucceed. You are the only one who can make yourself the “best” of the “best”. I hope thatreading this report will be a good starting point but don’t leave it there. Education is the key,in whatever area of property you eventually decide to specialise in. There’s no substitutionfor reading. If you’re serious, at least an hour day. There’s so much to learn: construction,law, planning and economics, to name but a few and these are always changing so you needto be updating constantly.

9

Attributes of a successful property investor

“Until and unless you can form a clear and distinct and accurate picture of what yourvision for the business… is, I mean when you get to where it is you’re trying to get to,until you have that clear and defined and not abstract, you can’t possibly build orfulfill or achieve your dream for that business”. So says Jay Abraham, my favouritebusiness and marketing genius.

Before we start looking at property investment and how it works I think it would be reallyuseful to take an inventory, if you like, of where we are now in out attitudes and attributeswhich could have a bearing on whether we succeed in property or not.

As you have bought this report I can take it as read that you think you want to be a propertyinvestor, but perhaps you’re not sure if it’s really for you or whether you’re really cut out forit. No doubt even the great property investors of our time have felt like that on occasions, butwhat sets them apart from the rest is that they still went out and did it.

I can’t prove it but I believe that the successful property investors have certain commonattributes. It is true that they might have been born with these, that they are part of theirnature. However, even if you feel that you may not possess these qualities naturally, I thinkthat they are something which with time and a little application, you can start to develop andthen apply to your own situation. I cannot guarantee that this will bring you success inproperty, but frankly I don’t think it will do any harm.

These are what I feel are the most noticeable attributes of a successful property investor thatI have observed.

Attribute number one - they are focussedThe great and successful investors know where they are going, why they are going there, andhow they are going to get there.

I certainly agree with Jay Abraham that until and unless you know what you want, you aren’tgoing to get there. That’s true for all business not just property. This has been put anotherway, “begin with the end in mind”.

I guess that if they were starting again the first question they would ask themselves would be“why do I want to invest in property?” If you were asked that question, do you know whatyou would say ? The answer may be obvious to you, but you still need to ask the question.

On the basis of that answer I suspect that the great investors would set their goal, theirpurpose for being in that business. Then they would plan how they are going to achieve it.Then they would do it.

Goal setting in a business and personal context is a useful, if not invaluable exercise. If youdon’t know where you are going in an area of your life, how will you be able to plan to getthere, and how will you know when you’ve arrived?

There are many books written on goal setting but I think it’s worth saying a few words now.Firstly, here are three basic rules of goal setting.

10

Number one – make sure that the goals are your own, and haven’t been set for you bysomeone else. That would include peer pressure, parental pressure and maybe baggage andprejudices from the past.

Number two – make certain that your goals will benefit others, whether in a philanthropicsense, or to the benefit of your family, friends, work colleagues or others close to you. Youmay not believe it at the moment but it’s easier to be successful when your motivation is“self-sacrificing” rather than “self serving”.

Number three – Never measure your goals in comparison to others. We are what we are.We are all unique and capable of achieving different things, and different levels of success.If you compare yourself and your achievements with others, you run the risk of eitherbecoming disheartened if you feel that you don’t measure up, or at the other extreme,pompous and complacent.

To be successful in any business you need to be successful in all areas of your life. If you arenot, then any success you do achieve whether in property or elsewhere will be transitory.

For example, what is the point of developing a property based business only to have to lose itthough ill health. Why struggle all that time to get there when you only have to sell it allwhen you go through a messy divorce. No one on their deathbed ever said they wish they’dspent more time at work.

There are eight main areas where I would suggest that you set goals:

Spiritual prayer, recognition that we’re not all there is, there’s something more.Family family priorities and activitiesSocial clubs, friendships, pastimes and pursuitsCommunity volunteer work, civic duties, political involvement, neighboursMental reading, education, seminars etcPhysical wellness/fitness, nutrition, exercise, sport etcFinancial income, savings, pensionsProfessional career advancement, professional objectives

Now you can set your goals in each of these categories.• With each of the above headings in mind, write down everything you want to be, or do or

have.• Next ask yourself “why” you want these and decide whether they are burning desires or

mere whims.• Then start to eliminate the less important.• Look at what is left on the list and ask if reaching each particular goal will make you

happier.• Then ask whether your goals are big enough. Are you being self-limiting.

Ask these five questions about the goals that are left on your listq Is it really my goal?q Is it morally right? Will it benefit others?q Will it take me closer to, or further from, where I want to be?q Can I commit myself to this goal, whether emotionally or physically, and see it through

to the finish?q Do I believe I can achieve this goal?

11

Finally, take the most important goal to you from each category and start to look atthe actions you will need to undertake to achieve it and devise a plan. Make this as detailedas possible and resolve to follow it through. Then work through each of your lists indescending order and make plans for achieving each of those goals as well. Set a time-tablefor each goal and then, well, just do it !

Make it a discipline to review your goals and plans regularly so that you can keep focussed.It is very easy to become distracted and to do things which seem urgent and even important,but which are actually interfering with your moving forward, and which may even be takingyou further away.

I realise that this is a brief canter through the subject which is worthy of a book in its ownright. A worthy ‘Mental’ goal would be to do a lot more reading on this whole subject.

In the context of this report your goals may be related to:

capital growthincomeor a combination of the two

and may be expressed in terms of :

the capital value of a property or properties i.e a portfolioa specific income requirement in the form of rent or expressed as a net profit

and may require considering:

the types of property you want to invest intheir locationand the vehicle through which you want to own them i.e privately, through a limitedcompany etc.

Attribute number two – they get their timing rightSuccessful property investing depends upon timing. Firstly, there is the timing of individualdeals and when to do them. Then there is timing in context of the economic cycle.

By nature I think I am a contra-cyclist. I have been privileged enough to work with theManaging Director of a small property company and watch him become a millionairethrough his contra-cyclacism. What does that mean? It really means that he didn’t follow thecrowd, in fact he did the opposite.

This is the principal that he taught me. If you buy at the top of the market, what then? Whereis your profit going to come from ? Isn’t it better to buy at the bottom and give your assetroom to really grow? At the bottom of the market you can pick and choose yourself abargain as prices are pushed down because no one else is buying. At the top of the marketevery one else piles in and buys, and prices are pushed up. That’s the time to be selling, notbuying, and taking your profit.

I am assuming in this that the boom bust cycle of the British economy is here to stay. Itwould be nice if it weren’t, and in fairness the peaks and troughs may be a little shallower in

12

the future, but I don’t believe we will never have another recession. When the next recessioncomes, as it surely will, it would be sensible to be in a strong enough financial position to beable pick and choose some decent properties cheaply and collect the income until theeconomy picks up. Then they can be sold at a profit.

This is what my old M.D did. He bought sound properties with sound tenants cheaply in thelast recession. As a function of the purchase price, they were nicely high yielding and thecompany was very profitable. Then he sold the whole lot about six months ago and pocketeda cool million in profit.

The problem most people wrestle with is when to buy. There is always the fear that they maynot be buying at the very bottom of the market. I don’t think this matters. I very much doubtthat any one can actually know when we are the very bottom of a cycle and so you almosthave to expect that prices might continue to slip after you have bought. This is unless you arevery lucky in which case you should treat that as a bonus. If the property is incomeproducing, or capable of being income producing, and is either giving you a surplus on yourinterest payments or at the very least covering your holding costs in full, then it will comegood in the end.

Then, of course, they wrestle with when to sell. Again, I don’t think that one can count onperfect timing to get out at the very top, but I don’t think that can be helped. ‘Always leavesomething for the next man’ is a principal worth living by, it helps you sleep at night.

Not every one is a contra-cyclicalist and I am not by any means suggesting that one shoulddo nothing during a boom period. Specific opportunities will always arise and should alwaysbe considered. Boom periods definitely allow the chance of quick speculations and gains asagainst longer term holds. The aim then will be to make the maximum amount of capitalgain in the shortest possible period.

I would probably be looking to do a series of short sharp deals, moving quickly in and thenmoving out quickly. Property renovation and refurbishment fits the bill well, and to someextent outright redevelopment although I wouldn’t advise a beginner to get involved withthat.

Refurbishment works are good because you can create a new product and with careful costcontrol and by choosing a property which needs the right sort of work the increase in valuewill more than cover the cost. In a moving market this sort of tinkering combined withrapidly rising prices means that you can justify coming back to the market within a relativelyshort time at a substantially enhanced asking price.

A final thought on timing. If you do feel safer following the crowd just remember that it’sbetter to follow in at the beginning of a trend and ride it for what it’s worth, than to tag on atthe end of a trend that has just about run it’s course.

Attribute number three – they take actionRobert G Allen got it right when he said “There’s only one good time to buy real estate; andthat’s now”.

So often in life it’s the things we don’t do which we regret, not the things we do.

13

Sometimes an investor will see something in an opportunity that most others won’t. It can bea bit scary being out in front. It’s easy to spot a good deal when there are so many peoplequeuing up in front of you you’ve got no chance of getting it. It’s a bit more uncomfortableto be at the head of the queue. Good deals do come along more often than you’d think butyou won’t always recognise them, sometimes not even when someone else has exploitedthem before your eyes. Individual investors have different objectives.

Successful property investor investors take action, at the right time, and when that action isin alignment with their goals. Don’t forget, they have planned for this moment and when itarrives, they act.

Try and do the same. Go back and write your goals, think about the timing. Make a plan.And then act. I don’t mean in a reckless way. Of course you must be aware of what can gowrong and be sure that you have plans in place in the unlikely event that something totallyunexpected moves against you.

Some things you can’t guard against and can’t plan for, but don’t let that be your excuse forinactivity. If you are going to win at property it is always better to do something rather thannothing. And much better than doing just anything, is doing the thing you have planned for.

Attribute four – they don’t assume anythingVery little in property is straight forward. Certainly not everything is what it seems to be.Success in property depends upon not taking anything for granted and being prepared to digaround to get to the bottom of the facts. The great property professionals are able to do this,the greatest almost seem to know the facts instinctively. Through a combination ofdeveloping your creative thinking, and experience gained over time, you will be able learnthe right questions you should be asking to get the whole picture.

Digging around is what unearths the opportunities not seen by others, and the pitfalls whichwould otherwise have wiped you out.

People assume too much, almost always to their own detriment. The worst false assumptionis that they cannot afford a particular deal or a particular type of property. Anything ispossible if you really want it, if you are willing to put in the time and effort to make ithappen. But have you checked that you’re not assuming the wrong thing.

When we look we all see different things. That is one of the most exciting things aboutproperty. It is entirely possible that you will see things others have overlooked. You may puttogether two apparently unrelated facts to make a profitable situation, which others have justignored.

Never assume a property isn’t for sale. Never assume that the most obvious purchaser hasbeen approached already. Never assume that there are no problems, either physical or legalof which you have not been informed. Never assume that a vendor won’t sell for less, howcan you know what pressure he is under ? Never assume that a deal is beyond your meansuntil you have tried every possible avenue to get it through.

This is why local knowledge and specialising on a single geographical area can be sohelpful. When you know your patch inside out you will know when something may work orwhen something may not. You may understand when a change of use may be appropriateand when it would not. You may see demand for something long before the market has

14

spotted it and know when to sit tight. You will know who is looking for what and why. Youwill know the right time to move. All this comes through digging and learning and assumingnothing, being open to every possibility and playing with the permutations. You must neverstop being creative when thinking about property.

Attribute number five – they are patient at all timesI think it is true that with property things either happen extremely quickly, or they happenslowly. One of the attributes of the world’s great property investors is that when things aregoing slowly they are able to keep their heads and their focus and if necessary just stop andwait. In other words when they have to be they are supremely patient.

If you want to be successful in property you will have to accept that this is a long termcommitment. If things happen quicker than you’d planned, that’s great. If not look to thefuture and content yourself that your assets are growing like a great strong tree. You can’talways see it but it’s happening.

Property is illiquid. This paradoxically is one of it’s greatest strengths and one of it’s greatestweaknesses. Buying takes time and selling takes time. Putting deals together takes time.There are always many details to check and attend to. It can take time to make all the piecesfit.

All property is in the control of people and people are unpredictable and irrational. Theydon’t always fall in with our plans. Deals and situations need to be patiently cajoled andnurtured.

The property market is also a function of fashion. What’s in today will be derelict in adecade. Some things come, others go out. Irish theme pubs and out of town shopping werethe flavour of the month. Then it was call centres. Now it is e-commerce distribution centres.If you spot the next trend coming you may well have to wait to make your move. The greatinvestors do wait.

But the great investors don’t use waiting as an excuse for doing nothing. They are preparingand making plans, attending to every detail in advance so, when the waiting is over, they areready to act and they act immediately.

There are always things to do. There are always other deals to be done. Each one will gothrough in time. The great investors just seem to know when that time is. If you are patientand learn, with experience so will you.

Attribute number six – they invest enough to make it countIn my opinion one of the great myths of investment is that you should spread your risk anddiversify. This is explained as being your insurance policy against something going wrong.The more you spread your investment into different things the less chance there is of all ofthem going wrong together.

I see two things wrong with this approach. If you are reducing the chances of it all goingwrong, conversely there is also less chance of anything going right.

Second, if you try to do a bit of everything then you will almost certainly become a jack ofall trades and master of none.

15

The great property investors stick to what they know, love and feel comfortable with andthey get very, very good at it indeed. This is really another example of the great investorsbeing totally focussed.

Another aspect of this is that they have self-belief. If they really feel that their judgement iscorrect they back it with everything they have got, whether in material sense with theircapital, or in an emotional or intellectual sense. If they believe something will work, theydon’t pussy-foot around, they go out and do it. As I’ve already said, they take action.

And finally….Attribute number seven - they love what they doYou can tell by what they say and do that they love their jobs. I am sure that with a fewexceptions most really successful property investors did not go into it for the money. Youknow what they say, that most millionaires are so absorbed with the jobs they love theydon’t even realise that they are millionaires until their accountants tell them

OK, I think that’s set the scene. Now let’s have a go and see if we can do it, after all….

16

Anyone can do it, you just need to try

“It’s the law of supply and demand. Real estate, especially residential property, is acommodity which is in critical shortage and for which there is enormous demand. It is anecessity, not a luxury. People can’t print up 100,000 new homes as they might print up astock offering. That’s why I continue to say ‘Don’t wait to buy real estate, buy real estateand wait’” (Robert Allen, American self made millionaire property entrepreneur)

Have you noticed that the British public are almost totally obsessed with their homes,or at least the value of their homes? Perhaps it’s because we remember the excitementexperienced in the late 1970's and 1980's when house prices were moving so fast that paperfortunes were being made almost overnight. Every one was a jackpot winner and you didn’tneed a lottery ticket to win; if you lived in your own house or flat you were guaranteed abumper pay-out. Now the market’s hotting up again and the same thing is happening.Friends of mine who bought a four bed house in Surrey last year for £200,000 tell me it’snow worth £300,000. I’m sure we’ve all heard stories like that.

Everyone seems to know how much their house is worth, almost to the last penny. Whatmakes this so surprising is that the professional valuers, who tell the Building Societies howmuch your house is worth when you ask for a mortgage, spend at least five years training,including three years at university, and yet most home owners seem to be able to get to theright figure instinctively.

When they retire most people’s largest asset is the equity in their home; in a survey in theUSA a few years ago it was found that the average home owner’s assets were worth thirtytimes the value of a home renter’s assets. Just look at how much the capital value of homeshas increased in this country over the last 30 years. In 1969 the average price of a Britishhome was around £ 4,500. In 1999 alone house prices went up an average 14% and today theaverage house price stands at £ 83,100 (December 1999).

And despite recent proposals to radically overhaul the Capital Gains Tax system, owningyour own home and “trading up” is still the most tax efficient way to make money inproperty; if your home is your main residence for tax purposes, when you sell at a profit youpay no tax at all.

So if you are serious about making money in property the first step is to own your ownhome. It’s probably the most important investment you’ll ever make. It isn’t just for livingin. As the capital value accumulates it’s also a cash machine, a savings account and a sourceof equity for your future deals. I’ll talk more about that later.

But that is by no means the end of the story, it’s only the beginning. As the British public areso naturally good at property I am always surprised that their interest stops at their own frontdoor. Most people don’t seem to realise that there are all sorts of opportunities in theproperty world for every one to explore and exploit, which with a little bit of creativethinking every one can afford.

I have been lucky enough to have spent most of the last 18 years working in commercial andresidential property and have been able to follow the careers and fortunes of individuals inthe property world who never seem to put a foot wrong and who have been tremendouslysuccessful in making money from property.

17

It’s probably true to say that property has created more millionaires than any other type ofbusiness. And it seems that business people who are successful in an another area are moreoften than not tempted into trying their hand at property, even if it is only as a side line.

You would probably think all property entrepreneurs must have had at least a small fortuneto start with and could afford to play with property. For some of them that may have beentrue, but certainly not for all. Many successful property investors have started almost literallywith nothing but by knowing just a little more than the average lay person have built up largeproperty fortunes.

There are several powerful secrets all successful property people use which give them abetter than even chance of being successful . In this report I will teach you what they are andhow to use them so that you can start to build a property empire. At the moment this mayseem like an impossible dream but if you have the time and the desire, and if you put thesesecrets into practice, you too can be a successful property investor.

Let me start by telling you something that may surprise you. Any one can afford to be aproperty investor. It really is true that you can start your own private property empiretomorrow by buying properties for as little as £500, perhaps even less if you shop around.And if you are really clever you can start by getting someone else to pay for them for you,perfectly legally. I know this sounds almost incredible but I’ll tell you how to do it later inthis report.

Without giving away too much now, how successful you will be depends upon how youperceive property, so now is as good a time as any to start you thinking the right way. Youneed to understand that most people don’t think of property as something they can beinvolved with. Perhaps it’s psychological and they are overwhelmed by the physical size andscale of property. Perhaps it’s because they assume that all property is too expensive and outof their price range and they don’t realise that they don’t have to pay the whole purchaseprice themselves.

But the key to building your property empire is to start thinking more laterally, and to start tosee the opportunity and not the building. So this is the first point to remember, the value of aproperty depends on the interest being sold and not on the physical accommodation itprovides.

Flats are a good example. Many people in this country own flats and most flats are sold onlong leases. It is quite usual for the lease to be for 99 years or 125 years and for the “flatowner”, who is technically a long leaseholder, to pay a ground rent of say £50 a year to afreeholder.

A two bed flat in my town costs on average about £70,000 if you want to buy it to live in. Sofor the purposes of this example we will assume that this is the value of the flat to the flatowner.

Now think of the value to the freeholder. Is the value of the flat also £70,000 to thefreeholder? Try thinking of it this way, how much would you pay to get an income of £50 ayear in ground rent from the flat owner. You certainly wouldn’t pay £70,000. In fact atcurrent prices property investors are paying between ten and fifteen times the amount of rentreceived for freehold interests of blocks of flats. So in this example, assuming a ground rent

18

of £50 a year, you will probably only have to pay between £500 and £750 to own thefreehold.

Why would anybody want to buy the freehold of a flat? Well, if they paid £ 500 for anincome of £50 per annum they would be earning 10 % on their money; I will show you someof the basic maths you will need to work out how well your properties are performing, andmore importantly how much you should be paying for them, in a future article. Even if theinvestor paid £750 they would still get a 6.7 % return on their money which is still betterthan they will get in a building society savings account. And there are other ways to increasethe return which I will tell you more about later in this report.

So you can see that it is possible to own a £70,000 flat for a few hundred pounds, althoughof course you won’t be able to live in it, yet. We’ll look at the attractions of freehold groundrents in more detail another time. I hope you are beginning to get the point. It’s true that tobe successful in property you need to engage in some creative thinking but don’t worry, Ibelieve that is a skill most people can learn with practice.

I have written this report especially for private investors who may have limited resources andwant to do something more interesting than leave it in a building society. Even with interestrates creeping up they pay such a small amount of interest at the moment that waiting foryour investment to grow really is as exciting as watching paint dry.

In this report, amongst many other things, I am going to tell you why it’s better to buyproperty using other peoples money, and how to get them to lend it to you, a rough rule ofthumb which will show you how to value investment properties and work out whether youare getting the best return on your money, and about the different types of property that areavailable and why they should be of interest to you.

19

Yes, but not at any price

A layman’s guide to valuationOscar Wilde famously said "a cynic is someone who knows the price of everything

but the value of nothing". If this is true we can assume that cynics don't get very far in theproperty business, because, quite simply, if you don't know the value you can't make a profit.

There are two things that are disastrous for a property investor; either paying too much orselling too cheaply. If you want to be successful you must learn not to do either. This meansthat you must have at least a working knowledge of property valuation.

I mentioned earlier that most home owners have almost an instinctive feel when it comes tovaluing their own homes. That’s because, whether they know it or not, they are using the“direct comparison” method of valuation, also known as the “comparative method” or“market value approach”.

The “direct comparison method of valuation”Simply, this is a method of valuation by which the value of a property is assessed by lookingat prices recently agreed on other similar properties. The more similar the other propertiesare, the easier and more accurate the valuation will be. Ideally, you will be looking for theprice agreed for properties of a similar age and size, in the same or a similar location, and ofa similar quality and with similar amenities.

There is also a presumption that it will be used mainly for vacant properties, although if youwere valuing a property that had been let, and you were able to find identical properties leton identical terms to similar types of tenants, I guess you could apply it if you are careful.However, those circumstances are rare so I mention them only in passing.

So, for example, if you are valuing a three bedroom terraced house in a row of otherwiseidentical three bedroom houses, and two have both sold recently, one for say £30,000 andanother for £30,500, then it is fair to say that the value of the property you are valuing willbe around £30,000.

I should say here that because valuation is an art and not a science precision does not comeinto it. This is why valuers use terms like “in the region of” and “fairly represented by” andoccasionally “in the range of”.

Where there are obvious differences between the properties, you will need to makeadjustments to get to the valuation figure.

If the two properties which have just sold both have a modern full gas fired central heatingsystem but the property you are valuing does not, in an ideal world you would start again bylooking for sales prices of properties without central heating. But let’s assume that there arenone, or that in all other respects these properties are so similar that you feel that you canaccurately account for this one significant difference. The way you may deal with this is thatyou estimate it would cost around £2500 to install a similar system so you knock this off thefigure to give a valuation of “around” £27,500.

Then suppose that in addition to the central heating both of these other properties have beenmodernised and have new kitchens and bathrooms, and the property to be valued is in an

20

unmodernised condition. You may allow another £5,000 for a new bathroom and kitchen togive a value of £22,500.

Time for a word of warning. Unfortunately, even this is something of an over simplification.Any property professional will tell you “cost does not equal value”. The valuation figureyou are trying to arrive at is a reflection of what a purchaser would pay in the open market.So a prospective purchaser may know that it would actually cost £6000 to install a newkitchen and bathroom, but in order to secure a purchase they may offer a price reflecting areduction of only £5,000.

Similarly, you also need to take account of the overall quality and value of the property. Forexample, an allowance of £5000 may be appropriate for a new kitchen and bathroom in asmall three bedroom terraced house, but would be totally inappropriate in a large, fivebedroom, luxury, executive detached house.

The more unique a property is, the less likely it is that you will be able to find directlyrelevant evidence, and the more adjustments you will need to make. In other words, the more“judgement” you will need to use and often this will stray into the realm of “gut-feel” wherethere is no substitute for experience. It’s no accident that valuers spend years training andthen years out in the market learning their trade. But that doesn’t mean that you can’t have ago and be close, or at the extreme, get a feel for whether a proposition is worth takingforward before you start incurring fees and costs. If your initial appraisal suggests that it is arunner then you can get additional professional help.

An interesting aspect of the property market over here is that we tend to consider property infairly general terms. For example, we compare a three bed house with a three bed house, butunless one is significantly larger, we usually make no real adjustment for differences in size.However, on the continent, our European cousins have for many years used the floor area asa direct unit of comparison and will analyse the sale price down to francs per square metre,for example, and then apply the resultant figure to the property they are valuing.

So if a 100 square metre appartment sells for £50,000, i.e £500 per square metre the propertyappartment next door which measures 110 square meters, all other things being equal, willbe valued at £55,000.

This methodology is catching on more and more over here, in particular in high value areassuch as the City fringe in London, and more particularly since the loft style of appartmentcaught on where in effect one buys a “shell” which is then fitted out to your ownrequirements.

A Quick Guide to Investment ValuationsIf you are serious about buying an investment property you will also need to know how tovalue a property which isn’t vacant.

I've tried to keep the theory and maths to a minimum but unfortunately there has to be some,but nothing you can’t handle without a pocket calculator.

It may sound obvious but the key to understanding the valuation of investment property is tofirstly understand what an investment property is and why investors buy them. My definitionof an investment property is a property that produces income, usually in the form of rent –

21

(although not always)- and mostly investors buy them to have the income, although they canbe equally concerned with capital growth.

By this definition any type of property can be an investment, whether it is a house or a flat,an office, a factory, or a shop, or something more unusual like a petrol filling station, a sea-front amusement arcade, a river bank with fishing rights, an advertising hoarding or a radiomast, just so long as it produces an income for its owner.

When an investor values a property he is not really concerned with the physical bricks andmortar, what he is really valuing is the current income or rent, or if he thinks this couldincrease, his estimate of the future rent. If you remember this you shouldn’t go too farwrong.

When you understand this the next thing to do is to take a deep breath and think of valuing aproperty as like looking at your building society account, only backwards. Let me explain.

Suppose you have a building society account which pays you 10% per annum interest andyou want to know how much you need to invest to get £1000 a year in interest. This is easyto work out. If it pays 10% you need to invest £10,000. What would the answer be if theaccount only paid 5%? The interest paid is only half so you will need to invest twice theamount, £20,000. To make it easy you could use the formula:

Capital sum x interest rate/100 = income received

or in this example

£20,000 x 5/100 = £1,000.

Now to relate this to property we need to add one more element to the equation, the "targetrate of return". This is also known as “the yield” and to all intents is the same as the interestrate in the Building Society example.

Usually when buying a property an investor will not be trying to buy a specific amount ofrent but will be trying to achieve a specific return on the money he is investing.

Serious property investors will know what rate of return they want to achieve from thedifferent types and qualities of the properties available. Other than in exceptionalcircumstances these “rates of return” will be market led. In other words an investor will notusually want to pay more for a property than the “going rate” and through keeping an eye onwhat others are paying, perhaps through regularly attending auctions, he will be able toanalyse the sales prices and see what “return” or “yield” is appropriate for particular types ofproperties.

He knows that the “going rate” is really a reflection of the cumulative views of all theindividual investors in the market, and in particular reflects their views on the “risks” and“expectations” for that type of property. An individual investor is at liberty to agree with thatview, or if he thinks he knows something the others don’t, he can bid either more or less.

Remember, investors mainly buy property for the income they produce. So the three mostimportant things the yield will reflect are the current income, whether this will increase in

22

the future, and how secure the income is, that is whether the tenant can afford to pay the rent.This is where the risk and expectation comes in.

Probably the most important of these considerations is the security of the income. If theinvestor finds a property producing a cracking rent, it won't amount to much if the tenantgoes bust. That will leave the investor with an empty building and no rent, the cost of findinga new tenant and, in a poor market, the possibility of having to accept a lower rent to findany tenant at all.

The rule of thumb is that the riskier the income, the higher the target rate of return that willbe required by the investor to tempt him to buy the property. He will weigh up all of theadvantages and disadvantages of a particular property and decide which target rate of returnhe requires to compensate him for the risk he is taking with his money.

So how does this relate to looking at a building society account backwards and how does thishelp us to value a property? Using a hypothetical example, let’s assume I’m interested inbuying a residential investment. Other investments of the quality of the one I’m looking athave been selling at auction recently at prices reflecting a gross yield on the rent of around13%. If my target property produces a rent of say £5000 a year, the most I should pay is£38,500. I can calculate this using the formula I showed you earlier but backwards.

income (rent)/interest rate (yield) x 100 = Capital sum (value)

£5,000/13 x 100 = £38,461, say £38,500

No one should pay more than a property is worth and so you will need to get a good idea ofwhat yield is appropriate for particular types of property. In practice this is easy just bykeeping an ear to the ground and seeing what different properties are selling for. Irecommend going to as many property auctions as you can.

You may be asking how did I know the other properties were selling at prices reflecting areturn of 13%? Well, you can analyse the sales prices by slightly changing the formula againto:

Yield = rent/purchase price x 100

Once you understand the maths you can see that the higher the yield the less valuable theproperty is. This seems a bit strange at first. After all it would be natural to assume that aproperty producing a high yield will have a high value. But if you think about it a high yieldmeans that in effect you get a lot of income by spending not much money. In other wordsyou want to agree a low purchase price relative to the rent.

Let's look at a practical example to give you a better idea. This is illustrated by going toextremes and by and comparing the attractiveness as investments of a batch of lock-upgarages, and a modern town centre office building that has recently been let to a multi-national company.

If you were to do some digging around on recent investment deals to get a feel of whatother investors think about these types of property I would expect today to see sales pricesfor similar properties showing yields of around 15% for the lock-up garages and, depending

23

on who the tenant is, 6%-7% for the office building. Because these yields have beenestablished in the open market through bids at auctions, and negotiations betweenindividual buyers and sellers, they directly reflect the current view in the market place ofthe relative desirability of lock-up garages and offices as property investments.

The 15% yield achieved on lock-up garages is very high compared to the yields achieved forother types of investment property and there are good reasons for this. These are all relatedto the rent.

The first thing an investor will consider before buying a property is how safe the rent is.Lock-up garages don’t provide a guaranteed and constant income, usually one or more of thegarages will be vacant. Some investors need certainty, particularly the certainty of receivingtheir money, and the less certain the income, the higher the yield they will require.

Then there is the cost of owning the garages. They are often located on the edges of estatesand at risk of being vandalised. Of course some areas are better than others and an investormay think that these particular garages won't be under too much threat and so he shouldn'thave to pay out a lot on maintenance and repairs. But he will have to decide whether he isgoing to manage them himself or appoint agents to act for him. He may wish to appointagents if he lives a long way from the garages which would make it impractical for him tovisit them regularly, or if he knows that the current tenants have a history of being slowpayers and collecting the rent could be time consuming.

Lastly an investor will consider the probability of future rental growth and may concludethat although demand for garages in this area is steady there is unlikely to be anyspectacular increase in the rent. It may just about keep up with inflation if he is lucky.

Weighing all this up an investor may conclude that these garages are only worth buying if hecan get a yield or return on his money much higher than he could get if he bought anothertype of property investment. If he thinks the rent won't increase any faster than inflation,and so the income is effectively fixed, he will only get a high yield by paying a relativelysmall amount of money relative to the rent. Looked at another way, the income will have tobe high relative to the purchase price to achieve a high yield.

Because of his research into the market and sales prices acheived he knows that lock-upgarages are currently selling at prices reflecting yields of around 15%. If he thinks that afterallowing for some of the garages being periodically vacant he will get a rent of £4,000 everyyear, he calculates their value to be £26,666, say £26,500, and this is the most that he will beprepared to pay.

The maths looks like this:

Income x100/ Target yield =£4,000 x 100/15 = £26,666 say £26,500

He may think that lock-up garages are so risky that he may not be prepared to pay even themarket value and may need a guaranteed yield of at least 20% before he will even considerbuying. This means that the most he will pay is £20,000 which he will calculate like this:

Income x 100/ Target yield =£4,000 x 100/ 20 =£20,000

24

If the market is valuing garages of this quality at 15% he will have to search around to get abargain at 20%, but more often than not is likely to be outbid by another purchaser and willeventually have to put his money into a more secure category of investment.

The offices let to the Plc don't have the same risks or problems for an investor. Let’s assumethat the tenant is an extremely profitable multi-national corporation, and in real life we cancheck this by ringing up their head office and asking them for a copy of their latest publishedcompany accounts. Most large companies (that are listed on the Stock Exchange) will sendthese free of charge. If the accounts look alright they can be assumed to be a save bet when itcomes to paying the rent. Using property talk they are a "good covenant" and the rent shouldbe safe for the whole length of the lease which could be as long as 25 years if it were grantedsome years ago.

So, unlike the garages, the rent should not only be paid, but should be paid for theforeseeable future and beyond. Investors, as opposed to speculators, often need this certaintyand will be willing to pay for it.

An investment will be even more attractive if, in addition, there is good reason to assumethat the rental value of the property will increase. These offices are located in a primetown-centre location and an investor may conclude that the rental value will grow faster thaninflation. Almost without exception modern commercial leases allow landlords to increaserents periodically and so in time he will get a real increase in his income.

It’s modern practice for leases to make tenants responsible for all repairs and maintenance.This means that the investor will be able to retain the majority, if not all, of the rentalincome, which again will be reflected in a higher price.

In all respects the offices are a much more attractive and less risky investment than thegarages. Investors won't need to achieve such a high yield to compensate them for riskingtheir money, in fact there are likely to be so many potential buyers in the market for this typeof investment, that between them they will push the price higher and the yield lower.

This raises the interesting question of why should a property investor want to buy a propertywith a 1ow yield. Why doesn’t he put his money into an investment which will give him ahigh return such as a high yielding property. The reason is that a low yield implies that theinvestor is confident that the rent is not only secure for the whole length of the lease butthat he is confident that the rent will increase.It will be apparent by now that one of the most important considerations for an investor isfuture rental growth but you may be wondering how and why rents rise and how investorsget the benefit.

Quite simply rents rise when demand for certain types of property increases in aparticular location. For example I have already mentioned the property boom of the l980'swhen shop rents in particular went through the roof as retailers scrambled to open up moreand more shops to take advantage of free-spending consumers.

Commercial properties like shops, offices and factories are usually let on leases foranywhere between five and twenty-five years. Historically the rent would be fixed for theentire length of the lease but because of rent inflation during the l960's and 1970's landlordsrealised that they were missing out as rents achieved on new lettings soared above the rentsthat had been fixed on their other properties. To overcome this problem it became common

25

practice for leases to allow for periodic rent reviews, usually every five or seven years forcommercial property. Normal practice today is every three or five years. Under the terms ofthe lease the tenant will have to accept the increase in rent if the landlord can prove it isjustified by comparison with rents agreed on other similar properties in the locality, or insimilar locations.

It is not so clear whether an investor can expect rental growth on residential investments asthis will depend very much on when the lease was granted. In the past residentialtenancies have been heavily legislated and if a lease was granted before 1987 it is probably aRegulated Tenancy.

If it is, the law only allows the rent to be reviewed every two years and then to a level thatwill almost certainly be below an open market rent. Things have improved since thepassing of the Housing Act 1988 and I shall explain why later in this report. Needless to say,receiving rising rents will have a profound effect. Let’s have a look at an example.

During the boom years of the late 1980's it wasn’t unknown for investors to buy prime shopunits for prices reflecting yields as low as 2.5% - 3%. They were confident that becausethere was strong consumer spending, and demand for shops from retailers was high, shoprents would grow rapidly. They were happy to buy shop properties and wait knowing that atthe next rent review they would benefit from a substantial increase in rent. As a result theyield on the money they had spent buying the investment would also increase dramatically.

For example, our investor may have bought a prime shop in a major commercial locationsuch as London' s Oxford Street, considered by many to be the very best retail pitch in thecountry. Let’s assume the rent is £100,000 per annum and the investor is prepared to makean offer reflecting a yield as low as 3%. This means that he will pay £3.335m which he cancalculate by:

Income x 100/Target yield = £100,000 x l00/ 3= £3,335,000

For a yield this low you may think it's hardly worth the effort to buy the investment and hecould probably obtain a higher rate of interest from a simple building society account.However, our investor, who has been keeping a careful eye on the retail market , knows thatshop rents in Oxford Street have grown so quickly over the last couple of years that at thenext rent review, which we will assume is in three years time, the rent will at least doubleand could even treble. If it does then the yield will double or treble respectively as wecan work out by slightly adjusting our valuation formula:

Income/ purchase price x 100 = yield

£200.000 /£3,335,000 x 100 = 6%

Or if the rent trebles:

Income /Purchase price x 100 = yield

£300.000/ £3,335,000 x 100 = 9%

With the promise of rental growth like this the property will soon be producing anattractive yield and if the market continues to value prime Oxford Street shops at prices

26

reflecting yields of 3% then he will also make a considerable capital gain as thevalue rises in line with the rent.

He paid £3.335m but if the rent received is £300,000 per annum the value is now

Income x 100 /target yield = £300,000 x 100/3 = £10,000,000

So he now has a property producing a 9% yield on his original outlay of capital, three timesthe rental income as when he first bought the property, and an increase in capital value of£6.7m.

In practice, after each increase in rent, the market would push the yield out to reflect thatthere is no imminent prospect of rental growth. However, as retail rents continue to rise theyield will move back in again until the next opportunity to increase the rent arises. So thecapital value will increase, but immediately after each increase in rent, part of the increasedvalue attributable to that increase will be off-set by the increase in yield. The underlyingtrend will be for an increase in capital value but the yield pattern will be stepped.

In real life the calculations will be a more complicated depending how detailed an analysisthe investor requires of a transaction. The purchase price isn't the only money paid out onpurchase.There will be stamp duty which is currently charged at 1% of the purchase price (orthe value of a property, whichever is the higher) on all transactions over £60, 000, 2.5% over£250,000 and 3.5% over £500,000 (April 1999).

Then there will be solicitor's fees for conveyancing and legal advice on leases although forinvestments of the value with which this report is concerned with I wouldn't have thoughtthat this would be more than a few hundred pounds each time. And lastly there will besurveyor's fees for valuation advice and undertaking surveys. Again for smallinvestment properties worth less than £100,000 you are likely to pay around £500 for avaluation and survey if you shop around.

Obviously fees and costs will vary from one property to another and it is largelycommon sense to estimate what they will be in each individual instance. A rough rule ofthumb used by large investors who deal in properties worth hundreds of thousands or evenmillions of pounds is to allow a percentage of the purchase price for fees, which iscalculated as stamp duty at the appropriate rate, plus 1% surveyor’s fees plus VAT, and0.5% solicitors fees plus VAT. This provides a rough guide and will not always be helpfulfor small properties or cheaper investments where there is unlikely to be such an easilydefined relationship between purchase costs and purchase price. It will require adjustmentfor abnormal circumstances such as title problems or a defective lease. These will result inmore legal work and so a purchaser’s solicitors fees will be higher as will the banks legalfees, which will normally be the responsibility of the purchaser.

Once you have purchased a property there will also be ongoing costs of ownership. In theearlier example of the lock-up garages I referred to the appointment of managing agents tolook after the day to day running of the investment, for example organising repairs and rentcollection. Managing agents generally charge 10% of the rent collected for their fee, plusVAT. For a full management service the standard charge is 15% plus VAT. Depending uponthe lease terms and the type of property owned an investor may also have to budget part ofthe rent each year to cover the costs of repairs and maintenance, and will have to insure athis own cost.

27

To get a true analysis of the return on their capital investors will calculate the yield net ofcosts. This means that they will take into account all potential purchase costs and the costs ofowning the property. If we go back to the example of the lock-up garages which ourinvestor calculated would produce £4,000 a year in rent, and for which he wanted a yield ofat least 15%, we saw that he would pay £26,500.

The yield of 15% is what the market is currently paying for this type of investment.However, we can consider the 15% yield to be a “gross yield” because it only takes accountof the rent received. What the investor will want to know is whether he is really getting 15%on his capital.

In this example costs would not include stamp duty as the purchase price would be below thecurrent £60,000 threshold but would include solicitor's conveyancing fees and possiblysurveyor's fees. If he appoints a managing agent to 1ook after the garages and collect therent, they will charge a flat fee of 10% of the rent collected plus VAT. The investor wouldalso be well advised to set aside a contingency sum to cover essential one off repairs andmaintenance. With these costs in mind he can now calculate the total costs of purchase, thetotal income receivable after costs, and the actual return on his money as follows:

Purchase Price ( as before) £26,500Solicitors fees and other costs say £ 1,000Total capital expenditure £27,500

Income £ 4,000less repairs at 10% per annum £ 400less management @ 10% plus VAT £ 470Net income £ 3,130

He can apply these to the formula:

Yield = Income/purchase price x 100

Yield = 3130/27500 x 100 = 11.38%

So he can calculate that the true return on his money, or the net yield, is actually 11.38%.

For the moment, that’s as far as I think I can go on this subject. There’s an awful lot that Ihaven’t said. For example, I haven’t talked about the valuation of leasehold properties, or thevaluation of reversionary properties, that is properties where you know that the rent will begoing up at a specific date to a specific amount. That’s the stuff of university lectures andmusty text books.

But I think I’ve given you enough of a background to be able to undertake a fairly simpleanalysis of sales. and to get a feel for the returns you should be looking for. And hopefullyI’ve given you enough information to do a basic back of the envelop valuation of the typesof investment property you are most likely to be looking at, so that you can at the least cometo an informed view whether a proposition is worth taking further and whether you need totake more expert advice.

28

A quick guide to “residual valuations” and development appraisals

The “residual” method is the principle method of valuing

• development schemes• redevelopment schemes: and• properties for refurbishment.

As well as finding the value of land or a building before redevelopment or refurbishment it isalso a very useful analytical tool for analysing and appraising whether a particulardevelopment or refurbishment scheme is profitable.

As the name suggests the method involves finding the residual value, in other words theamount left over if you take the costs of construction and other associated costs away fromthe end value of the scheme. Associated costs include professional fees, marketing andinterest. If you are analysing profit you will find the residual after also allowing for the costof purchasing the land or building subject to the scheme.

This is a very subjective process and changing any one of the many constituent parts canhave a disproportionate effect on the end result. So the valuation or analysis will only be asgood as your knowledge or research. Like the computer saying “rubbish in, rubbish out”.

Here is an example template of a classic residual valuation to establish the value of adevelopment plot, or a property for refurbishment or redevelopment.

Gross Capital Value (once completed) £Less agents costs of disposal £Less legals on disposal £Net Capital Value £A

LESSBuilding costs £Building finance £Professional fees £Interest on fees £Promotion/marketing £Contingency sum £Agents/letting fees £Developers profit £Total costs £BResidual land value £A - B

The amount left for the residual land value will include an amount for acquisition costs, andinterest on the funds used to purchase the land or property which is rolled up because it isassumed that the acquisition costs occur at the point of purchase.

29

To get to the land value the acquisition costs and the interest can be stripped outalgebraically by:

Sum available for land, acquisition costsand interest (residual land value) £x

Finance on landInterest rate/100 x No of months = y

Acquisition costsCosts x interest rate/100 x No of months = z

1 + y + z = x

Land value = x/1+y+z

If the cost of the land is known, by substituting this for developers profit, the appraisal canbe used to calculate the profitability of a specific project where all costs are known.

Don’t forget that if you are doing a “valuation” a lot of this will be a purely hypotheticalexercise as the market value is often based upon “a market average”. However, if you areundertaking an appraisal, for example to determine the profitability of a particular scheme,then you will use figures that are as accurate as possible for that scheme.

A good example is building costs. On a particular plot of land you know that the only likelyplanning consent will be for a three bedroom house, and that because of prevailing levels ofvalue in the area most developers would construct it to an average specification. On thisbasis you can determine the value of the land using building costs that reflect the marketview.

On the other hand, if you decide that you would like to retain the property and live thereonce the building is completed, you may decide that you want to build to a higher standardthan the market norm. You can then use your estimate of the enhanced building costs todetermine whether this project is still viable.

A word of explanation about the constituent parts of the calculation:The end value of the project, i.e the gross capital value, is found by using either the directcomparison method or the investment method. The cost of sales like estate agents andsolicitors fees are deducted to get to the net capital value. This is the money you would haveleft over when you sell the completed project.

The building costs will already be known if estimates are available. Otherwise you may needprofessional help from a quantity or building surveyor, or an architect.Because in theory building costs only need to be financed as they occur, i.e when thebuilding contractor sends in his bill at the end of each completed stage of building, it is usualpractice to average out the interest charges on these costs. There are two ways this can bedone relatively easily – firstly, apply half the interest rate to the whole of the building costfor the whole of the estimated length of time the building works will take, or, secondly applythe whole interest rate to half the building costs over the estimated length of time forbuilding works.

30

Promotion and marketing ? Well once you’ve built it, there’s an assumption that you’ll wantto sell it. How much should you allow? For smaller schemes this will probably be wrappedup in estates agent fees, and you won’t need to make a separate allowance here.

Developer’s profit. If you are doing an appraisal this will be whatever return you wish tomake on the project. If you are doing a valuation you will use figures that reflect what anaverage developer in the market will require at the moment. Usually this won’t be less than15% of the end value of the project, but can be 20% or more.

Agents and letting fees are again usually applicable to larger schemes. For smaller schemesthis figure will most likely include an allowance for promotion and marketing.

Although a residual can be very complicated the rationale behind the method is sound anduseful. However, you may be wondering whether it can be quickly and easily applied tosmaller projects. I’ve set out on the next page a very basic residual I developed on aspreadsheet, which I have used to appraise the viability of a number of refurbishmentopportunities I have looked at. I must stress that this is only a very rough and ready reckonerand I wouldn’t argue for its infallibility as a valuation tool. However, it has provided mewith enough of a guide to be able to assess from my desktop whether a project is worthresearching in more detail. I’ve made it fairly adaptable so it is relatively easy to add ordelete fields to make it bespoke for each individual situation.

The example shown is for a relatively small refurbishment of a low value house. You can seethat the end profit was minimal and this opportunity was considered not to be profitableenough to justify the time and effort involved.

31

Gross sale price 77500agents inc Vat 1821.25legals inc Vat 235Net sale price 75443.75LESSRefurbishment costsRoofDampTimber 160Bathroom 280Kitchen 1250Wiring 1128Plumbing 300Windows 1950Cheating 2000CeilingsReplastering 210clear gdnSkiphire 300Decorating 1000Contingencies 2101.85Total Development 10679.85Other costsInsurance 397.37SurveyValnTravelling 804.96Legals 462Electricity 20.03Gas 22.53WaterBank 17.5

1724.39

Purchase Price 54000

gross profit 9039.51FinanceDevelopment for 3 mths 133.49813Property for 14 mths 4410Arrangement feeprofit on property 10 %legals on loanTotal Finance costs 4543.4981Stamp dutynet profit 4496.01

32

If you want to write your own spread sheet be careful about how you handle the interest andfinance section. It is easy to get dragged into circular arguments and achieve onlymeaningless mathematical solutions.

As ever I advise that if you use your own residual model be very cautious about relying uponit. By all means use it as a rough guide, but before you spend thousands or even hundreds ofthousands of pounds of your own money, get an independent view and take professionaladvice. You will probably have to pay for it, but there’s no question that it will be moneywell spent if it means that you avoid an expensive mistake.

33

Why You Don’t need to be able to afford to buy a whole property

The secret almost every successful property investor hasused is…

I’m now going to tell you probably the most important secret known by andused by all the great property investors. I think you are going to be surprised. “Nobody everrises above mediocrity who does not learn to use the brains of other people and sometimesthe money of other people too… it takes a combination of the two”. So said Napoleon Hill,the man who through his philosophy of personal achievement probably helped to createmore self made millionaires than any other person in history.

The trouble with using other peoples money is that debt makes us squeemish. From an earlyage we are told that debt is bad and should be avoided. And that is true, or at least partlytrue. There are certain types of debt that we should avoid at all costs, but like it or not anybusinessman will tell you that most businesses cannot grow without the proper use ofinvestment debt.

This is especially true of property where the sheer scale of the figures involved mean thatonly the super rich can afford to be seriously involved without some form of debt. If youwant to build a sizeable and profitable property investment business the truth is that you willrequire some short term debt.

So the first rule is “ investing in property works better when you use someone else’smoney”. I’ll show you later how borrowing the money you need is probably easier than youthink.

There are two main elements to this first rule that I would like to show you.

Firstly, when you are looking at a potential property to purchase don’t be put off by thepurchase price. Remember that you don’t need to have the monetary equivalent of the askingprice, or put a better way, you don’t need to be able to afford to buy the whole propertyoutright.

Most people don’t take the idea of themselves as being property investors seriously becausethey assume that they can’t afford to buy properties. You may think that they have a validpoint, after all property is expensive. But the simple fact is that you don’t need to be able toafford the asking price, you just need to be able to pay the part of the price that the bankwon’t lend you.

I’ll show you later that even if you do have enough money to buy an investment propertyoutright, it will almost certainly be to your benefit not to use all your own money.

You may be able to apply this rule in other contexts but I think it is best illustrated if we lookat investment properties. For simplicity I shall refer to residential investments but theprinciples apply equally to commercial properties. Most banks or other lenders participatingin the buy-to-let scheme will lend between 75% and 80% of the lower of the purchase price,or the value of the property, depending upon the individual circumstances of the case.

34

This means that when you want to buy a property the question to ask is not “can I afford it?”but “can I afford 15% to 20% of it?”

Looked at another way, if you have a sum of money which you intend to invest in property,for example let’s say £10,000, rather than looking for a property worth £10,000 you shouldbe asking yourself “if I can borrow 80% of the purchase price where can I find a suitableinvestment costing £ 50,000?”

As a purely hypothetical example, suppose you see a nice flat that you think would make agood investment when it is let to a tenant. Because it’s in a good area you are sure it will beworth keeping for a few years because the value is almost certain to go up. You have foundout that the asking price is £62,500 but you think you can get it for £60,000. You askyourself “Can I really afford a property worth £60,000?” Wrong question. If you can borrow80% what you should be asking is “can I raise £12,000? ”

This is why I think that probably the most important part of raising money for property isn’tto finance the purchase as such, but is to finance the balance not covered by the loan. If youcan find the first 20% to 25% of the purchase price, and as long as your existing income andthe rental income from the property you want to buy cover the lenders criteria, you will beon your way.

If you have sufficient savings you will be ready to put in an offer and start talking to a brokerabout a loan for the balance. If you don’t have the cash in the bank a flexible lender mayallow you to use equity in your home as security against which you can raise the money forthe deposit through a second mortgage, or an equity release loan. I’ll tell you more aboutlenders and how to approach them next month.

Now, let’s look at the second reason why “investing in property works better when you usesomeone else’s money. The reason is gearing, and this really is the star of the show. Let meshow you the amazing and powerful affect that it can have on your personal finances.

If there is a key to success in property this is surely it. When you understand what happensyou will see why buying property with other peoples’ money is much more profitable thanbuying property with your own money. Remember I said that even if you do have enoughmoney to buy a property outright it would pay you not to use all your own money? Let meprove it.

Going back to our earlier example of the flat let’s assume that your offer f £60,000 isaccepted and your purchase goes through. As you are cash rich you don’t bother with a loanand you buy the property outright. The flat is let to a decent tenant at £500 per calendarmonth which you know is the going rate in that area. We can easily calculate that if theproperty cost £60,000 and the income received is £6000 per annum, you will be getting areturn of 10% on your capital invested. Not bad.

But now let’s compare this with the return you will receive on your money if you borrow tofund part of the purchase price. Still using our earlier example, we know that you haveaccess to £12,000. Your mortgage broker has told you that it will be possible to borrow 80%of the purchase price of a property and so, applying the rough rule of thumb, you startlooking for a property with a value of five times the amount of cash available to you.

35

You are offered a flat which is let at £6000 per annum, and from your research and fromattending property auctions you calculate the property is worth around £60,000. As you canget an 80% loan you can afford to pay this.

To keep things simple let’s assume that you can obtain an interest only loan at 7.5%.

As the purchase price is £60,000, you will be able to borrow

Purchase Price £60,000Loan ratio 80% 0.8Amount Borrowed £48,000

The interest you will pay on the loan is:Amount Borrowed £48,000Interest charged at 7.5% 0.075Annual interest payments £ 3,600

The interest will be paid out of the rent so you will make a profit of

Rent received £ 6,000less interest £ 3,600Profit on rent £ 2,400

After paying the interest on the loan you will be left with £2,400 each year.

As before we know that the gross rent, that is the rent before the deduction of interestcharges, represents a return on the full purchase price of 10%. The return on the purchaseprice represented by the profit left over after the payment of the interest is only 4%.

But let’s see what the return is on the money you have actually put into the deal. You haveput in your available cash of £12,000 and you are now receiving a net profit of £2,400 eachyear. We can calculate that the return on your capital is:

Profit (net rent)/capital (own money) x 100 = £2,400/£12,000 x 100 = 20%.

So, by paying only part of the purchase price yourself and borrowing the balance you havebeen able to increase the return on your money from 10%, which is all you would get if youpaid for the whole property outright, to a massive 20%. In effect you have doubled yourprofit just by borrowing the majority of the purchase price.

This means that even if you had £60,000 and could afford to buy the property withoutborrowing, you would be better off splitting your capital to fund the purchase of severalproperties, and borrowing the balance to increase your total return. In this instance if youbought five identical properties, the profit you would receive in actual rent would increasefrom £6000 per annum to five times £2400, in other words £12,000 per annum.

This is a very simplistic example just to illustrate the point. In real life the calculationswould be more complex and would have to reflect extraneous matters like stamp duty, andthe costs of arranging the various loans. It’s also unlikely that you’ll find five identical

36

properties let on identical terms. But it does prove that in property you don’t want to putyour eggs all in one basket, it’s better instead to spread your capital over several purchases.

This is the power of gearing and the effect is even more pronounced with higher yieldingproperties, and when you are able to arrange loans at lower interest rates.

That’s why being able to supercharge the returns on the money you put in makes property soattractive, and gearing a property investors best friend.

These kinds of returns aren’t the sole preserve of residential properties. A couple of yearsago I was offered a secondary shop in a fashionable and historic south east town, let to a soletrader. The lease was a little bit short having only about 9 years left to run, which somelenders may feel uncomfortable with, and the rent is £20,000 a year which is still slightlymore than the current market rental value, having been agreed in the late 1980’s. However,retail rental values in the town were picking up and it seemed that they should catch up againfairly quickly if things kept going the way they were.

The freehold of the shop used to be owned by a property company but they went bust and aReceiver was appointed to dispose of the assets and pay off the creditors. This property soldfor £75,000 representing a return on the sale price of 26.6 %. But assuming that thepurchaser was able to fund this purchase the return on his money would be substantiallymore.

Let’s assume that the buyer was be able to borrow at 9%, which is a fairly commercial ratebeing 2.25% over the base rate as it then was. Also that as this is a fairly tertiary shop with aless than substantial tenant the bank would want to reduce their risk by restricting the loan tovalue ratio to 60%. For simplicity let’s again assume that the loan will be interest only.

If the investor could borrow 60% of the purchase price, ie £45,000, he would have to put in£30,000 of his own money. We can calculate that the return on his own capital is 66.6%.

In the property world the expression “you get what you pay for” is often proved to be true,and I wouldn’t recommend a purchase like this for a first time buyer or inexperienced buyer.I’ll show you in a later article what influences whether a yield is high or low, or somewherein the middle. In this instance the yield reflects the risks of ownership, for example if thetenant went bust this shop could have taken some considerable time to re-let, and then almostcertainly at a lower rent.

This is the type of property you’d want to tuck away in an existing portfolio, if it works outyou’re quids in, if not the rest of the portfolio will cover it until it comes good. Even so,there are plenty of properties out there which are suitable for smaller investors, and wherethe benefits of gearing can be reaped big time. So start looking and in the meantime startsaving up for your deposit, with any luck you’ll need it sooner than you think.

37

Other peoples money and how to get it

Now that you can see that not only do you not have to be able to afford a wholeproperty, but it actually works out better that way, we’re going to have a look at borrowing.

If you have enough to cover around 25% of the purchase price, and you concentrate onbuying reasonable quality investments at the right yield, you should be able to borrow therest from the bank.

For a lot of us this is where things start to get scary. Let’s face it, until you’re established andhave proved you’re a good risk, no bank is likely to throw wide the doors and welcome youwith open arms when they see you coming.

As an aside, one of many great ironies in the property world is that once you are established,you can afford to lose millions on highly speculative and disastrous ventures, and still beconfident that you will get a another backer. If you don’t believe me, just look at the numberof big names who completely blew it in the 1980’s along with millions of pounds of otherpeoples money, who are making a come-back at the moment.

Have you considered what it means to be a property owner, and how much you are preparedto pay and risk to achieve this? How are you going to feel when you put your money on thetable? How are you going to feel when you spend the bank’s money? After all, it’s easy to beglib but the chances are that you won’t get a penny without signing a personal guarantee, andif it all goes horribly wrong these people will think nothing of taking the shirt off your back.

So, you’re absolutely sure you want to buy property but don't have any ready money of yourown. Don’t worry. You've heard the expression "you need money to make money". Thismay be true, in part, but it doesn't say that it has to be your money. Actually I think thatdesire, commitment and action are more important to succeed in property. If you wantsomething badly enough you will find money somewhere, somehow. You’re just going tohave to use creative thinking.

There are two main places to start looking. Using very broad and general headings the firstof these is the “bank”, which includes all formal lenders and lending institutions and brokers,and the second is friends, relatives, and acquaintances including prosperous individuals youtake on as backers for specific projects.

Here’s a brief guide how to get what you need.

The BanksYou’ve probably already worked out for yourself that paradoxically the more money youhave the easier it is to borrow. This is how the banks operate. If you have money they'll lendyou more. If you don't have money it’s going to be hard work. The description of a bankeras being someone who will lend you an umbrella when the sun is shining but who wants itback when it rains is absolutely true.

There is one thing you will have to accept from the start. Unfortunately no institutionallender is going to lend you 100% of the purchase price even if you go through a broker. Thebest you are going to get is probably 75% to 80%. You are also going to have to have pay

38

more in interest than on a standard residential mortgage; commercial rates are usually quotedat about 2% to 2.5 % above bank base rate but you may well be able to haggle and get thisdown by a quarter of a point. I have tried this successfully before but some lenders won’tbudge.

A word of explanation, “commercial” in this context refers to your status, not the type ofproperty you are purchasing. As the loan is not for buying your principal dwelling, but sothat you can make a profit, the bank will treat you as a business. So you can be buyingresidential properties and paying “commercial” interest rates. This does not apply when youapply for a loan under the ‘Buy to Let’ Scheme which we’ll look at later.

The one thing you can count on is that for all their training bank managers are not businesspeople, their role is to be administrators, and you cannot expect them to understandentrepreneurs. Unfortunately, the moment you sit down in front of a bank manager you arenegotiating from opposite interests. Business people like you and me are by definition risktakers, but bankers are conservative; it’s their job to protect their money and make sure theymake only safe, sensible loans. If you are going to succeed you will need to learn how to getaround that obstacle.

Approaching a BankIf banks make their money by lending money, why do they make it such hard work toborrow from them? The answer is, of course, that bankers know that if they make the wrongloan they lose money and their jobs. This is why it’s up to you to prove you’re worth therisk.

When you start it’s worth taking time to select your target bank carefully. Some banks aremore flexible than others. The big four or your high street bank may feel more comfortableto deal with but the smaller foreign banks, which are mainly clustered around centralLondon, are often prepared to be more flexible. However they are more likely to want tolend larger sums than you can afford to borrow.

Before you choose a bank to make your first approach it’s worth doing some homework.Even the main high street banks vary in the way that they deal with enquiries andapplications. When I first started and wanted to borrow some money to buy a property torefurbish, I contacted all the main banks in my town to ask for an appointment to see themanager. Before they would make an appointment I was asked a few questions to find outwhat I wanted to talk about so I explained that I was interested in buying a property forrefurbishment but I wanted to establish whether in principle whether the bank would beprepared to lend to me, and if so how much. Then I could work out how much I could affordbefore I went out and spent time seriously searching.

To me this seemed extremely logical. In fairness for three of the banks this wasn’t a problemand I was able to make appointments to meet the respective bank managers. However, forthe fourth bank this was impossible. I was told quite categorically that I would not beallowed to see the bank manager unless I had first found a property. In vain I tried to explainthat this was going about things backwards but this didn’t cut any ice at all. The girl on thephone wasn’t at all interested in letting me through their door and wouldn’t even transfer thecall so I could explain to someone who may understand. Needless to say I didn’t do businesswith them.

39

So don’t waste your time, give them a call first and ask to speak to somebody who knowsabout business loans. Briefly explain what you are trying to do and ask them whether theywould be interested in lending on this type of proposition. If they say that they would beinterested ask them what information they require and what type of loans they actually give.By this I mean some idea as to whether it would be capital and interest, or whether theywould give you an interest only loan depending on the type of loan you need.

At this stage, as you are still pretty much only an anonymous enquirer, it’s worth asking theiradvice about the best way to approach them for a loan and see what they say. Obviously themore junior the person you’re speaking to the less useful information they are likely to giveyou, but you never know; they might just give you one little tip which may swing thingsyour way when you make your application. Finally, while you’re on the phone, ask if youcan have the name of the person who they think would be the most experienced in dealingwith your type of proposition and make an appointment to go and see them.

You know that you only get one chance to make a good first impression. This is crucialwhen you first set foot in the bank for a face to face meeting with the person who willultimately decide whether you can be a property entrepreneur. This is why you should gothrough the hard slog and do your homework before the meeting.

First things first. When you make an appointment insist on seeing the most senior personpossible. What you don’t want to have to do is to explain your proposition to somebody whothen tells you that they are not in a position to make a decision and will have to refer you on,you know, the old “ Can I make an appointment for you to come back next week ?” This is awaste of your time and is extremely frustrating. In some cases even the most senior personyou’ll have access to, the local manager, may have to refer your application on to a regionalor head office.

A word of warning. Things in the banking sector are changing fast. I telephoned my branch afew months ago to make an appointment with the manager about funding my next deal. Iwas told that loans are no longer dealt with at branch level. I was given another numberwhich was evidently a regional call centre where, going by the voice, a spotty seventeen yearschool leaver who knows nothing about business, property or customer relations told me Iwould have to fill in a form. I’ve now closed that account and bank where I can go in to seethe business manager face to face, and where she is interested in my business and helping itgrow.

Plan aheadBack to the meeting. Before you go you must prepare a business plan. This doesn’t have tobe terribly detailed; but the mere fact that you’ve prepared one will show you are seriousabout what you are doing, and you have some business acumen and financial maturity.

40

This is what it should contain…

Banks love cash flow projections, ideally on a monthly basis for your first year of trading,and then at least quarterly for the next two years trading. Your cash flow should showincome, expenses and profit.

Your income projection should explain where the money will come from, your expenseprojection should show exactly how much everything will cost and when, and your profitprojection will show what is left over when you have paid your expenses from your income.

You shouldn’t need to produce reams and reams of pages of figures to begin with, the bankmay ask for clarification and more detail later. It will be helpful if you can identify whereyour maximum loss will occur and where you will reach break even. This shows that youhave thought about the implications about going into business carefully and that you’replanning to cover all eventualities.

A lot of banks now provide, free of charge to prospective business customers, a windowscompatible programme which will help you to write a full business plan along with a fairlydetailed cash flow.

Then you need a brief overview of your business, what it is, what you’re trying to do, andwhen you’re trying to do it by. If you are interested in buying standing investments it wouldbe useful to give a brief description of the type of properties you would like to deal with,their likely value, the geographical area in which you’d like to buy them, the amount of rentthey are likely to yield and the cost of running them. It’s also useful to show that you’vethought about how you will find these properties such as through estate agents or at auctionand who is going to manage them, whether it is yourself or a management company.

If, on the other hand, your primary interest is development properties or properties forrefurbishment, it would again be useful for the bank to know the value of the properties youwill be targeting, the likely cost of refurbishment, the likely sale price afterwards and thelevel of profit that will give, how long you intend to hold each property for and how you willsell them once completed.

I learnt very quickly that it’s easier to talk about a real situation rather than a hypotheticalone. It will be easier for you to prepare a business plan if you actually have a specificproperty in mind and so you can give some certainty to the figures involved. If you haven’tfound a property you want to buy yet, find one that is available for sale that you can use anexample to get an “in principle” reaction.

Ideally you should produce a CV unless you really have nothing of any significance to puton it. Let the bank know exactly who you are and what you have done. A CV is great if youhave a track record of being successful in some other business as, rightly or wrongly, humannature being what it is, there’s a presumption that if you can do one thing well you can do allthings well. This actually doesn’t make any sense at all but there’s no reason why youshouldn’t use it to your advantage.

41

Be prepared to be vettedWhen you walk into the bank there are five things that they will want to check out. The firstis your character. It goes without saying that they don’t want to deal with a crook who’sgoing to disappear with all the money. Related to this they’ll also want to check yourbackground as they equally won’t want to deal with somebody with a track record of serialbankruptcy.

They’ll check your ability to repay the loan. This is where all your cash flow projectionscome into their own and you should show them how you intend to cover the interestpayments on a month to month basis and where that money will be coming from. This maybe in the form of rent if you are buying investment property, or from your existing income.This is when you’ll need proof of income and photocopies of all your bank statements for thelast 6 months.

Then they’ll check your collateral which is the security you can provide in the event thatthey need to recall the loan. To be helpful and to show that you know what you’re talkingabout it would be useful to provide them with a pre-prepared personal asset statementshowing your net worth, which is calculated by listing your assets such as cash in the bank,stocks and shares, or equity in an existing property, if any, and by listing your total liabilitiessuch as bank loans, mortgages, overdrafts or the amount currently outstanding on your creditcards. Obviously if you are raising a loan against a property then this will itself providetowards the collateral.

Next they will want to see how much capital you are putting into the venture. After all itwould be difficult to persuade them to finance something which you are not prepared to riskyour own money on. This is sometimes known as “hurting” money because the bank willwant to see how much you’re prepared to be hurt if your venture doesn’t work out. It’s asign of your faith in your own ability and your own proposition.

The last thing they will check will be your current credit status. I’m not going to go into gointo this here but if you have a poor credit status there are ways of repairing it and companieswho will help you do that.

Using Your Existing AssetsWhen you put up collateral against a loan you’ve got to be prepared to lose it. The bankaren’t playing games and if for any reason the loan does go wrong they will take your assetsoff you. Even if you try to get around this by setting up a company to borrow from the bankthey’re bound to want personal guarantees from you backed by whatever assets you mayhave. Most bank loans are really personal loans, personally guaranteed and the bank reallywill take everything you have. It’s obvious but before you launch into a business you reallymust sit down and think about what you’re risking if it doesn’t work out.

What sort of collateral do you have which may help you raise a loan? If you are in your ownhome with or without a mortgage and have equity you can raise a loan against it. If you areable to do this then you have several options.

The first is to ask your existing lender to remortgage your property, or alternatively you canapply to them for an equity release loan. If you have enough equity and a satisfactory

42

payment history either option should be plain sailing if your current income is sufficient tocover the new repayments.

There are four advantages of using your existing lender:

Firstly the ease of setting up the loan as the lender will know and trust you;

You will pay residential mortgages rates of interest which will be cheaper than takingout a commercial loan - interest rates for commercial loans can be around 2% higher;

Most existing lenders will lend you up to 90% of the value of your property(assuming you have the sufficient salary to cover the repayments); and

The fees of setting up the loan should be reasonably cheap, especially if you opt foran equity release loan as opposed to a remortgage.

Raising money against your existing assets requires some common sense. Inevitably thebank will ask what you want the money for, and although some may not be particularly keenon the idea of using it for investment property, I think attitudes are changing. If the proposedpurchase provides adequate security you should be able to persuade them to go along withyou. Don’t try lying and tell them that you’re going to use it for house improvements orsomething else. Although they may never find out, lying to the bank is not only morallywrong, it’s illegal, it’s called fraud. And if they were to find out you will lose your flawlesscredit rating which you’re now going to spend your lifetime trying to improve.

If your existing lender isn’t prepared to help then there are other possibilities for you toinvestigate.

I recommend shopping around to find another lender who will remortgage for you. Thismay be easier than you think because at the moment the mortgage market is verycompetitive and a new lender is more likely to be flexible to get your business. They mayeven be prepared to pay any penalties you may incur for the early repayment of your existingmortgage. Arranging a remortgage will cost more than arranging an equity release loan fromyour existing lender because of the extra legal fees which are required, but this is well worththe money spent if it allows you to launch your property business.

Flexible mortgages

God bless Richard Branson. I don’t know how much credit he deserves but it seems that thenumber of flexible mortgage products on the market has increased greatly since he broughtout the Virgin One account. There are now around twenty different flexible mortgageproducts on offer, accounting for 11% of the market in 1999. It is predicted that this couldrise to 50% by 2004.

If you have unused equity in your home using this or a similar product may be a way ofreleasing it for an investment purchase.

All of these products vary slightly so you need to shop around to get the best package foryour needs. I’ll give a brief overview of the main points here, but if you want to know more I

43

suggest that you go through the various mortgage magazines that are available in your HighStreet newsagents, and then contact the various lenders direct for a chat and an informationpackage.

I don’t know whether the Virgin One account was the first of its type, but I think it’sprobably the best known. The way it works is very simple. Your house is valued and youagree an amount you can borrow against it. Initially this can be up to 95% of the value, butthe higher the proportion you borrow, the higher the rate of interest you will pay. Anyexisting mortgage is paid off and any positive balance is available for you to spend as andwhen you want. You are provided with a cheque book and credit cards to access your fundsand you can spend up to your limit without giving notice.

In return you will agree to pay your salary into the account (if you are self employed youagree to pay in a monthly equivalent), show you have suitable life cover, and agree a date bywhich you will pay the loan off, which has to be by the time you retire. You can choose howyou do this, whether by endowments, PEP’s, ISA’s or monthly repayments, or by acombination. If, as you pay money in your equity begins to grow again you can spend that atanytime too, as long as you don’t go over your pre-agreed limit. When your account is incredit you receive a reasonable (that is, reasonable for a current account) rate of interest.

The obvious advantage of this scheme is the flexibility, you can have instant access to yourequity. In fact as the value of your home increases you can increase the amount you canborrow.

When you do withdraw your equity, interest is charged daily so you are only ever payinginterest on the money you borrow, as you borrow it. As you pay money back into youraccount, even if you pay off the whole loan, there are no redemption penalties.

The only downside is that you will incur extra charges such as solicitors fees and valuationfees when you set it up. However, presumably to a greater or lesser extent, this will alsoapply to the other available schemes.

Just a quick comment on the conditions of use. This is a personal account and “may not beoperated for the purpose of any business or profession”. However, I can’t see any reasonfrom the small print why you shouldn’t use an account like this to free up equity to fund aprivate portfolio purchased in your own name, but I suggest you ask them the questionbefore you take the money.

Standard Life, Legal & General, Woolwich, Abbey National and many others have broughtout similar flexible mortgage packages. These works more like a traditional mortgage and inthe main don’t have an attached current account facility. What they do offer is access to anyexcess equity in your home up to a pre-agreed limit, usually 90% of the value on one monthsnotice. Like the Virgin One account you can pay lump sums, or make overpayments, to buildup the equity and reduce the cost of the loan.

Presumably because there is no current account facility and access is not instant, thesepackages seem to charge a slightly more competitive rate of interest than the Virgin account.Also some absorb the legal and valuation fees when you transfer your mortgage.

44

The ‘Buy to Let’ Scheme

New lending products are always coming onto the market and over the last few years severallenders have started offering loans specifically aimed at small investors who want to buyresidential properties for letting as an investment.

This is the ‘Buy to Let’ Scheme, a tailor-made loan package aimed at small, privateinvestors.

Before the ‘Buy to Let’ Scheme (BTL) was introduced it was incredibly difficult, if notimpossible, for a private investor on an average income to raise funds for purchasinginvestment properties. Any loan application was treated as a commercial proposition andhigher “commercial” rates of interest were charged. More significantly the maximum loanavailable was calculated based on a multiple of the individuals salary, and the potentialincome from the investment property was totally disregarded.

In the 1990’s, ARLA, the Association of Residential Letting Agents, saw that there was anopportunity to encourage private renting and along with half a dozen or so lenders set up theBTL as a joint initiative.

Now private investors can invest in rented residential property at normal domestic, notcommercial, rates of interest. And full account is taken of the rental income to be receivedfrom the property.

As I say, there are about half a dozen principal BTL lenders. I think it would be unfair tohighlight any one particular scheme here, so I have tried to give a composite view. Eachscheme varies slightly in the detail so you should not take this as a definitive guide, butshould shop around and talk either direct to each lender, or to a mortgage broker, to get thepackage that best fits your needs and circumstances. However, here are the main features :

Most lenders will provide finance for an unlimited number of properties, usually up to acumulative value of £1m. Some lenders have a limit of £250,000 per property.

Lenders will now take account of the rent receivable from the property. There is someflexibility if the property is not fully let when you acquire it. The lender will take account ofthe potential rent when let, not the rent received at purchase. Naturally this assumes that thevacant element will be readily lettable.

Generally lenders are now less concerned with “earnings multiples” in calculating themaximum loan available. Some schemes require a minimum level of income - £20,000 for asole applicant, £30,000 for a joint application. The loan is then limited by the rent receivable.

Multiples of the rent receivable vary. Lenders will be looking for the rent to cover between130% and 150% of the monthly repayments calculated on the basis of an interest only loan.

Loan to value ratios vary. There are full status schemes requiring proof of income whichallow 75% or 80%, the latter being charged at a higher rate of interest. There are also non-status schemes allowing loan to value ratios of 60% to 70% at higher rates of interest.

45

Other schemes limit the loan to value ratio according to the size of the loan, for example80% up to £250,000 or 60% up to £500,000.

The balance must be from your own funds and can’t be borrowed.

With the full status schemes, if you are employed, you will be required to provide proof ofearnings. If you are self-employed you will need an accountant’s letter, or the last three yearsaudited accounts, or the last two years agreed tax accounts.

Loans are available on a repayment or an interest only basis. Most schemes don’t require anendowment policy or life cover.

Some lenders will lend to limited liability companies that have been specifically set up tohold residential investments, but this will be subject to full personal guarantees fromdirectors.

Certain types of properties will be excluded such as commercial and agricultural properties,properties of non-traditional construction, properties designated as defective under theHousing Act, and others.

Unless you are an experienced landlord and are able to negotiate personal terms, it willusually be a condition of the loan that you take advice from an ARLA member agent aboutthe suitability of any property, and the lender may require an ARLA agent to be appointed tomanage the property for you.

There are quite a few lenders who are involved in the BTL; Paragon Mortgages ( they usedto be known as National Homeloans), Mortgage Express, Halifax and others. It’s well worthgiving a few a ring, or wandering into your local ARLA accredited estate agent and seeingwho they would recommend.

Other forms of “Bank” borrowing

Overdraft FacilitiesWhat about an agreed overdraft limit? You may say ‘big deal, that’s not going to get me veryfar’. Sure, but how many bank accounts do you have? Why not have several small loanswhich every one is happy with rather than one large loan which is difficult to arrange ? Icurrently have 8 separate bank accounts with 5 separate banks either in my sole name orjointly with my wife. Together, they provide me with instant no questions asked credit ofover £20,000.

I have a Gold Card account which allows me instant access to £10,000 and I have on-linecredit to a further £8,500 with another bank which I arranged when I was buying a car andneeded a short term loan. Setting up the facility took about an hour on the phone while thebank checked my details and validated the purpose of the loan but now that my creditworthiness has been established, and the car has been bought, I still have access to thatcredit, with no questions asked. All I have to do is write myself a cheque and repay theinterest at a set minimum level every month.

46

That is enough for my needs but without having to be deceitful or underhand I could arrangeto have other larger amounts of instant credit arranged against my other bank accounts. Likemany clearing bank accounts they already have a fixed maximum level from when I firstopened them and together allow me something like another £2,000 or £3,000.

Credit CardsOver the last six months or so I have received on average at least 2 invitations per week totake up various credit cards. Some companies have written several times.

All credit cards are worth looking at. For me there are two important considerations. Firstly,is there an annual charge? Secondly, will it allow me to withdraw cash? I don’t like annualcharges, to be a useful form of credit you will need more than one card and so won’t want topay out a lot of annual charges. However, one needs to be pragmatic, if it’s the only way ofraising credit then I would accept this as a necessary evil. Some do not have an annualcharge and more and more do allow you to withdraw cash at a hole in the wall. This is auseful facility if you are buying some of the cheaper types of property I shall tell you aboutlater. Yes, there really are types of property investment that you can buy on your credit cardlimit.

But better than that have you thought about using credit cards to give several small loanswhich add up to something useful in same way I suggested you may use overdrafts ?

If you can successfully apply for half a dozen cards with only minimal cost then this couldbe a useful part of your credit armoury. However, do not under any circumstances keep themin your wallet or purse because you do not want to use them any more than you have to. Theidea is to make money, not to let the credit card company make money out of you.

Mortgage Brokers

Would I use a mortgage broker? If I am struggling to find finance then I definitely will.There’s no question that a broker can considerably ease the process and get further in a daythan you probably can in a week or two, or even a month.

Arranging a new loan is easier to write about than to do unless you have help and this iswhere mortgage brokers come into their own. Using a broker is not as cheap as doing ityourself, they will charge an arrangement fee, usually of around1% of the loan. But theyhave the advantage of having dealt with many applications like yours and they know whichlenders will be prepared to stick their necks out and lend on an unknown quantity like you.They also know who’s offering the best deals. So although you will pay more in fees afriendly mortgage broker will be invaluable in getting you started.

You will find the names of brokers in your Yellow Pages, and the Business to Businesssection of the broad sheet Sunday papers. It’s worth giving them a call but you may find thatthey are not placed to arrange a “commercial loan”, which is what you will require, (the termcommercial loan refers to the fact that you are a business borrower, not the type of propertyyou are buying) if they specialise in the owner-occupier market.

47

Several specialist commercial mortgage brokers advertise regularly in the classified sectionof The Estates Gazette, a weekly property magazine which is available through majornewsagents. It’s probably worth having a call around and speaking to them all, explainingwhat you are trying to do, and seeing what loan packages they may be able to offer you thatsuit your own particular circumstances.

Even better if you have the time is that you telephone a few brokers and make anappointment to go and see them. Tell them what it is you want to do and ask if they can helpyou. Half an hour talking with a good broker could save you a lot of wasted time and giveyou a far better idea of which direction you should be headed in.

My own favourite broker is Stephen Long at Professional & Commercial in Southamptonwho has been very helpful to me over the last year or so. You can contact Stephen on 02380639 624 or write to him at Latimer House, 5 Cumberland Place, Southampton, SO15 2BH.

Property Angels

Despite their name these people aren’t going to do you any favours but they may be able togive you your first valuable step up the property ladder. These are usually, but not always,individuals who will lend money to people like you and me, in other words people who havea good idea for making money out of a particular property but are too broke to do muchmore about it than dream. Some brokers and specialist property lending institutions will alsoact as angels.

The major advantage of an angel is that for the right situation they will provide 100%funding.

More often than not they are looking to be involved in property development situationsrather than straight forward investments. They want to put their money in, make a quickprofit, and then get their money out ready for the next deal that comes along. They are verycareful about what they lend on. This isn’t to say that they won’t take on extremelyspeculative projects, but before they get involved they will want to be totally satisfied thatyou know what you are doing and that you have done your homework. You will have toexpect some very stringent questioning and you will be expected to be able to prove everything. If this is the only way you are going to be able to raise the finance then it’s worth theeffort, and in fairness for your own comfort and security, you should go through this processfor yourself anyway.

They charge a high price for their involvement. When they are satisfied that your project isworth putting money into they will invariably charge interest on the loan and still want 50%of any profit. This may seem a bit harsh but as my old boss was always telling me 50% ofsomething is better than 100% of nothing. Using an angel may not help you get rich overnight but they will at least help you to get started, to build up some capital and to get a trackrecord for when you want to shop around other lenders and prove you are a good prospect.

48

Friends, Relatives and Acquaintances

This is a general term to describe any one you may know who isn’t a bank,broker or institutional lender. There are several advantages to borrowing from these peoplerather than going cap in hand to the bank.

There is also one very serious disadvantage and that is a lot of people actually find it easierto ask a bank for money than a friend, relative or acquaintance. Regrettably many of us seemto think of money as something dirty which we shouldn’t really talk about. In reality moneyis a commodity like any other, and should be treated as such without embarrassment.

Let me get one thing straight. In this section I am not going to suggest that you steal yourgrandmothers life savings from the box under her bed and blow it on some wild speculativescheme. What I am suggesting is that each and every one of us knows somebody who at thecurrent time can afford to lend us money as long as it is on a proper commercial footing andof benefit to both parties.

Of course we will need to approach them with genuine humility and respect, after all theyhave the money and we don’t. Make no mistake, though, if you offer them the right termsyou will be doing them as much of a service as they are doing you. The reality of theeconomics of the situation mean that, unless they are prepared to let you have the money as afavour, you will have to offer terms attractive enough to make them want to lend to you. Aslong as both sides can see that it is a win-win situation there is no need for anyembarrassment or guilt. I would go so far as to say that even if they are prepared to let youhave the money purely as a favour I would still insist that commercial terms are agreed. Thismeans that you can then take responsibility for your decisions without feeling accountable toyour lender. You do not want to feel hindered by having to explain your every action, youcan take the money as you would any normal loan and spend it as you like with a clearconscience.

To keep every one happy and to avoid future fall outs and misunderstandings you mustdocument the deal in writing. This doesn’t have to be anything fancy drawn up by yoursolicitor, although it could be if that makes every one feel better, but make sure that you bothsign it and date it to show that you both understood the basis of the loan at the time it wasmade.

The agreement should include the rate of interest to be paid, whether it is fixed or is variable,and if it is variable how and when it changes. Also whether interest is simple or compoundand whether it is compounded monthly quarterly or annually. Most important state howmuch the loan is for and when it will be paid back.

The great thing about approaching a friend, relative or acquaintance is that, as and whenneeds dictate, it is easier to agree a more flexible arrangement. For example, it could be thatyou want the money for a development project and know that you won’t have any extra cashflow to service the interest while the work is in hand. In fact you won’t be able to pay theinterest until you have sold the finished property. As an unknown a bank almost certainlywon’t lend to you, but a relative, friend or acquaintance may be prepared to give up regularshort term interest for a larger one off payment when you have sold the development.

49

An alternative may be to offer them a share in the profit also payable only when thedevelopment sells and the profit is made. Or it could be that you borrow the money to buy aninvestment property and you agree that interest will not be payable until the property has letand is producing a rent and that you will pay a higher rate of interest to cover the shortfall.

It’s really up to you and your lender to be as creative as you need to be.

One last thing to consider when talking about friends, relatives and acquaintances. It may bethat they are asset rich but not cash rich and so will not, or cannot, find the money to lendyou. For example, they may have considerable equity in their own property but can’t releaseit without selling up. If this is the case, don’t give up. Instead of asking for money ask themwhether they will be prepared to act as a guarantor if you go to the bank for a loan usingtheir asset as a security. They will then become responsible for the loan should you default,but of course you wouldn’t agree to terms which you could not honour. Otherwise yourfriend, relative or acquaintance will loose their asset and you will loose your reputation andany chance you ever had of being a success in property.

50

“Nothing down” property deals A clever thing to do in a hot market

“Send me to any city, take away my wallet, give me $100 for living expenses, and in72 hours I’ll buy an excellent piece of property using none of my own money”. So saidRobert Allen, self made millionaire property entrepreneur.

And he did. Although he readily admits his heart was in his mouth when the Los AngelesTimes took him up on the challenge. Still, he shouldn’t have been worried. After all, he hadleft university with only a few hundred dollars and he started doing property deals onlybecause he couldn’t get the job he wanted. By the time the Los Angeles Times took up thechallenge he was already a millionaire and promoting his book “Nothing Down”. And toprove his point he bought six properties in three days in San Francisco just by using“Nothing down” techniques

“Why can’t I do it over here?” is a question I often ask myself. But I have to accept thatRobert Allen operates in the USA, and I don’t. The legal and financial systems operatedifferently and it seems for property entrepreneurs it really is the land of opportunity. Youmight think I’m the property equivalent of an “Anorak”, but I must confess that there is anAmerican Newsgroup on the internet that I frequently tune into just for fun. I can spendhours and hours reading the discussions on “Flips”, and “Liens” “PAC trusts” and“FSBO’s”, wishing that the same principles operate over here as over there. (Have a look atthe Newsgroup at www.realestatelink.net. I left a note offering to sell them property in theUK and got a resounding cold-shoulder, but I guess that’s better than being flamed!).

The whole set up in the States allows “wanna-be” property investors so much more flexibiltythan we have over here. Most striking is that it seems that buyers can take over existingmortgages, which means that when times are hard “sellers” will give away any equity intheir properties to anyone who takes over the mortgage payments. That just doesn’t happenhere - in practice mortgages are rarely transferable. It also seems that sellers that are muchmore geared up to granting buyers loans.

I think that most of the “Nothing Down” techniques used in the States probably don’ttransfer easily over here but believe it or not, there are ways to make “Nothing Down”profits even in our property market. I’m going to show you one of these ways now.

Let me start by telling you the impressive and inspirational story of a contact of mine whohas made a fortune by dealing in city centre sites, all through using “Nothing Down”techniques. The principles behind his scheme are simple, the work hard, and the rewardsimmense. This is what he does. He picks a town or city where there is reasonable activity inthe property market and where he is confident that there is sustainable demand fromoccupiers (under current market conditions this isn’t an issue but he used these safeguardsthrough the last recession and kept on making money). He will take a good look for siteswhere he thinks the land could be better utilised, either by putting a bigger building on, or bychanging the use of the existing buildings, or by a combination of the two. He will then go tothe local planning department and discuss his ideas with them in detail. When he isabsolutely sure that he has a scheme for that plot which is much more valuable than it’s

51

existing use, and which he is sure that the planners will accept when a planning applicationis made, he will then approach the owner and make an offer for the property.

Whilst he has been doing all this he will have been in touch with developers who areinterested in sites like this, and he agrees to sell it to them at a price which makes him ahealthy profit. Remember, at this point he doesn’t own it, and the only money he’s spent ison some petrol for visiting the site and the planning office, and some phone calls. When he’sagreed terms with the owner to buy it, and with the developer to sell it, it’s all handed over tohis solicitor to make sure that both transactions happen simultaneously. At that point hepockets the difference and walks away his profit.

This is a classic “back to back”, sometimes known as a “turn”, where you literally sell aproperty on at the exact same moment you purchase it.

To do this you need a cool head and meticulous planning, but my contact has got so good atit he is literally dealing with multi-million pound sites without using any of his own money.All he needs to do is to make sure that he keeps the seller and the buyer apart.

If it is done properly there is nothing underhand about a turning a property. In effect mycontact is being rewarded for doing the homework which the seller couldn’t be bothered todo, or he is cashing in on information that he has but which other players in the market don’thave. Or it could be that the selling agents have misjudged the market and are asking toolittle for the property, and it is a genuine brrgain. This can happen particularly when theeconomy is coming out of recession and the seller and the agents have not grasped howstrongly the market is picking up. If the seller and buyer are happy with the price, he is beingrewarded for seeing the opportunity to put them together.

Can more modest deals be arranged like this, and can they be done through auctions?

This sound like one of those “urban myths” but I once heard the story of a cool operator whoput a property into an auction and sold it on at a profit after exchanging contracts to purchasethe property but having first agreed a delayed completion date to give him time. This takesnerve and you need to have complete confidence in the seller and the solicitor. I wonderwhat the auctioneers would have said if they had found out that legally he didn’t own theproperty. Umm?

But I have heard of speculators who have bought a bargain at auction, and have already gotbuyers lined up to take it off their hands even before they make the first bid. As you know,the moment the auctioneers gavel hits the block is the equivalent of exchanging contractsand the purchaser is expected to pay a 10% deposit and then complete 28 days later. Thespeculators I am referring to arranged an immediate exchange of contracts with the newpurchaser (which meant that they only needed a very short bridging loan to cover thedeposit) and the completion to the new purchaser was simultaneous with their owncompletion. What could be easier?

In a strong market this type of “wheeling and dealing” is actually reasonably common, and itcertainly isn’t unknown for a successful bidder at an auction to be approached by a frustratedunder-bidder and be offered a higher price there and then.

52

As I alluded to earlier, these instant “Nothing Down” profit opportunities occur becauseproperty is an imperfect market where nobody can know everything. That’s why it’s worthtaking your time when you go through the auction catalogues. Take a special look at anyproperties on your “home patch” and where you have superior knowledge. This may be localknowledge, legal knowledge, valuation knowledge; in fact, it could be anything where youhave a slight advantage over the rest of the market. You never know, you might just spotsomething no one else will.

A good time to spot this type of opportunity is when the economy is coming out of recession.It is not unusual for a site or property to be put on the market during a recession and toremain unsold for a considerable period of time. A property can become stale. It willprobably have been offered around the market several times, possibly at a price which isclose to the maximum one could expect to get for it, and as a result no one has looked at itseriously. The selling agents may have felt that they have given all they can to this sale, andmay even have stopped actively pushing the property.

At the point where it is obvious that the market is on the upturn it may be possible to put in abid at the full asking price on the condition that after exchange of contracts completion of thesale will be deferred until sometime into the future. It may be possible to agree thatcompletion may be up to six months after exchange. That gives plenty of time to offer theproperty around a more active market place with fresher and more enthusiastic agents and toline up a sale to complete simultaneously with the purchase. The great advantage of this isthat you then only need to find enough money to pay the deposit and the sale will financeyour purchase and provide the profit. In a sense you are buying the property for only 10% ofthe price and will also manage to avoid holding costs which will be the responsibility of theseller until completion. All in all, if you can arrange a turn, it’s a very cost effective way ofmaking money from property, and depending upon the cost of the property a 10% depositmay be a small enough amount for you to be able to borrow easily, using one of the methodsoutlined in this report.

A similar idea is purchasing an ‘option’. An option doesn’t tie you into a purchase in thesame way as exchanging contracts will. Once you exchange contracts you have to completethe purchase within an agreed time scale. With an option you effectively purchase the rightto exchange contracts at a fixed price within an agreed time scale. For example you may buyan option to buy a development site for £100,000 within the next six months. You may beable to agree the price of the option itself at £5000 and in practice this will be treated as anon-refundable deposit. If you don’t exchange within six months you lose the money, but ifthe deal goes sour you can still pull out and cut your loses. Ideally a term of the optionagreement should be that the cost of the option itself will be deducted from the purchaseprice if you do proceed with the purchase.

The option agreement should give you sufficient time to find a new buyer if you wish to turnthe property, or if you want to develop the site, to get planning and other consents and soavoid expensive holding costs while you resolve details.

53

Other peoples money …againHere’s another inspirational story of a friend of mine who made an excellent spot in anauction catalogue. What he saw was a single lot which comprised a couple of vacant shops, asmall shop let at about £2000 a year, a small club let for about £4000 a year on the upperfloors, and a piece of land at the back, used mainly as a car park for the club.

On the face of it this was an extremely unattractive piece of real estate. It was located in areasonable south east town, but at the wrong end of the High Street in a secondary, going ontertiary, position. The empty units were boarded up, and covered in fly posters, the roofswere leaking and the land at the back was unmade up and looked a mess.

But credit to him, my friend saw something that apparently no one else had seen. He sawthrough all this and realised that a lot of these negatives were just cosmetic. He realised thatif he could buy the property he could make a killing. The only trouble was that he didn’thave any money.

As he couldn’t buy it himself he realised that he would have to do the next best thing andhelp someone else to buy it, but in the process make sure that he kept control and a cut of theprofits. So that is what he did. He went to the Chairman of a small property company andoffered him a deal. Basically, if the property company would provide the funds to buy at theauction, he would put in the hard work of releasing profits for a share of the profits, taken intranches, up to 25%.

It was a classic win-win. The property company were risking the money to buy the property,but they knew that if things didn’t work out they could always stick it back in the auction.On the other hand, they would have a highly experienced professional effectively workingfor nothing and at his own risk and whose reward would be based purely on results. Andthey wouldn’t have to pay him until the profit was generated and in the bank, and then theywould only have to pay him 25%.

For my friend, he was able to generate a potentially large windfall profit (25%, if hishunches were right, was still going to be a large amount of money), but he didn’t have to putin any money of his own. From his perspective the property company were taking all therisks of purchase. And they would be covering all the holding costs until the profit wasgenerated.

How do I know that no one else had seen the potential in this property? Because when itcame to the auction, only one other party bid against him, and that was one of the tenants. Hegot it for a snip. He paid just under £220,000, fully funded by the property company.

The first thing he did was take the boarding off the vacant shops and clean them up a bit. Heput them on the market. At the same time he renegotiated the rents on the occupied shop andthe club, which were due for review. And he put in a planning application to build oldpeoples’ flats on the car park at the rear.

By selective marketing, within 6 to 9 months he had firm offers on the two vacant units at acombined price of around £280,000. He sold the club to the tenant for another £130,000, andthe land was sold for around £100,000. The property company was sold around this time andthe new owners inherited the occupied shop, which I believe they put into auction andreceived around £80,000.

54

However, by that time my friend had generated a profit, after holding costs and agents andsolicitors fees etc, of around £300,000. £75,000 of that went straight to him. Not bad. Yes, ittook him about a year and a half in total to get that money, and yes there was some work todo to get it, but this averaged out at only a couple of hours a week, if that.

Are opportunities like this common and is it realistic for you to expect to spot one? Why not? I suspect that they are probably more common than we suppose because very few peoplethink very deeply about the possibilities of any particular property. Most people go by facevalue and assume that what they see is what they get. Even those who stand out from the restand look beneath the surface may be restricted by a lack of local knowledge. So I wouldencourage you to keep your eyes open, and in the meantime work on a hit list of who youwould take an opportunity like this to, if you found one. If and when you do find one, youwill need to act quickly.

Will opportunities like this only arise from properties sold at auction? No, I don’t think so,there are no hard and fast rules and I am sure that there are plenty of properties out there thatare equally interesting that are or will be offered by private treaty. However, let’s take alook at the pro’s and cons of buying at auction.

55

Buying at Auction

Buying bargain properties at auction isn’t as easy as it was a few years ago. Theproperty press is full of stories about how prices achieved over the last year or so have insome instances substantially exceeded the reserve and guide prices. But, even so, there arestill good buys out there, even if they don’t go for a steal.

Things have certainly changed over the last few years. Auctions used to be perceived asbeing a last resort through which to sell undesirable stock, a place where you could buycheap property. In the main they were attended by ‘professional buyers’, the institutions andproperty companies.

Now prices seem to be reaching or even exceeding the prices which can be achieved throughprivate treaty sales and the quality of the properties has improved enormously. Now lotscosting millions are sold at auction, I think the most expensive so far was about £8m.

Things really started to change when private investors started looking around for suitable‘Buy to Let’ properties. Nowadays auction are so popular that as many as 1200 people ormore have been crammed in at one time at some of the London auctions.In fact, London auctions have become so popular that with prices rising investors are lookingfurther afield to find bargains. As a knock on effect, the regional auctions are becoming evermore popular as well. When you consider that sales figures of 80% –85% of the lots on offerare regularly achieved this is great news for the sellers.

Buying a property at auction isn’t always the easy option. In fact, because of the timeconstraints it can be very pressured. For you and me the process starts when we learn of anauction and ring for the catalogue. Inevitably nowadays that means ringing a premium ratenumber and paying around £1.50 a minute while a recorded message asks us to leave ourname and address (“don’t forget, post code first”). Then the catalogue arrives three to fourdays later leaving us with only about a fortnight or so to get our act together. The alternativescenario is that you already “subscribe” to the auction catalogue. The trouble is that so manyfirms run auctions nowadays that it really would cost a small fortune to pre-pay for the lot.So I kid myself that I will be selective, but in the end I ring for every catalogue going, just soI can see what’s happening in the market, and end up paying £1.50 a minute (“don’t forget,post code first”) many times over.

Actually, with the advent of the internet my troubles could be over. Many auction houses arenow displaying their catalogues on the net. The better sites are interactive and can display farmore information about a property than a traditional catalogue. In the relatively near future itis thought that they will be able to offer a virtual tour of each of the lots.

So, you browse the catalogue and you see a lot that that you really think could make a goodbuy. If the catalogue includes guide prices (don’t you just hate it when they’re on a separatesheet of paper - you can never find it when you need it, and it always looks like the guide toviewing arrangements, “2 p.m. alternate Mondays”) you’ve already learnt to take them witha pinch of salt. They always seem to be slightly higher than you’d expect, apart from theones which are obviously pitched deliberately low to get you interested. Otherwise how doyou explain that so many properties seem to sell at prices two or three times the guide price?

56

At the moment you have as much chance of making the successful bid as any one else butover the next fortnight, unless you are a cash rich speculator who can afford to take shortcuts, you will have to do your home work to make sure that you are ready.

Here’s what you need to do.

First things firstThe first thing is to make an appointment to view, unless, of course, the catalogue had aseparate sheet of shiny paper confirming batch viewing dates for each of the lots. Attend theearliest possible viewing day. Take your time and have a good look. Is the condition as youexpected. Better or worse? You don’t have to be a surveyor to spot cracks, but it does help ifyou want to interpret what they mean. You can always get professional advice later, chancesare you will need funding and your lender will be sending a surveyor down if you get thatfar.

Things aren’t always what they seemThe next stage, probably even before you get to the viewing, is to obtain the legal pack. I amassuming that you already have a solicitor lined up. If not go back a step, find a solicitor, andthen get the legal pack. Let your solicitor chew it over for a day or two and then demand anopinion. By now you probably only have a week and a half until the auction, two weeks ifevery thing has gone according to plan which it rarely does. Don’t assume that this propertyis a straight forward unencumbered freehold.

Parenthetically, here is a tale of woe I have recently been involved with which illustrates thepoint. And yes, as the “expert”, I should have known better. I put in offer on what appearedto be a fantastic purchase about 18 months ago (not at auction, this was a private treatyproposition advertised in a magazine) and when my offer was finally accepted I passed itover to my solicitor thinking that the deal would be completed in a month or so.

The first thing I knew was, that despite there being a presumption that this was a freeholdproperty, my solicitor told me that about one third of the site was not registered at all, andanother third was a leasehold variant, and the whole thing spelled trouble. Undaunted andusing my management training, I told him not to confront me with the problem withoutoffering a solution. After some persuasion he reluctantly agreed that by using an indemnitypolicy we could cover ourselves. But then, because I am not a cash rich buyer, we had todisclose all this to the bank. The whole thing disappeared into a legal black hole and when itcame out, the vendor had gone saying he was going to put the property into an auction. I hateto admit it but this cost quite a lot of money with nothing to show at the end. And it all tookabout 12 months. The lesson to be learned ? Things aren’t always what they seem to be, andeven if you think you can put things right, don’t count on it.

Incidentally, if this vendor were to put the property into auction it could be an absolutenightmare for a potential purchaser. Unless they go into the legal pack in detail theywouldn’t have a clue what they may be letting themselves in for just from reading the detailsin an auction catalogue. If they needed funding but thought they could arrange this after theauction they’d be in for a nasty shock. Even if they were cash buyers, they would still find itdifficult to complete in the prescribed time-scale.

57

Watch the special conditionsSimilarly, do remember that the auctioneer’s catalogue is a legally binding document. All theproperties sold are subject to the terms laid out in the General Conditions of Sale and theStandard Conditions of Sale, so although it often looks like pages and pages of small printyou really have got to read it and, worse still, try and understand it. Individual propertiesmay have Special Conditions attached; details of these should be in the legal pack oravailable for inspection at the auction itself, along with any Addendum which may or maynot be printed in time to go out with the catalogue.

Although not terribly widespread at the moment there is evidence that some sellers areincorporating the addition of ‘buyers premiums’ into the small print. This could mean thatyou may have to pay an extra 1% or more. Usually the reason given for this is that it’s tocover the seller’s costs. It doesn’t seem very fair, but if it’s there, then there is nothing youcan do about it. It’s best to be forwarned so it doesn’t come as a nasty shock.

Also, watch for VAT. This usually only applies to commercial properties but some auctionhouses are in the habit of telling you when VAT doesn’t apply, and assume that you knowthat it does apply if they say nothing. VAT is something you could easily overlook in yourexcitement so it’s worth watching out.

Do your homeworkBack to the auction. The next stage is to do your homework. You do a tour of the local estateagents to see what that type of property is selling for locally, or if it’s an investment you do aquick ‘back of an envelope job’ to get a feel for what it should sell for. This is based on youranalysis of the yields achieved on other investments you’ve seen sold at other auctionsrecently. You are still ignoring the guide price as being largely irrelevant. But you decide ona figure over which you are not prepared to bid. This is essential otherwise in the heat of themoment you may get carried away, bid too much, and then what?

The trouble is that you have no idea what the reserve price is. All properties at an auction,unless otherwise clearly stated in the catalogue or by the auctioneer prior, are sold subject toa reserve which the auctioneer will agree with the vendor prior to the auction. The auctioneeris not authorised to sell below this price, and as it is confidential between him and thevendor, he will not disclose it prior to the auction no matter how nice and polite you are. Thetrouble is the reserve may be above or below the guide price. That’s why it’s so annoying tobid above the guide price and still not get the property. The trouble is that the vendor willultimately make the decision at what level the reserve should be set, and they don’t alwaystake the advice of the auctioneer.

Out of interest some auctioneers will tell you when the bids have exceeded the reserve bymuttering things like “Gentlemen, the house is in the room”, which nowadays sounds morelike the lyrics from an Ibiza-mix dance record.

Arrange your funding before you go !So having chosen a property and having decided how much you will pay for it, all you neednow is the money to buy it. Assuming that you’re not a cash buyer you must arrange yourfunding before you go any further. As in monopoly, you’ve now got past “GO”, there are nolegal or apparent structural problems. All you need now is your “£200”. With only a week,or at the most a week and a half, until the auction, you already need to have a lender in place.If not, it’s almost certainly too late.

58

You probably know this already but the second the auctioneer’s gavel goes down on theblock, you are committed to buying. It’s the equivalent of exchanging contracts. You have topay 10% (usually) of the purchase price as a deposit before you go home and the rest within28 days when you complete. If you don’t complete the best that can happen is that you looseyour 10%. The worst that can happen is that you are sued for breach of contract and run upmassive legal bills.

So you need to have a lender on board, probably even before you get the catalogue. This iswhy you may consider using a broker, especially the first time around. There’s so much tothink about. The bank will need details of earnings, savings, expenditure, assets, copies ofbank statements, forms filled in triplicate. And then, and only then, they will tell youwhether in principle they are prepared to lend to you subject to survey

So you arrange for the bank’s valuer to inspect the property, as soon as possible, and keepyour fingers crossed that he will produce his report even quicker.

As an aside, particularly if you are looking at high value property, now may be the time toask the bank if their valuer could also do a structural survey for you. Yes, it is extra money,but why buy a “dog” for the sake of a few hundred quid. You may waste some money butyou may save a lot more.

At this stage you are relying upon the auctioneer to be helpful. If not your valuer is going tohave to squeeze in the door at the next viewing day. If you are right about the cracks andthey aren’t significant, you’ll get a mortgage offer. Let’s hope it’s enough. If the valuerdoesn’t agree with the figure you have in mind you could already be in trouble. Let’s assumethat he concurs with your opinion of value.

Auction financeIf you need finance let’s have look at what pre-auction deals are on offer.

Assuming that the property is in reasonable condition, you should be able to borrow up to85% of the valuation, (not the purchase price) as long as the income or potential incomecovers the loan interest by a ratio of 1.5 times. This will cost you around 1.5% over Libor (February 2000). Some schemes will add the valuation cost to the loan so at least you aren’tpaying for this in advance. Some won’t try to recover valuation fees if you aren’t successfulat auction, but you’ll probably have to shop around for this.

The trouble is that generally properties offered at auction aren’t always in good conditionand may not be ready for letting without some refurbishment work. Some lenders will caterfor this.

It is possible to borrow 75% of the lower of the valuation or the purchase price, and up to100% of the cost of the works. A higher rate of interest, generally 2 to 2.25% over 3 monthLibor is usually charged for the initial “development” or refurbishment stage. However, oncethe property is available for letting this should reduce to the lenders usualmargin of 1.5% over 3 month Libor. Also, once the property is let it should be possible toincrease borrowing to 80% of the enhanced value.

This type of scheme does require the payment of a valuation fee prior to the loan offer.

59

However, the lenders 1% arrangement fee will be added to the loan at completion.

As a guide the minimum loan available for a straight forward investment is around £30,000,or £40,000 with a redevelopment angle.

How to bidOnly at this stage, if you have secure funding ahead of the auction, can you bid withconfidence. Because there has been a big increase in the number of private buyers attendingauctions over the last couple of years, the auctioneers are making an effort to be userfriendly.

However, if you really don’t want to attend there are other ways that you can bid withoutbeing there in person. If any of these are of interest you will have to arrange it with theauctioneers in advance.

You can arrange a ‘proxy bid’. This is where you tell the auctioneer the maximum amountyou are prepared to bid up to, and he will do the bidding for you. And if you’re wondering,he will undertake to buy it for less, if he can.

Alternatively you can arrange a ‘telephone’ bid. You’ll be hanging on the other end of theline while the auctioneer’s assistant relays to you what is happening, and relays your bid tothe auctioneer.

And last, but not least, in this high-tech age some auction firms are now taking bids over theinternet. By means of the world wide web you can be linked direct to the auction room, andthe auction room with you, and you can watch the bids posted on your computer screen asthey are received. By the same way your bid is posted on the auctioneers screen. This is stillrelatively new, and some pundits doubt that it will catch on except for smaller lots, but therehave been highly publicised accounts of investment properties being sold at auction throughinternet bids.

Once the hammer falls a legally binding agreement is deemed to have taken place; you arebound to buy, and the vendor sell, at your successful bid. Unless the vendor agrees it won’tbe possible to renegotiate the terms of the contract after the auction.

Very often, because the reserves have been set too high, you will see property that doesn’tsell. If this happens when you are bidding it’s worth taking a walk forward to the top tablewhere the auctioneers assistants will be very happy to take an offer for you. Most auctioneersare on a fee if the property sells within 14 days of the auction, and all they want to do is sellat the best possible price. Once the property has failed to reach the reserve the auctioneer candisclose the reserve and can negotiate with you. So it’s still worth putting an offer in.

Is it worth the effort ?

The trouble is it can all be a bit of a lottery. You see, when your solicitor sees the content ofthe legal pack, he may decide that the games up and this property isn’t a runner. Or you mayjump that hurdle, but the bank’s valuer decides that those cracks are significant and makeslife too complicated to get a loan through in time. Or perhaps he just decides that the cracksare alright but puts a value on the property which makes it impossible for you to bidcompetitively at the auction.

60

Either way, you’ve spent real money on legal fees, and valuers and banks fees, and you stillmight not buy a property. Even if you find a property and get funding arranged, you’ll stillonly be at the auction room door with no guarantee of producing the winning bid. There isthe very real possibility that all your legal costs, and the costs of obtaining an offer from thebank, will be wasted if you are out-bid at auction. If you want to go in for a property atauction, you have to budget these costs and be prepared to lose them.

So that’s the down side. What, if anything, is the benefit of buying at auction ? Well, there isstill the opportunity of seeing an angle or a bargain no one else has spotted.

And it’s definitely quick. If you are successful, you know there and then that you havesecured the property with no fear of gazumping, or the vendor pulling out, or stringing thingsout and trying to up the price at the last minute. So you get certainty.

So, on balance, the answer has got to be yes. The incredible success of auctions over the lastcouple of years in particular shows that they are popular with vendors and sellers.Somebody’s making out of it. If there were no benefits to the purchasers, market forceswould have redressed the balance by now.

But you’ve got go in with your eyes open. You need to know what you’re going after beforeyou get there. Honestly, unless you know something nobody else does, don’t go in and bidfor a property unless you’ve viewed it and done your home work.

And if you haven’t got your funding in place don’t assume that it will be a formality andstart bidding anyway. It’s worth remembering that a lot of properties that go into the auctionsare flawed, either structurally or legally; all that glistens isn’t gold. Yes, it’s true that by thesame token a lot aren’t. But unless you take the right steps how are you going to tell thedifference?

61

Safe as houses

Residential lettings

Renting property is more popular now that it has been for more than half a century.Why this should be is a good question. There are many reasons why people rent. For some itis because they cannot afford to buy; for example, those on benefits, or young people whosesalary hasn’t yet reached a level where the mortgage lenders multiples make sense.

But the majority of tenants today in private rented accommodation (as opposed to localauthority property) are sub 40 year olds in full time employment. After the recession of theearly 1990’s renting property is now recognised as a viable alternative to buying property.Young people ultimately want to get their feet on the housing ladder but are prepared to waitlonger to get there. And today, people are expected to be far more flexible in their attitude towork, and are much more likely to need to be flexible in their living arrangements. Manypeople rent because of their jobs, or work related moves.

As a result, expectations about rented accommodation are higher, and tenants are demandingbetter quality properties and a higher quality of service from their landlords. The good newsis that if you are prepared to provide a higher quality, tenants are prepared to pay more for it.

The private residential letting market in this country is immense. It has been estimated that itcomprises around 2.25m dwellings, with a combined capital value of over £1.5 billion. SoI’d say there’s room for a few more if you want to try your hand.

It’s easier nowToday houses and flats are probably more interesting as investments than

they have been for the last thirty or forty years. Their new lease of life can be explainedbecause previously strict legislation which made renting out residential propertyfinancially unattractive for many potential landlords, has been scrapped and replaced by asystem which doesn’t penalise landlords. On the back of this, lenders who were previouslywary about lending for residential investments, have developed new mortgage productsspecifically designed for “wanna be” landlords. Add the final ingredient, relatively lowinterest rates, and you can see why the Buy to Let market is fever-pitched at present.

The Housing Act 1988 has completely overturned the previous restricting and sterilelegislation affecting residential lettings. This has had a profound effect upon the residentialinvestment market over the last 12 years.

Prior to 1988 letting laws were complex and granted tenants almost unlimited rights tooccupy a property. What was worse for a landlord was that these rights could be passed on tothe tenants' children or other close relatives. The final blow for investors was that they wereonly allowed to charge artificially restricted rents which were always below open marketlevels.

Ironically the Government called these " fair rents" although, of course, there wasnothing fair about them. It’s not surprising that investment in residential properties wasunpopular and the supply of houses and flats to rent was very limited. If landlords wereprepared to let residential property they would only do so on short-term holiday or company

62

lets, which was the only way they could circumvent the Rent Acts, but which didn’t helpordinary renters at all.

The good news for property investors came in 1988 when the Government, keen to increasethe amount of private rented housing, turned the legislation on its head to try to even thingsup for the landlord. For the first time in a generation a landlord could grant a tenancy ofa residential property and be certain that he would have an automatic right to takepossession at the end of the term.

Tenancies that were already granted before January 15th 1989 were unaffected (and I shallrefer to them later) but since January 1989 all new residential tenancies have been eitherAssured Tenancies or Assured Short-hold Tenancies. Both these types of tenancies stillprotect tenants' rights, although in a much more limited way, and just as importantly fromthe landlord’s point of view, allow landlords to charge a realistic open market rent.

To allow landlords more flexibility the Housing Act 1988 introduced the Assured ShortholdTenancy by which a landlord can grant a lease for a specified short-term of a minimum ofsix months and be confident of gaining possession at the end of the tenancy agreement. Theyprovide an investor with a means to create an attractive investment. I’ll talk about this inmore detail in a minute.

The other type of tenancy, the Assured Tenancy, is defined within the Housing Act as "A dwelling house let as a separate dwelling to a tenant who is an individual and whooccupies the dwelling as his only or principal home". Once an Assured tenancy is grantedit will continue until the tenant decides to leave or until the landlord can obtain a CourtOrder for possession. The Courts can grant possession for any one of sixteen differentreasons that are listed within the Act. I will not list them all here, but they basically cover theusual sort of things you would expect, such as the tenant not paying the rent or not keepingup repairs, or where the landlord wants to live in the property himself, or if the tenant dies.

It is not necessary to go into the full details now but is important to note that although theAct effectively gives the tenant total security of tenure there is a procedure for the landlordto obtain regular rent reviews to make sure that he is obtaining the full open market rent.

Although they are more restrictive than Assured Shorthold Tenancies, there are still arelatively large number of Assured Tenancies in existence. This is because at the beginningof the 1990’s the Government introduced the BES (Business Expansion Scheme) to promotethe growth of the private rented sector. The main incentive was a generous tax break forinvestors who purchased properties to let on an Assured Tenancy Agreement. A largenumber of BES Companies were formed to hold these properties. The BES scheme finishedsome years ago but even now you will still see ex-BES portfolios being traded, many ofthem with their original “assured” tenants still in place.

Today, investors are put off granting Assured Tenancies because of the difficulties ofobtaining possession of the property if they wish to sell it, and naturally, given the choice,most investors will want to let their properties as Assured Shortholds. In fact since theHousing Act 1996 introduced a subsequent amendment to the 1988 Act, all new tenanciesare deemed to be Assured Shorthold Tenancies, unless the tenancy agreement itself specifiesthat it is actually an Assured Tenancy. I suspect that given time the Assured Tenancy willjust fade away.

63

As the name suggests Assured Shorthold Tenancies are lettings for a specific and usuallyshort period and they do not give the tenant unlimited rights of possession. AssuredShorthold Tenancies must be granted for a minimum period of six months and can be inrespect of furnished or unfurnished accommodation.

As long as the landlord gives two months clear Notice to Quit there should be no problemsabout getting possession at the end of the lease. If the lease is not terminated at the end of theterm, it will continue for as long as the landlord wishes, and he will still have the right tobring it to an end on two months notice.

Like Assured Tenancies, Assured Shorthold Tenancies allow the landlord and tenant to agreeto an open market rent but unlike Assured Tenancies, immediately after signing thelease, the tenant can refer the rent to a Rent Assessment Committee if he thinks it is too high.However, the Committee can only reduce the rent if it appears to be significantly higherthan that they would expect to be paid on the open market. In reality few, if any, tenantschallenge the agreed rent.

But what about properties that are let under the old system where the landlord is onlyreceiving a "fair rent" and has a very long wait before the property becomes vacant and canbe sold.

Properties that are subject to sitting tenants under the old system are still actively bought andsold on the investment market, most usually at auction. But unless a prospective investor isexperienced in property and has done his homework I would not suggest that this type ofinvestment is suitable for a beginner.

For a start he must be totally comfortable with the concept that the longer he has to waituntil possession can be gained, the lower the value of the property. How long you wait willdepend upon the age and health of' the tenants. This makes the valuation of individualproperties very difficult because as well as all the usual things to consider such as the age ofthe property, its condition and its location, you will also have to take into account all of thelease terms, the age of the tenants, whether they are male or female, single or a couple, andtheir life expectancy.

On top of all that the actual legislation is also extremely complex and it is possible that thetenants may have children or other relatives who can take possession of the property whenthey die. This may mean that there is no realistic chance of ever getting possession of theproperty in your life-time to sell it.

You can see that it is essential that before you buy a pre-let property, particularly at auction,it’s best that you get expert advice so that you know exactly what you are buying and howmuch you should be paying for it.

Having said that prices of properties let to Regulated Tenants have gone through the roofover the last few years. Before, as a rule of thumb, you would have expected to have paid40% to 60% of the vacant possession value depending upon the age of the tenants. Now,especially for properties in central London, prices are much closer to vacant possessionprices and are totally unrelated to the rent paid. In fact, if you analyse the sales prices thereturns are in low single figures. The reason why they are so popular even at these prices is

64

that investors are assuming that the capital values of residential properties will continue toincrease at a similar rate to that we have seen over the last couple of years. They are willingto take a long-term view that they will more than make their money back if they get vacantpossession and are able to sell the property on.

65

A long term idea - going for growthHow to turn sixty one grand into one and a half million

More on gearingI was surprised a couple of months ago when my brother decided to get married and

sold his two bedroom flat in Surrey. I wasn't so much surprised at the price, although£140,000 does seem a ridiculous amount of money for what it is, or at him getting married,although as his new baby was at the wedding I think he left it a bit late (I guess I'm just oldfashioned). No, the reason I’m surprised is that the new owner wants this flat as aninvestment.

My brother paid £60,000 about ten years ago and for the last five years or so he had let itout; partly while he was at university as a (very) mature student, and partly while he went ona round the world trip. Most of that time, on the advice of his managing agents, he's beenletting it at £650 a month. He was happy enough with that, it covered the mortgage and whatwas left over covered the cost of keeping it in good nick.

Why am I surprised that someone want's this flat as an investment? Well, the gross return(after managing agents fees), even assuming the flat remains fully let, is only 4.6%, and I’mgetting more than that in my savings account at the moment.

It doesn’t sound like much of an investment to me, so there must be more to this than meetsthe eye. There’s only one reason I can think of why an investor would pay that money forthat income – he’s counting on a substantial increase in capital value.

Now, as far as I know, the purchaser is a cash buyer, a nice position to be in. But that’s notthe end of the story. I taught you earlier the first secret of property: “investing in propertyworks better when you use someone else’s money”. I showed you how “gearing” cansubstantially boost the return, measured by income or rent, if you borrow the right amount atthe right interest rates. The question is, can gearing boost the return measured by capitalvalue? Let’s see what would happen if the investor borrows to fund the purchase.

Frankly, I think that if my brother had pushed the managing agents harder they could havegot him quite a lot more rent, so I’m going to assume a rental value of £750 pcm, or £9000per annum.

One option for the investor is to fund this through the Buy to Let Scheme, but, dependingupon which lender he uses, he’ll need the rent payments to cover interest payments by aminimum of 130%. At current variable rates of around 8.5% this means he will be able toborrow 58% of the purchase price, or £81,000. He will have to put in £59,000 of his ownmoney, plus stamp duty at 1%, and solicitors and surveyors fees, so let’s say he puts in£61,000 altogether.

As an aside, if he’s well enough heeled, he’ll probably be able to borrow more from his bankbut we’ll stick with the example of the Buy to Let scheme to see what happens.

Being realistic it is very unlikely that the flat will be occupied all the time but as this is areally nice flat, and as the tenants will have to give notice before they go, I am sure that itwill be easy to have a new tenant lined up to go in almost immediately.

66

This flat is leasehold and there is a ground rent to pay and building insurance to cover. Theflat and the block it is in have been well maintained but I’ll set aside a nominal amount foron going maintenance.

Now we can do a simple analysis:

Rent received £750 pcm £9000p.aLess ground rent £ 100Less buildings insurance £ 250Less maintenance £ 500Net rent £8150

Interest payableLoan amount £81,000Interest rate @ 8.5% 0.085less interest payable £6885

Net Profit £ 1265

So our investor will only be making around 2% on his capital of £61,000.

When investors go into a deal like this they are not looking to make a short-term immediateprofit, and as the sums show, they are not looking for the income.

Here’s how he will make his money…It’s all about property price movements.

Let’s be pessimistic and assume that the Government achieve their target to keep inflation ator around 3% every year for the next twenty five years, and let’s face it that’s prettyunlikely. If property prices just keep pace with inflation the flat will double in value to£292,600 after 25 years. And if the rent grows at the same rate, the rental income will be£18,800 per annum.

Just think what the investor has bought himself. After he pays back the bank loan of £81,000he will have equity of £211,600. If, instead, he had invested his £61,000 in a building societyaccount at 3% he would have just £128,000. So he now has an extra £83,000 in equity. Andthe return on his own money invested has jumped from 2% to around 30%.

Now, here’s the good bit…That was assuming property prices pegged inflation at a measly 3%. In real life property hasperformed much better than this.

The average house price increase over the last thirty years has been at just over 10% perannum. If this rate of growth is repeated over the next twenty five years the flat will be worth£1,516,858. After paying back the bank the investors equity is now worth £1,435,858. So theinvestor now gets an extra £1,307,858 by putting his £61,000 into property and not leavingit in the building society. If the rent follows the same pattern he will also get a return on hismoney of 160% per annum.

67

As the tenants will have been servicing the loan and paying the interest, you’ve got to admitit’s not bad for nothing !

You may be thinking that’s all well and good but I don’t have £61,000. Fair enough. Eveninvesting relatively small amounts of money in property can produce equally dramaticconsequences for your equity.

This may sound so easy that you are thinking there’s a catch. Of course, no one can predictthe future of the property market, and I’ve got no more idea than you whether these averagerates of growth will be sustained over the next thirty years. Investment advisors in a differentcontext often use the phrase “past performance is no guide to future growth”, and this istrue of any type of property investment.

Property values may slow down or be static at some time in the future, and there may bespells as in the early 1990’s when values fall. Without wanting to be gloomy my guess is thatwe could be back in a recession again within two or three years. Because money is so cheapon the continent I doubt that we’ll get back to double figure interest rates again for theforseeable future so hopefully any recession will be relatively shallow.

But, what ever happens, history tells us that in property the long-term trend, up to now, hasalways been upwards.

For the last couple of decades some investors have using this as a realistic and workable wayof providing for their old age. If it works out as they plan, it should literally cost themnothing, because somebody else will happily pay for their investment for them through therent.

For people who are still young enough, in their twenties for example, this could allow themto retire in their mid forties, to get out of the rat race while their colleagues and peers areworrying their way up the career ladder to stress and an early heart attack.

If you’re tempted…The only reason why an investment like this would be attractive is because of the capitalgrowth. This why people spend what seems to be outrageous sums of money on properties inhigh value areas and where the yield on their purchase could never justify the investment.Traditionally, when the market has been hot, places like that are red-hot and the investors aretaking a view that at some stage the capital value, and therefore their equity, will growsignificantly.

To do the same you need to look for a property which is of top quality, and in a quality areawhich will attract quality tenants. High yields have been sacrificed in favour of security andsafety, and high growth.

So, the key is to select a target area carefully, and look for properties that won’t just retaintheir value but have the potential to take off in the right market conditions. Then you have tobe prepared to sit back and play the waiting game.

68

This goes hand in hand with one of the seven major attributes I’ve identified in the “great”property investors, they are, almost without exception, supremely patient. Unless you arecash-rich this ‘buy and wait’ strategy may not suit you, and you may need to balance areduced expectation of capital growth with a higher income.

When you decided to buy this report you may have been hoping that youwould learn something which would make you rich overnight. Although property candramatically change one’s financial position very quickly, more often that not that will bethrough ‘speculation’ rather than investment, and speculation isn’t is the subject of thisreport.

Personally I think it’s unfortunate that we’re all a bit hung up on instant success. We have aculture that wants everything now or not at all, and we are all hoping to find the perfect getrich-quick scheme which is instant and requires no effort on our part. Not many people todayare prepared to take a long term view of things. This is a shame because, as they get older,they will wish that they had taken a longer term view.

I heard recently that only about 10% or 15% of us make proper provision for our pensions,and the state pension is a pitiful amount to try to have to live on.

So far we’ve assumed that the investor has a sizeable deposit to put down. But will this workfor some one with more modest means? And how would you go about buying an investmentlike this in practice. I’m going to try to illustrate this by using an example, and as a first stepI am assuming an investor will have some cash to put towards the deal. This probably needsto be between £10,000 and £15,000. Depending upon where they live it may need to be moreor less; in most places less.

The second step they will need to take is to do some detective work and find an area wherethere are nice but not too pricey houses and flats which they are reasonably confident theycan let relatively easily and quickly. It makes sense for them to look somewhere near theirhome if only to save on travelling time going to and from viewings. They should thensaturate themselves with information about the chosen area and start to get a feel for whathouses and flats sell for, and what rent they get when they are let. As part of this first stageof familiarisation they should look in every estate agents window and read the propertysection of their local papers from cover to cover.

The third thing they would do is to then register with all of the estate agents who cover thatarea and ask for details of properties with a maximum price of around four or five times theamount of the deposit they can raise. This is because they will be borrowing a minimum of75% of the purchase price and so the amount they can afford to pay is determined by themaximum deposit they can afford, subject to a 4 or 5 times multiple. We saw earlier in thisreport that some Buy to Let lenders will advance up to 80% on full status schemes.

What they are looking for is a property which is cheap enough to buy taking into account themoney available as a deposit, and which will let at rent high enough to cover the interest onall the money they have borrowed, plus enough to cover other costs, and if they are a taxpayer, their tax.

69

Let me show you what I mean using a real life example. I was recently offered the freeholdinterest of a mid terraced Edwardian house in a trendy and relatively high value area of mylocal large city. The property has been converted to form two flats, both with one bedroom.The ground floor flat has recently been renovated and refurbished and is vacant. The firstfloor flat is let on an Assured Shorthold, and although the amenities aren’t as modern as theground floor, it is still a nice flat. Because I’ve done my homework I know that I should beable to get a rent of around £400 per month for each flat and I should literally be able to letthe empty flat within days.

I am confident I could buy this property for £100,000. On top of that there will be costs suchas solicitors fees and arrangement fees for any loan I take out so I am assuming that the totalcost will be around £102,000, £102,087.50, to be exact. I might be able to get these extracosts added to the loan but in this example have assumed I pay them myself.

I know that if I can convince my friendly broker that the rental value will be around £800 amonth, he will be able to find a lender to advance me 80% of the purchase price on conditionthat the property is let as soon as possible on a proper legal footing.

If I pay £100,000 I will need to be able to cover the 20% the bank won’t lend me and so Iwill need to raise £20,000.

The rent covers the prescribed multiple of 130% of the interest payments, but not 150%. Sothis wouldn’t be an attractive proposition to all lenders, but there are lenders will who willlend at that level. At today’s levels, depending upon which lender I use, the loan is probablygoing to cost around 7.8%. To keep the example simple I have assumed I would take out aninterest only loan.

Being realistic it is very unlikely that both the flats will occupied all the time. Most tenanciesnowadays are written up for six months although quite often a tenant will stay longer.However, as the tenants will have to give notice before they go I am sure that it will be easyto have a new tenant lined up to go in almost immediately. However, I’ve allowed for a twoweek void.

To make this work comfortably I would deal with lettings and management myself, I amliterally only 30 minutes drive from the property and can easily handle this. Tenants can befound through adverts in the local papers and I can interview and vet them myself, and askfor references. If I couldn’t, or didn’t want to do that, I would have to budget for managingagents letting fees at 10% plus VAT, and if they managed the property for me I could addanother 5% plus VAT.

Because I am being offered the freehold there is no ground rent to pay but there will bebuilding insurance for which I would budget £250. The properties seem to have beenmaintained well and so I’m not anticipating any major repairs, but I’ll set aside £500 perannum for on going maintenance and breakage’s.

It is normal now for the tenant to pay all other costs such as electricity, gas, telephone, waterand council tax.

70

Now we can do a simple cash flow analysis to see what the result is:

Rent received £800 pcm £9200p.aLess buildings insurance £ 250Less maintenance £ 500Net rent £8450

Interest payablePurchase price @ 80% £80,000Interest rate @ 7.8% 0.078less interest payable £6240

Net Profit £ 2210

If you calculate the yield in terms of the total purchase price you will be receiving 2.2% onyour capital. Is this too much bother just to make just £42.50 a week?

If property prices move over the next twenty five years the way they have over the lasttwenty five years this property could well be worth five or even ten times the purchase priceat the end of the loan period. Let’s be pessimistic. If property prices just keep pace withinflation the property value will double in value to £209,000 after 25 years.

So the investor will have an asset worth £209,000 and if the rent grows at the same rate, therental income will be £19,250 per annum. After the investor pays back the bank the original£80,000 loan he will have:

• £129,000; plus• an almost 100% return on the money he has invested.

If he had merely invested his £22,087.5 in a building society account to achieve a 3% return,he would now have just under £50,000. So the effect of gearing is to produce an extra£79,000.

If the investor is in a position where he doesn’t have to spend the profit, small though it is,and is able to reinvest it then the whole deal will be become self financing. Let’s knockanother 20% off the profit to cover the investor’s tax position (in reality it may be more orless) so he is now left with £1768. If he can invest this money at just over 6% he will recoverthe whole £102,087.50 he spent on the purchase and the associated costs. So he will be ableto pay back the bank, and pay himself his own £22,087.50. In fact he will be able to payhimself back after 11 years.

So after 25 years he now has an asset worth £209,000 which is paying an income of £19,250every year. And that is working on the most pessimistic of figures. Capital values have risenso steeply in some parts over the last few years that it is entirely conceivable that throughcapital growth alone the investor will make a substantial profit in a relatively short time. Aswe’ve already noted the average house price increase over the last thirty years has been atjust over 10% per annum. If this were repeated then the property would be worth £1,083,470

71

after 25 years. Not bad for nothing ! Wouldn’t you be over the moon if you were about toretire with a million quid ?

Even assuming that the rent only increases in line with inflation over the mortgage period,depending upon interest rate movements, there will be times when the rent will exceed themortgage payments. At that time you can then choose whether to spend the excess or toinvest it to pay off the mortgage quicker so you can free up your growing lump-sum sooner.

Of course, as the capital value of the flats increases, the investors equity will increase, andthis can be used as security to negotiate new loans to buy other properties, and so repeat theprocess.

It is possible that rental values will fluctuate, and a certainty that interest rates will. If youcan obtain fixed interest loans as often as possible during the loan period this can reduce alot of the uncertainty, but this would have to be weighed against the prevailing view that,despite the recent increases, the long term trend for interest rates is down.

Even if at times over the loan period the mortgage interest repayments exceed the netincome, wouldn’t it still be worth paying the short fall to obtain a lump sum which could beas much as £1m. Well, I guess that depends upon how much the shortfall is and how longyou had to pay it. If it was a risk worth reasonably taking wouldn’t you just think of payingthe excess in the same way you would if you paid an equivalent sum into a normal savingsscheme?

In the example I have assumed that it will be possible to get an interest only loan and wehaven’t calculated what would happen if it were a repayment mortgage. This would costmore each month but then an investor wouldn’t have to set aside any profit (if there is any)from the rent to pay off the loan. If he were able to afford to use all profits to pay themortgage, equity in the property would build quicker and the loan would be paid off quicker.If capital values are also rising at the same time then the value of the equity could grow veryquickly.

In summary, the only reason why an investment like this would be attractive is because ofthe capital growth. If there were no capital growth then an investor would be better off justleaving his money in the building society or another form of investment, possibly a propertyproducing a much higher yield. This why people spend what seems to be outrageous sums ofmoney on properties in places like Kensington or Chelsea, and where you would think thatthe yield on their purchase could never justify the investment when judged on the basis ofthe rent received. The investors are taking a view that at some stage the capital value, andtherefore their equity, will grow significantly.

If I were to characterise the requirements of this type of property they would probably be:

• a quality property• a quality area• quality tenants• security, and safety• low yield• high growth

72

If your main requirement is income and you haven’t got time to wait for capital growth, youwill have to adopt a totally different buying and investment strategy. So let’s have a look atthat.

73

An Alternative idea – going for income

A lot of investors operate on a long-term basis, and quietly sit back and wait forcapital growth, because they can afford to. That’s fair enough, if you are not dependent uponthe income and can live by other means, then the idea of tying your money up in secure andsafe, but relatively unexciting invesrments, is bound to appeal.

Don’t forget that security in this context is the key, and because these are nice properties innice areas, and which traditionally have not only held their value, but during the good timeshave raced ahead, the return on the money invested is actually very low.

This is because relative to the purchase price the rental income is low. But as we saw in thelast section, when you are ready, you can just sell the property and take the profit in capitalgrowth.

Let’s now go from one extreme to another. If you are in the same boat as about 90% of thepopulation, you are more concerned about income today than capital growth in fifteen,twenty or twenty five years time. Who isn’t ? So this type of strategy may be of no use toyou at all.

You need to be looking in a completely different market. You’re now moving from theworld of professional couples and sedate divorcees, to students, single parent families,benefits claims. This is a world of attractively high yields, but where you can expect to be farmore actively involved with the management of your investment.

And, this is the biggest and most significant difference to you, you cannot rely on capitalgrowth.

Now this may sound slightly alarming, so let me explain. I’m not saying that there won’t beany capital growth. There may well be, in fact if we look at the values of properties of alltypes over a given number of years, I suspect that all properties are slightly ahead of thegame. But there are distinct tiers in the property market, and as economic conditions andfashions, and people’s expectations change, they all move along at different speeds.

So, with the types of property we are now looking at there may be capital growth, but notenough in the short to medium term to justify the purchase. That’s ok and is no more that wewould expect. We saw in the valuation section of this report that investors trade the prospectof capital growth for income and pay a reduced price for the privilege. There is more riskinvolved with a higher yielding property, and an investor will want that higher return tocompensate him for risking his money.

None of this means that these are not properties worth looking at. It’s just that they need tobe looked at in a slightly different way.

So what types of properties are we looking at? Well, you’ll know it when you see it. It’sdifficult to generalise. At the extreme is low value property in low value areas. This mayinclude the rows of terraced houses in northern industrial cities. A less extreme examplecould be reasonably priced houses in relatively low value areas and may include houses

74

converted into flats in lovely Georgian sea-side towns on the south coast. And it couldinclude anything in between.

As always there are no absolutes, there are only shades of grey. At current returns I am reallytalking about properties yielding 12% plus. For some properties the yield may go off thescale. I was told of one block of flats in the East End of London that was for sale about ayear ago at a price reflecting a yield of about 50%! The snag was it is in a particularlynotorious location and some one had actually been shot in the building. May be not one ofthe management headaches you would be expecting when you usually buy property.

Further down the scale back towards reasonableness are the previously quoted terracedhouses in northern cities. Without meaning any offence at all, it has been very welldocumented in the media over the last year or so that in some areas there is no demand forthese properties. In some areas almost whole streets lie vacant and boarded up because no-one wants to spend their own money to live there. We’re told it’s because every one is nowmigrating south for work reasons. Whatever the reasons, these properties are now ‘surplus torequirement’ and in some places you can’t give them away.

This is causing the local authorities and central government some headaches as they decidehow they can regenerate the housing markets in these areas, and all sorts of fanciful schemesare being mooted. I’ve no doubt that politically something will be done, after all, we can’t allsqueeze into the south-east, can we? But in the meantime, unless you carefully select yourpurchase, I wouldn’t be getting too excited about the prospect of capital growth.

Now, this doesn’t necessarily mean that there isn’t a rental market. I’m sure that there is. Itwill be a lot more attractive to most people to rent than to sink their money into somethingthey may never sell again. The plan for an investor should be to try to find an area where theproperties are sufficiently blighted to be cheap enough, where the prospects of letting aregood, and where he is reasonably certain that he will be able to get his money out if he needsto. The most likely out for him will be through an auction, but if he can buy and a let aproperty to show a yield of 25% plus and then get his cash back in three years or so, he maynot be that bothered. Without being disrespectful, if he can keep it fairly well let for a fewyears until he’s paid himself back, he only has to keep it for a couple more years and thereturn will be such he could probably afford to treat it as a disposable “investment” and“abandon it” if he can’t sell it (in reality he couldn’t completely wash his hands of it; if it fellinto very poor or dangerous repair the local authority would start chasing him waving theHousing Act around). The point is that this investment will have done it’s stuff and he canafford to be fairly relaxed about what happens next.

Before I go any further I just want to put my remarks on northern cities into context. Thereare some areas where I would not buy, ever, period. Yes, that probably includes areas wherestreet after street are boarded up, but would depend upon what the prospects for regenerationare. Worryingly for novice investors is that there are other areas where, if you were taken ona tour, you may think they look like quite reasonable suburbs. But appearances can bedeceiving.

On the other hand, I’ve been shown suburbs which frankly I would be afraid to walk inalone, because to my eye they look a little neglected. But actually, although the housing ischeap, these are actually good suburbs which are improving and which will prove good inthe long run.

75

This is why you must tread carefully, and do your homework. There is no substitute for localknowledge, but don’t take any advice from a third party at face value. Not every thing iswhat it seems.

So, in summary, I would buy in some nothern cities, and others I wouldn’t touch with theproverbial. Don’t be deceived by what you see and are told.

Moving on, I mentioned houses on the south-coast. There are many, many houses convertedto flats along the Kent and Sussex coasts, and the freeholds of whole properties quite oftencome up at auction. Prices here are relatively cheap, it’s not an economic hot spot, even theeffects of the Chunnel on the local economies, after so much publicity and speculation, waslimited. This is where you will find an interesting mix of people; there are many retiredpeople soaking up what sunshine there is on offer, in some towns living side by side with arelatively high number of young unemployed. This is where the young benefits claimantscome to holiday permanently. If you are not too squeemish about it this could be to yourbenefit. Here is a ready made rental market, and the government will pay you directly forputting them up. I ought to say that there are also a large number of potential tenants who arenot on benefits. But in some towns, if you specify no DSS then you will have troublekeeping your properties full. I’ll say a little bit more about DSS tenants in the next section.

Current yields on the south-coast are, as a general rule of thumb, running between 12% and20% depending upon the location and age of the property, whether it’s on the sea-front etcetc. This is the level of yield that is beginning to get interesting but again it reflects that theowner-occupier market is sluggish at the best of times.

What you will need to watch here is the age of the property. The majority are older;Georgian, Victorian and Edwardian for example. So you need to be looking at condition andwhether the conversion is to a suitable standard, and what the previous owner has done sinceto keep it in good nick. You’ll also see in the next section, “stuff you have to know if youwant to be a landlord”, that you must be thinking about the costs of making the propertysafe. If it is an HMO (House in Multiple Occupation) does it have proper escape routes, firealarms, fire doors and the rest, and if not when will the local authority be asking you toattend to this and how much will it cost ? More on that later.

And then there are little nuggets scattered around the country. In the recent past I’ve been tothe Midlands to view a two year block comprising fourteen purpose built flats, in a very nicearea, all beautifully fitted and let to an assortment of tenants. The rent on this property wouldgive a yield of 11.5% on the asking price but I think you could get it for 12% or slightlymore. If the architects and builders guarantees stack up, this would be very fundable throughthe Buy To Let scheme and would make a lovely income generating investment. However,as I’ve said before, I wouldn’t be expecting any fireworks when it comes to increases in thecapital value.

I’ve also seen a lovely conversion of a period house, again in the West Midlands, which wasundertaken by a local builder who has done everything with immense care. It is a beautifulbuilding and comprises a couple of flats and half a dozen bedsits, with beautifully fittedbathrooms on each landing. The owner has managed the property himself and carefullyselected his tenants, and all in all, it made a very impressive investment, and was giving ayield of about 13.5%.

76

There was only one snag. That is that some of the accommodation was arranged as bedsitsand not as self-contained flats. Some lenders don’t like that. There are lenders who will fundthat type of property, but they may want to charge a slightly higher rate on it.

Let’s look in a bit more detail at why we would want to consider purchasing a propertywhich will need our time, regular attention and patience, and where any growth in capitalvalue will be slow at best.

A real life example will help, a property I was offered last year which is located in a largesouth coast City. This is a purpose built block of twelve flats which was built about ten yearsago. Eleven of the flats were all let on Assured Shorthold tenancies and when the vacant flatwas let the total income would be £54,000 per annum. Three tenants had their rent paiddirect by DSS.

The property is freehold and the asking price was £350,000, which is gross yield of just over15%. I can see no reason why this property wouldn’t be of interest to a lender for funding.

Let’s do a full analysis and look at the effect of gearing on our money.

Purchase Price £350,000Loan ratio 80% 0.8Amount Borrowed £280,000

The interest you wi.l pay on the loan is:Amount Borrowed £280,000Interest charged at 7.9% 0.079Annual interest payments £ 22,120

I’ve developed my own spreadsheet for analysing possible investment purchases. It saveslooking at unsuitable properties if you can weed them out from the comfort of your computerscreen. We can apply these figures to my standard appraisal template:

77

Purchase price £350,000Less deposits -£3000Stamp duty £8750Solicitors fees £8000VAT on legals £1400Searches £400Land Registry fees £550Bank charges £300Mortgage broker £2800Land Registry search £ 25Bank transfer £ 27Total Ancillary Costs £19,252Total cost of purchase £369,252

Total rent received £54000Less mortgage interest £22120Less voids £ 4000Less management £ 3318VAT on management £ 580Less Repairs £ 2700Less insurance £ 1200Total costs of ownership £33918Net profit £20082

Total cost of purchase £369,252 Less Bank loan £280,000Own capital required £89,252Return on own capital 22.5%*

*A disk containing my template with the formulae in place for you to copy to your system is available topurchase. e-mail peter@vaughanjones.freeserve.co.uk or fax 01636 812270 for details.

At a return of 22.5% on my own money I would go to view this property and give seriousconsideration to purchasing.

A few words of explanation.

Deposits. I have deducted deposits from the purchase price, as any deposits held should betransferred to me on completion. Although I will need to be able to access the monetaryequivalent from my own funds when tenants leave, I have treated it as reducing the moneyrequired to fund the purchase in the short term. The agent’s details don’t say whether thereare any deposits held, but I would be surprised if they are not. I have allowed £300 per letflat, which is slightly less than one months rent.

Stamp Duty is now banded and seems to be increasing at consecutive budgets. You willneed to make sure that you have applied the right rate. It may seem tempting to try tostructure a deal to reduce stamp duty, but unless your solicitor says it’s ok, the InlandRevenue will catch you eventually!

78

Solicitor’s fees. You may be able to negotiate a better deal than I’m assuming, but you’llfind that nothing is ever as straight forward as it seems and costs will creep up.If you use a solicitor from a reasonable sized practice the bank may not require you to usetheir solicitors as well. If you use a sole trader the bank will inevitably insist that their legalpeople oversee matters for which you will pay, and your legal fees will be increased. Unlessyou can negotiate an exceptional deal with your solicitor his fees are payable even if the dealdoesn’t complete.

VAT on legals. Your solicitor will have to charge VAT on his bill. As you are in theresidential letting business, for reasons I will not go into here, you cannot claim back VAT. (If you were able to register your letting business for VAT the logical conclusion would bethat you would have to charge VAT on the rents, and would therefore price yourself out ofthe market).

Searches, Land Registry Fees etc. As I understand it, these will vary according to thepurchase price etc, and my figures are based on a best “guestimate”. My solicitor will haveto firm these up later.

Bank charges. Some banks will charge an arrangement fee but add this to the loan. If thetransaction is large enough some banks won’t charge a valuation fee.

Mortgage Brokers fees. If this is your first deal, or first sizeable deal, a good mortgagebroker can be worth his weight in gold. They generally charge 1% of the loan advance. Becareful, their fee will usually become payable when the bank confirms its offer to you,regardless of whether you proceed with the purchase.

Bank Transfer Fee. The cost of sending the money on completion. As there may be severaltransfers, i.e from your account to your solicitors and then on to the vendor’s solicitors, theremay be more than one. It depends on whether you like sending large cheques in the post.

Total cost of purchase. When you are working out the multiples you can borrow from thebank, remember to allow for these costs. They can add up can’t they ?Mortgage interest. We’ve already calculated this on the previous page. I’ve assumed aninterest only loan. The rent received easily covers 150% of the mortgage interest so our bankshould be happy.

Voids. Even if you are strict on obtaining notice from tenants before they go and manage toadvertise a vacant flat immediately, you don’t want to have to jump at the first tenant whocomes along. There are therefore inevitably going to be times when some of the flats arevacant. I have allowed an occupancy rate of just over 90%. Whether this is realistic or notwill depend upon the area, the quality of the flats and the likely demand.

Management. I have assumed a full management service at 15% plus VAT. Some agentsmay try to charge extra fees for re-letting when appropriate but as this is quite a sizeableinstruction for them I would assume I could negotiate this out. If the property were nearerhome I would budget for managing it myself. Lettings can be arranged through localnewspaper advertisements. And I would build a team comprising a good plumber, builderand electrician to handle emergencies.

79

Repairs. How long is piece of string? Again it depends upon the age of the building, thequality of construction, and the quality of the tenants. I mean are they going to trash theplace when the pub closes on Friday? I’ve really only allowed for on going maintenancebecause the block is relatively young. If it were older I might allow for putting an extra suminto a separate account for major repairs in the future.

Insurance. It’s worth shopping around. It may be possible to insure the rent along with thebuildings insurance if you go to a firm specialising in investment property. Some of the BTLlenders will arrange this cover for you if you take out a loan with them. If you are borrowingto fund the purchase the banks valuer will assess the insurance value from which thepremium is calculated. It’s tempting to try and cut costs here, but it is better to be overinsured than under insured.

Net profit. Nowadays I would expect the tenants to be paying their own council tax,electricity, gas and water, so I have not made a separate reduction for these. This means thatthe net profit is the rent less the costs listed.

Own capital required. This is how much you actually need in your bank account on the dayof completion to make things happen.

Return on capital. Depending upon why you are buying, this is probably a better indicationof whether this is a good deal than the net profit figure. On it’s own, net profit is meaninglessunless you judge it against how much you’ve had to pay to get that profit. Here the return isin excess of 20% from a fairly secure property in a fairly nice area. That makes this propertyvery interesting. For my purposes 15% is the cut off point; below that and I’m not interested,over 20% and I start getting excited. In between and I’d think about it. It would depend onwhat it is and where it is.

What will happen to the capital value?I started this section by contrasting a property that produces a good return through the rentwith properties where the return will be achieved mainly through capital growth.

Let’s think a little bit more about the differences in these two approaches.

In the first example, which I detailed in ‘going for growth’, the investor was in effect buyinga property on a vacant possession basis. The fact that one of the flats was occupied isimmaterial; the value, or in this case the purchase price, was based on the vacant possessionvalue and not based on the value as an investment.

As an equally valid example we could easily have looked at what would happen if onebought a vacant house or flat in a nice area and stuck a tenant in. This can be contrasted withthe ‘going for income’ example where the investor is buying a situation which is specificallyset up to be an investment.

Earlier in this report we looked at the different methods of valuation. The ‘going for growth ‘property would have been valued using the “direct comparison” method of valuation, asthere would be a presumption that should either of these flats become vacant and sold themost likely sale would be to an owner occupier. Therefore the valuation method would be afunction of the likely market. If the property were valued as an investment, a different figuremay well be achieved. Ignoring voids the total annual income would be £9,600 and at initial

80

yield of 10%, which may be generous, the value would be £96,000, £4,000 less than thevacant possession value.

The converse is true for the investment property. There may be no relationship between thetotal vacant possession value of the individual flats and the investment value of the block asa whole. Depending upon the quality of the flats, the block and it’s location, it may beapparent that the flats would not sell to owner occupiers, possibly not without majorupgrading or in some instances enlargement. However, as flats for renting they may beperfectly acceptable.

I’m glad to say that most lenders recognise this situation and will value investmentproperties on an investment basis, having regard to the rent received and not the vacantpossession value of the individual flats. However, if there is a significant divergencebetween the two they my need some persuasion to lend. After all, they are concerned withfinding that all escape routes are open if you default on the loan.

So recognising the differences between the two types of investment, we can see that they sellin different markets. Properties that provide capital growth as the principle means of return,will by and large, trade in the owner-occupier market; or if sales are not direct to owner-occupiers, investors will recognise that the value is under-pinned by that market and payprices accordingly.

Houses in Multiple Occupation, and the larger developments like the one in the example areby and large traded between investors as a whole and are of no interest to owner-occupiers.Their value therefore depends entirely upon the demand from investors in the market. Thisdemand will itself depend upon the economy, the demand for rented accommodation, thelevel of interests rates (it wouldn’t take much of a rise in the mortgage rate to change theprofitability and rate of return in our example) and subtle influences like the availability andprofitability of other forms of investment.

So it follows that any increase, or for that matter decrease, in capital value, will be a functionof the yield, which will itself be a function of demand. The capital value will rise wheninvestors bid the price higher, or looked at another way, bid the yield lower.

In our example the price of the property reflected a yield of just over 15%. Suppose thatinterest rates fall, and this type of investment becomes more attractive, to investors. Themarket may take the view that it can afford to bid to a price reflecting a yield of 13%pushing the value to £415,000. So a 2% shift in yield leads to an 18.5% increase in thecapital value.

However, this will not necessarily show any correlation with any increases in value in theowner occupier sector, and such yield shifts are much more likely to lag behind the owneroccupier market. As the principle concern to investors is the return on their money, they aremuch more likely to be resistant to increases in price in the market as a whole until itbecomes apparent to them that the market as a whole has accepted it. This is why ‘sentiment’is so important in the investment market, and why it is so important to keep abreast of anytrends or changes.

So, extra returns from increases in capital value are not out of the question, but theinvestment market is far more erratic and an investor in high yielding property cannot take

81

this as read. Inevitably the long-term trend should be upwards, but the short and mediumterm fluctuations are greater. Often this fuelled by bank lending policy; as these investmentslook more or less attractive the banks will review their lending policy and accentuate analready developing trend, much more so than their lending policy affects the owner-occupiermarket.

Going back to our example, if an investor were to buy that property for £415,000, that is ayield of 13%, what would happen if interest rates went up soon after by 1%. If the marketwanted to build in the same differential the value could fall to £385,000, that is on a return of14%. This reflects a decrease in capital value of 7%. Although one can’t tell for sure, it isprobable that in the owner occupier market the number of house sales may fall on a 1% risein mortgage rates, but depending upon the base level of interest rates at the time, it isunlikely that capital values will fall, if at all, by anything like 7%.

The conclusion must be that these investments are very interesting for their incomeproducing qualities, but if you are looking for any significant increase in capital value thenone must be looking to hold these for the long term. If, in the long term, market sentimentdrives the yield down, then that must be treated as a bonus, and an investor can decide at thattime whether he wants to bail out and take a profit.

82

Stuff you have to know if you want to be a landlord

The Housing Act 1996 – Beware

This Act gives tenants the right of first refusal if a landlord wants to sell his property, subjectto certain qualifications:

• the property to be sold must comprise at least two flats held by ‘qualifying tenants’, andthe total number of flats held by qualifying tenants must exceed 50% of the total numberof flats in the property;

• the Act doesn’t apply if more than 50% of the property is used for non-residentialpurposes;

• a qualifying tenant is effectively any tenant except a business tenant, an assured tenant(this is not the same as an assured shorthold tenant), agricultural tenants, servicedtenants, and tenants under the Housing Act 1980.

If a landlord wants to sell he must first serve notice on at least 90% of the qualifying tenantsand specifying a price. If more than half of the qualifying tenants accept they can nominate apurchaser, and the landlord must sell to them. If the tenants do not accept then the landlordcan sell at the same or a higher price at any time over the next 12 months without having torefer to the tenants.

If the landlord sells his property without going through this procedure it is a criminaloffence. The new owner must inform the tenants of his purchase within two months and thetenants can require details of the terms of the purchase. More than half the tenants canrequire a purchase on the same terms.

If a landlord wishes to sell at auction he must serve notice on the qualifying tenants not lessthan four months, and more less than six months, before the date of the auction. The effect ofthe legislation is essentially that the tenants can take the place of, and the contract of, thesuccessful bidder. After the auction, the tenant’s nominee has 28 days to decide whether tobuy at that price.

The only exceptions to this Act are:

where there is a resident landlordwhere the landlord is a local authority, a development corporation housing association, ahousing action trust or a charitable housing trust.

This means in practice, before buying a residential investment, you must ask your solicitor tocheck whether the requirements of the Housing Act 1996 need to be fulfilled and whetherthey have been.

In reality, very few tenants of rented accommodation will be interested in buying; the rentalmarket is typified by those who cannot afford to buy and those who wish to retain flexibility.

83

However, it is much more likely to appeal to long leaseholders who “own” their flats andwho may see advantages in taking over the ownership and management of their property. Soit seems that this legislation is much more likely to affect investors in freehold ground rents,which we’ll be looking at later.

To remove any doubt for the purchaser, the Housing Act allows a prospective purchaser toserve notice on the qualifying tenants asking if they want to exercise their rights. If less than50% have responded positively within 28 days the purchaser cannot be required to sell theproperty to the tenants after his purchase has completed.

Houses in Multiple Occupation

Landlords have always had a duty under common law to make sure rented property and it’scontents are safe so that no injuries or damage are caused to the occupants, neighbours or thepublic.

In the early 1990’s the Government went further in bringing out various regulations whichclarify a landlord’s responsibilities. These are the key regulations.

Local authorities have the right to select various categories of properties and in conjunctionwith the local fire officer, request that certain works are undertaken to make the propertysafety compliant. This may include creating secondary means of escape, fitting fire retardantdoors where they are not already fitted, providing secondary lighting etc.

At the moment local authorities are undertaking a rolling programme to take a look atHMO’s, which despite their name, for the purposes of this exercise, includes housesconverted into self contained flats. If you are thinking of buying a property it would be aswell to check with individual authorities what their current policy is, and what their time-scale is so you can get an idea of when you will need to do any works. Then you can budgetand plan ahead.

If you are thinking of buying a property where basic safety could be improved it is, in yourbest interests to satisfy yourself as to what is required and try to negotiate a price that makesallowance for the extra cost of these works. Depending upon the age and nature of thebuilding the costs could be considerable.

Quite rightly, in my opinion, we are moving towards a situation where legislation will ensurethat all rented accommodation is safe, and the onus will be on the owner to organise and payfor any necessary improvements. Even if you are under no compulsion now, I believe theday will come when you will be, so you may as well start planning for it.

In any case, where a house is divided into flats, the landlord has always been responsible forthe common parts such as the hallways and landings, the stairs, and any facilities for thecommon use of the occupants, along with the safety of all tenants and visitors in thebuilding. In the 1990’s various regulations came into force which regularised and defined thelandlords responsibilities.

84

What is an HMO ?Well, if you are thinking of investing in a residential property there is a good chance that itis, or could be used as, an HMO. Here is a non-exclusive list of what is included within thedefinition and which falls within the scope of this report:• houses comprising bedsits occupied as single rooms with some shared facilities• shared houses where the occupants have exclusive use of a bedroom but share the

facilities and communal living space• board and personal care for persons in need• houses comprising self contained dwellings accessed from a common area, but with no

shared facilities ( i.e. self contained flats)

If you own or manage an HMO you are required by law to comply with certain standardsrelating to

ð fire safetyð fitness for human habitation including repairð provision of standard amenitiesð overcrowdingð general management

Local authorities are responsible for making sure that Houses in Multiple Occupation(HMO) meet certain health, safety and welfare standards. The property can be inspected bythe Environmental Health Officer, who will usually try to agree informally what works arerequired to bring it up to standard. However, if the landlord won’t co-operate the council hasthe power to prosecute for non-compliance with a fine up to £2000. And the council can dothe work themselves and then charge the cost back to the landlord and charge anadministration fee on top.

The Housing Act 1996 introduced a duty of care on the owner or manager of a HMO tomake sure that it complies with the Housing Act requirements relating to standard amenitiesand fire precautions. If a landlord fails to comply with the duty a tenant can take them tocourt.

The Housing (Management of Houses in Multiple Occupation) Regulations 1990These regulations cover all HMO’s to control the standard of management and require that:

• water supply and drainage must be maintained in proper order and good repair, storagetanks must be covered and water pipes protected from frost damage

• the supply of gas and electricity should not be unreasonably interrupted

• the common parts must be kept in good repair and in clean condition. Staircases,corridors, passageways, halls, and lobbies must be kept free from obstruction in case theyform a fire hazard or block a means of escape. Stairway enclosures must be kept free ofitems which could cause a hazard such as portable heaters, cooking appliances,upholstered furniture, other furniture, coat racks, any kind of store, and gas meters.

• installations in common use such as power supplies, lighting, baths, wash hand basins,fridges, cookers, etc should be kept in good working order.

85

• all living accommodation should be kept in good repair and installations in workingorder.

• windows and extractor fans must be kept in good repair.

• all means of escape from fire and all fire apparatus must be kept in good working orderand free from obstruction

• all yards, outbuildings, and boundary fences which are part of the HMO should be keptin good repair.

• an adequate number of rubbish bins should be supplied for the residents and anyaccumulated rubbish is the responsibility of the landlord to clear

• the general safety of the residents is the responsibility of the landlord who must makesure that the premises are safe by design and construction

• the managers name must be displayed on a readily visible sign giving his name, addressand phone number

• if required to do so the manager is under a duty to inform the local authorities of detailsof residents in the property

• residents have a duty to co-operate with the manager and allow access to any room at allreasonable times. They must comply with regulations concerning escape and storage anddisposal of litter. They must take care not to cause damage, damage caused by tenantsmay be considered un-tenant like behaviour and be grounds for eviction.

Fire Safety StandardsHMO’s must have an automatic fire detection system which alerts the occupants. In a twostorey building inter linked mains operated smoke detectors must be fitted so that if one goesoff, they all go of. In three or four storey buildings the detectors must be linked and alsocapable of being set off by manually activated call points, e.g. “in the event of fire breakglass”.

Each flat, bedsit or room should be separated from the rest of the house by a half hour fireresistant structure which will include the doors, walls and ceilings.

Every HMO must have a protected route which is provided by making sure that all walls anddoors leading onto it are half hour resistant. Fire doors should be self closing with a smokeseal and intumescent strip.

If it is felt that the fire precautions in an HMO are inadequate the local authority can consultwith the local fire authority to decide what works are necessary and then serve noticerequiring rectification.

Discretionary grants are available for fire safety improvements in HMO’s. If you want moredetails it is worth contacting the relevant local authority.

86

General Regulations

The following regulations apply to HMO’s, but also to any other form of rentedaccommodation.

The Furniture & Furnishings (Fire) (Safety) (Amendment) Regulations 1993These set the required safety standard for domestic upholstered furniture and furnishings;any failure to comply can lead to prosecution with penalties of imprisonment or fines up to£5000.

Simply stated, it is an offence to supply through any business activity, which includes lettinga property for investment purposes, any furniture which does not comply with the prescribedlevel of fire resistance.

The regulations apply to sofas, beds, bedheads, children’s furniture, garden furniture suitablefor use in a dwelling, scatter cushions, stretch or loose covers for furniture and other similaritems, but it does not apply to carpets, curtains, bed clothes including duvets, and mattresscovers.

The effect is that all residential investment properties that are let furnished for the first timesince 1st March 1993 must contain furniture that complies with the regulations, and anyreplacement furniture must also comply.

All furniture manufactured after March 1990 is likely to comply but the onus is on thelandlord to check with the manufacturer and be able to prove that it does comply if the kitesafety label is not present.

Transitional provisions ceased on 1st January 1997 and since that date all furniture andfurnishings, whether new or old, must comply.

The only exception is any furniture manufactured before 1950 which does not need tocomply as inflammable materials were not used prior to that date. However, if you inherit orbuy a property with older furniture, don’t leave it with the tenant. If there are valuableantiques you may want to keep or sell them (some hope), but old tat should go straight downto the dump. It’s not worth the risk and you’ve got to sleep at night.

If you are buying a furnished investment property and the furniture looks as if it doesn’tcomply, it will be no defence that you didn’t originally install it. I suggest that you negotiatean appropriate sum off the purchase price and get in new compliant furniture.

The Gas Safety (Installation and Use) Regulations 1994There were a number of well documented cases of carbon monoxide poisoning by faulty gasappliances in the 1980’s and early 1990’s. On average around 30 people a year die fromcarbon monoxide poisoning caused by faulty or poorly installed gas appliances.

As a result, since 31st October 1994, it is the responsibility of the landlord of residentialproperty to make sure that all “Gas Appliances”, which includes gas heaters, gas fires, gasboilers and gas cookers, and “Gas Installation Pipework”, which includes all gas pipework,gas valves, regulators, meters, and flues, are checked for safety at least once a year by British

87

Gas or a Corgi registered plumber.

Records must be kept and the landlord must be able to produce them if required; any newtenant has a right to request a copy prior to taking occupation.

The landlord of a let property must not use or let a gas appliance be used if at any time heknows or has reason to suspect that:

• there is insufficient supply of air for the appliance for proper combustion

• the removal of the products of combustion from the appliance cannot safely be carriedout

• the room in which the appliance is situated is not adequately ventilated

• any gas is escaping from the appliance or any connecting gas fitting

• the appliance is so faulty or maladjusted that it cannot be used without danger

In addition, a landlord will also be subject to the general regulations concerning gasappliances and should particularly note

• a gas appliance with an open flue should not be installed in a bedroom or any room usedfor sleeping.

• where a gas meter is installed in a meter box, the installer should supply the consumerwith a suitably labelled key to the box

• after an installer or engineer has carried out work on any gas appliance, a defined seriesof safety checks and tests must be performed

• any person who installs a gas appliance in a property must leave operating instructionsfor the occupier of the premises.

Failure to comply is serious. If faulty equipment leads to death the landlord will beprosecuted and convicted of unlawful killing and will face imprisonment. Less seriousbreaches can lead to fines of up to £5000.

The Electrical Equipment (Safety) Regulations 1994Naturally the onus is on the landlord to ensure that the electrical installations of rentedproperty are safe. This doesn’t just apply to the cabling and circuits, but also to anyappliances that are provided such as washing machines and fridge’s. It also includes, plusand fuses. Any electrical appliances should be regularly checked and serviced by a qualifiedelectrician or engineer, and records kept. Failure to comply can lead to prosecution withpenalties of imprisonment or fines up to £5000.

The Building Regulations 1991 - Smoke AlarmsAll properties built since June 1992 must be fitted with mains operated inter-linked smokedetectors and alarms on each floor. Properties built before that date aren’t yet covered butone assumes that it is only a matter of time.

88

Of General Interest to landlords

DSS TenantsIs there anything wrong with DSS tenants? Many landlords won’t contemplate taking abenefit claimant as a tenant, but the question is whether this is a valid reaction or just oldfashioned prejudice.

Well, that depends on the tenant. In principle there is no reason, in my opinion, why aclaimant should not make a good tenant, but it depends on who they are and why they arebenefits. There are a lot of legitimately unemployed people who, because of their age, dofind it hard to get work. It makes me sound my age but having a sensible, middle aged tenantkeeping an eye on things for an absentee landlord sounds very reassuring. Then, let’s facethere are the young tear-aways. In a lot of the seaside towns I referred to in the last sectionthere is a well-developed drug culture, spawning well-developed crime rates. Do you wantyour flat to be used for dealing?

Then there are young single parent families, most of whom just want a quiet life and the bestfor their kids. And lastly, but not exclusively, older victims of divorce or bereavement, whojust want somewhere comfortable and quiet to sort their lives out.

I would also say that it depends upon the property. There are obviously properties whichwould be inappropriate for DSS calimants, the Benefits people just wouldn’t sanction thatamount of rent, and some properties which a private tenant on a decencent wage wouldn’twan’t to live in.

Every one is an individual and I’d say that DSS claimants are no ore likely than non-claimants to make bad tenants. We all know the story of the flash looking young man in thesuit who turned out to be the tenant from hell.

In a lot of areas you will find a local Housing Association who will help you find and vettenants who are on benefits, and will generally be there to give you a helping hand andadvice. There is only one word of caution I would give about DSS tenants. The system nowoperates where a landlord can get the rent paid directly so that it doesn’t go through thetenant’s hands.

However, if the DSS later find out that this particular tenant should not have been claimingfor any reason, they can recover the full amount of the rent paid to the landlord, who willalmost certainly be entirely innocent and in no position to judge whether his tenant is makinga fraudulent claim. That’s tough one isn’t it.

The converse of this is to consider whether a private tenant is better. It all depends on howgood his or her job is and how much they are paid, and how secure their job is. As onemanaging agent told me once, when a tenant looses their job the first thing that stops beingpaid is the rent. I think it’s a matter of looking at it all pragmatically and adopting a horsesfor courses approach.

Patience is a Virtue

89

Residential Reversions

When house prices start to rise, or as sometimes happens, start to soar, people may“feel” richer, but of course their new wealth is only “on paper”. The trouble for most peopleis that they simply can’t sell up to get their hands on the money. If they did, where wouldthey live? And anyway a lot of people, particularly older people, get very attached to thefamily home and don’t want to leave it. So they have to resign themselves to leaving theirmoney locked up in the bricks and mortar.

That’s exactly why reversionary investments were devised. In its simplest form the homeowner sells the home, it doesn’t matter if this is a house or a flat, to an investor but retainsthe right to live there for as long as they like, rent free. In return for this the investor will paythem an agreed sum of money, and when the original owner dies, or decides to leave for anyother reason, such as to go into a nursing home or because they want to live in a smallerproperty, the home “reverts” to the investor.

Of course, there’s no such thing as a free lunch in the property world and there is a price tobe paid by the home-owner for staying there rent free for life; the price the investor pays willbe considerably less than the houses’ value. This means that an investor can make asubstantial profit when the property reverts to them.

Actually, deciding the price the investor pays is very interesting because as well as takinginto account that there will be no rent, it also needs to reflect the age of the home owners.After all, the younger they are and the longer they are likely to live in the property, thelonger it will be before the investor will get possession of the house and be able to sell it fora profit. This will reduce the price he is prepared to pay. The opposite also applies. If theowners are older, the chances are they will die or go into a nursing home sooner, and so theinvestor will be able to sell the property and get his profit quicker. This means he will beprepared to pay a higher price.

This may sound very complicated but calculating the right price is quite easy when youknow how. The first step is to decide how much the home would sell for if it were sold in thenormal way on the open market; the easiest way is to look and see what other similar housesor flats in the area are selling for. Then the value is reduced using actuarial life expectancytables, which most property valuers have access to, which take into account the ages of theowners and their average life expectancy.

In practice this means that investors tend to pay between 35% and 60% of a propertiesvacant possession value depending upon how old the owner is. Using actual moneyexamples this means that an average semi-detached house which normally costs £70,000 willsell for around £24,000 if the owners are in their 60’s, or up to around £45,000 if they are intheir late 70’s or early 80’s. At the top end of the market it is entirely possible for an investorto buy a £200,000 property for only £65,000 depending on the age of the owners.

If prices at that level are out of your range a variation of the reversionary investment may beof more interest and that is the part reversionary investments. As the name suggests this iswhere a home owner sells only part of the home, say 25% or 50%, at an appropriatelyreduced price and stays as co-owner with the investor. Usually the investor will have theright to first refusal if the home owner wants to sell the rest at a later date, otherwise it works

90

exactly like the full reversion scheme and the investor will get an appropriate proportion ofthe sale price of the property once the owner dies or moves out

You may think that it is a bit morbid to devise an investment opportunities which ultimatelyrely upon someone dying before you can make a profit, but if you think about it thereversionary investment produces a classic win-win situation for both the owner and theinvestor. Although the owners no longer have control over their family homes and can’t passthem on in their wills, they can release a substantial part of their equity early without havingto sell and move out. This is why the scheme is so useful for old people to supplement theirmeagre pensions.

For the investor, despite having to wait some years before he gets his hands on the property,there is the certainty of a substantial profit especially if house prices have risen in the meantime.

So why do residential reversions work? The main advantage to the property owner is that hecan benefit from the accumulated capital value of his property without losing his right to livein it. For many people the opportunity to stay in the family home or to stay in a house thatthey are particularly fond of is far more attractive than selling up and buying somewherecheaper despite missing out on any future increases in the property's value and will notbe able to leave the property to their children as an inheritance.

The main advantage of residential reversion schemes to an investor is that he canpurchase a medium to long-term property investment at a price substantially lower than itsvacant possession value. Unless the market nose-dives he should be guaranteed a profit onre-sale when the property becomes vacant. If there is a rise in property values while hewaits for it to become vacant then of course he will make an even larger profit. If theproperty has sentimental value to the occupiers they can usually be relied upon to keep itin good condition and look after it properly and the investor should not have to activelymanage it at the expense of his own time and money.

This is a big advantage over investing in a normal sitting tenant residential investmentwhere it is common for a tenant to be totally disinterested in the upkeep of the property andthe 1andlord may have to appoint expensive managing agents to look after the property forhim.

If you do want to buy a residential reversion then you should remember that there will beother costs as well as the purchase price. In addition to the usual stamp duty and so1icitor ' sfees that are payable on virtually all property transactions, it is common for the introducingagent to charge a small commission.

Cavendish Property Investments, who are based in Leeds, are a specialist agency dealingin reversionary investments and one of the market leaders. I was so impressed by theirliterature explaining how these investments work that I’ve obtained their consent toreproduce their report, and I’ve included it as an Appendix to this report. I’m sure you’llagree that it’s a very interesting concept and makes very intersting reading.

91

And they’ve recently also introduced a new financing scheme which should make theseproperties very affordable, especially to smaller investors.

If you want any more details then please call them direct on the telephone number provided.

Blocks of flats ? For £1000 ?

92

Freehold ground rents

Most people would probably think of a block of flats as far too expensive forsmall investors to buy. In fact this isn’t actually true.

You have probably seen that freehold ground rents, as they are called, are quite often sold atauction. On the face of it they may seem fairly cheap, in that they tend to sell for relativelysmall amounts of money. If you analyse the sale price against the income they seem to gofor surprisingly low yields. Even so they have become a much more popular form ofinvestment over the last few years. But you might not know that much about them or thesubtleties and nuances that surrounds this particular type of investment.

I won't give you a strict definition of what a freehold ground rent is. I think this could makethe subject sound more complicated and less interesting than it actually is, and in any casemost people are familiar with the concept of ground rents even if they couldn't say exactlywhat they are.

The best known form of freehold ground rent, and the most likely to be bought by a smallinvestor, is the small annual rent payment made by flat-owners to their freeholders. As thisis a familiar everyday example I have kept to it as far as possible although the generalprinciples are equally true of other types of ground rent such as those paid on shops, officesand factories.

Freehold ground-rents came about because, for legal and practical reasons, it hastraditionally been difficult to sell individual flats freehold and although in colloquiallanguage people are referred to as "owning" their flats this is not strictly true. The "flatowners” are really long leaseholders and there will be a freeholder or landlord whoactually owns the block outright.

The freeholder "sells", or more accurately grants, a long lease to the flat-owners usually for99 years or 125 years but sometimes longer. Often the freeholder will charge a ground rentand historically these were rents paid literally for the ground that the flats were built on.They are usually a nominal sum and, depending on when the lease was first granted,nowadays normally range between £10 a year and £125 a year.

So why is it that freehold ground rents have become more popular long terminvestments? I think partly because they can be purchased relatively cheaply although attoday’s prices with yields as low as 5% you may not think they are much of an investment.

But the rent received is only part of the story. This is just as well as many leases only allowfor the ground rent to be reviewed, or in other words increased, every 25 years or 33 years orso. Some leases do not allow a rent review at all and the rent is fixed for the whole length ofthe lease. Others may specify that the rent is to double every 25 years or provide anotherreview formula.

The first thing to remember about freehold ground rents is that they are usually thought of assecure and long-term, if very unexciting investments. It should be relatively easy and cheapto collect the rent. After all, the long leaseholder is unlikely to do a runner, and if under the

93

most extreme circumstances they do, 99 times out of 100 there will be a mortgage lenderwho can pay the ground rent.

The real attraction of freehold ground rents is that in addition to the ground-rent there areother sources of income that can greatly increase the value to the investor. This extra incomearises as a direct result of the terms and provisions of the leases of the individual flats.

It is usual for most leases to allow the freeholder to arrange the insurance of all theflats in a block under a single policy and for him to reclaim a proportion of the cost of thepremium from each of the flat-owners. The amount that a block of flats is insured for isessentially the cost of rebuilding.

The rebuilding cost is calculated by literally working out the amount of money that wouldhave to be spent to build an identical building starting from scratch, and it would includesuch things as building materials, labour and other costs such as architects' fees, and the costof demolishing the ruins of the old building.

With today's high costs of materials and labour even a modest block of flats can cost aconsiderable amount to re-build. In turn this means high insurance premiums which we shallsee is actually of great advantage to the freeholder who will re-claim the premium back fromthe flat-owners.

Because the lease allows the landlord to arrange the insurance for the flat-owners he iseffectively taking on the role of an agent, and as an agent he should be able to negotiate thepayment of a commission from the insurance company. As a general rule an agent shouldreceive a commission of at least 10% of the annual insurance premium. Even for a smallblock of flats this can mean that the freeholder will receive a substantial extra income whichis in addition to the ground-rents.

One of the benefits of receiving the extra income from the insurance commission is that it isnot a fixed sum and normally it will increase each year at least in line with inflation. Thisis because insurance companies generally re-calculate the premium, and therefore the cost ofre-building the property, every year and as the cost of re-building the block increases theinsurance premium and therefore the commission paid will increase pro rata.

Other forms of lease make the freeholder responsible for managing the block. This willinclude maintaining and repairing the property on behalf of the tenants.

It is important that a potential purchaser checks all the lease terms carefully beforebuying an investment because the provisions for repair and maintenance of a block of flatscan be complex. To benefit from the management it is essential that the leases make thefreeholder responsible for organising repairs and services, able to reclaim the cost from thelong lease holders, and able to charge a management fee.

Sometimes the repair and maintenance of a block of flats is the direct responsibility of theflat owners, either as individuals or as a Tenant's Association. If this is the case then thefreeholder has no practical role to play and cannot gain any financial benefit.The services will include maintaining and running a communal heating system if there isone, cleaning and lighting any common parts, maintaining the parking area, keeping the

94

garden cultivated and so on. It is rare for a lease to make the cost of these works thefreeholder' s responsibility but if it does then the property is not an attractive investment.

The most common and probably the most satisfactory arrangement will be for the freeholderto recoup the costs by charging the flat-owners an annual service-charge. The service chargeshould cover the cost of all routine works that will be undertaken in any one year and also acontingency sum, which the freeholder should invest in a “sinking fund” that will be used topay for emergency repairs and irregular large payments such as re-roofing or renewing lifts.

By organising the repairs and maintenance the freeholder will again be acting as an agent,this time as a managing agent on behalf of the flat owners, and the wording of the leaseshould allow him to charge a reasonable fee for his time and trouble. The amount that amanaging agent can charge will depend upon the full extent of his duties and obligations butas a general rule he should be able to charge around 10% to 15% of the total annualexpenditure on repairs, maintenance and services.

It is worth remembering that an older block will probably require more active managementthan a modern building and will require more frequent ongoing repairs and maintenance. Butof course this means that the potential for earning extra income is likely to be greater.

But landlords beware if you think you have a licence to print money. If the tenants of a blockthink that their landlord is ripping them off, or is providing an exceptionally poor service,they can apply for a new manager to be appointed through the leasehold valuation tribunal.Although it’s rare, there have been successful applications. What is worse for the landlord isthat the tenants are then able to buy the freehold after two years at a discounted price.

In a recent case the tribunal found that a landlord had failed to keep the property in repair,had demanded unreasonable service charges and had mismanaged the finances.

As well as providing income, freehold ground rent investments can produce windfall profits,for example where a freeholder is able to persuade the local planning authority to grantplanning permission to enlarge an existing block of flats. This is possible where changes infashion and local policy mean that accepted " development densities" for dwellings inthe locality have increased since the block was built. Enlargement may be in the form of anextension or even by building an additional storey on top of the existing structure, if it isable to take it.

Redeveloping the roof space is now a thriving business with several specialist firmsoperating in high value areas such as central London. I have seen roof spaces offered atauction on long leases of 125 years or thereabouts.

One interesting variation on this is the use of pre-fabricated apartments which are literallylifted into position piece by piece, and secured, and then plumbed in and have the otherservices connected. These may not sound very exciting but the market leaders in this fieldprovide luxury, high value flats and penthouses.

Traditionally investors were able to benefit from selling extensions of the leases to the longlease holders. This arises because as the length of each lease diminishes the value of theleases reduces. For this reason building societies and banks are reluctant to grantmortgages on flats with leases with less than 60 years left to run as they provide poor

95

security for the loan, particularly a loan for 25 years or more. This is because if the borrowerdefaulted on his mortgage near the end of the loan period the lease would then have only 35years or less remaining and would be very difficult to sell. The building society or bankcould find it virtually impossible to recoup their money and may only be able to sell the flatat a give away price.

It goes without saying that most flat-owners want to maintain the value of their property anddo not want to be left with a flat with a short lease that is extremely difficult to sell. So tonegotiate with the freeholder to extend the lease once it was approaching the critical 60years unexpired mark made sense.

An extension to the lease is a valuable asset to the flat-owner but looked at from thefreeholder's point of view it puts off the moment when he will be able to take backpossession of the flat and sell it at a profit on the open market. There are therefore twoconflicting views and it was usual for the freeholder and the flat-owner to negotiate a dealso that the landlord would grant an extension to the lease in return for a lump sumpayment from the flat-owner. In high value areas this could be a very substantial sum ofmoney.

The legislation of the 1990’s has changed the landlord and tenant relationship. Firstly, theLeasehold Reform, Housing and Urban Development Act 1993 now allows flat owners tocollectively purchase the freehold of a block, subject to certain qualifications. Now is not thetime and place to go into the all the details of which tenants are “qualifying tenants”, otherthan to say most long leaseholders probably are. If 2/3rds of the qualifying tenants in a blockserve notice on the freeholder, they set in train the process of buying his freehold. It isdifficult for a freeholder to challenge this.

Another process covered by the same Act is that an individual tenant, if he passes certaintests of qualification, now has the right to acquire a new lease on the payment of a premium.The new lease will be at a peppercorn rent (legal talk for nothing) for a term expiring 90years after the expiry date of the current term.

The problem for the freeholders is that the valuation of the premiums in these processes arealso covered by the Act and it seems that to date the freeholders have not been too happywith the prices they have been paid. Although the intention is that price is “fair” there is noquestion that the freeholders negotiating position is weaker than before, and it is seen bysome that the tenants can gain an unfair financial advantage.

So it seems, that for the time being at least, this particular avenue of extra profit has been atleast curtailed, even if it hasn’t been banished altogether.

So if you are interested in buying a freehold ground-rent investment how do you go about itand where do you buy them? Freehold ground rents are regularly sold at auction. This maynot suit every one, buying at auction can cause its own problems, if only going through theleases in the time scale available.

There are other pitfalls as well. I have already described the provisions of the Landlord andTenant Act 1987, as amended by the Housing Act 1996, which requires every freeholderintending to sell a block of flats to give notice to the individual flat-owners and giving them

96

first refusal to buy within a specified period. Even if the property sells at auction the tenantscan step in and take over the contract.

The successful bidder can find he has wasted his time and money on valuation fees and legalcost.

There are also specialist agencies that have links with large building firms who make surethat the leases of newly finished flat developments are written specifically to create readilysaleable freehold investments. Buying by Private Treaty gives more time to check out thedetail, but again, the 1996 Act allows tenants first refusal which may hinder your ownnegotiating position, as that can effectively set the floor value at which the owner can sell. Italso generally slow things down as one makes sure that all the necessary notices have beenserved.

As a rough rule of thumb an average freehold ground rent investment will usually cost youaround ten to twenty times the ground rent receivable. The question is, are they a goodinvestment? If you had asked me that question five or six years ago I would definitely havesaid yes, but to be honest I have mixed feelings. They are still a relatively safe and secureform of income, but ts the long leaseholders position has become stronger the freeholder’sposition has definitely weakened.

The writing’s been on the wall for some time. In the late 1980’s and early 1990’s there wasmuch talk about introducing a new form of tenure, Commonhold, which would allow tenantscollective ownership. The legislation discussed above has had a similar effect and it may beonly a matter of time before the freeholder’s position is eroded further. Tenants can alreadyget a poor manager replaced, but there is talk of introducing legislation to allow tenants totake over the management per se, regardless of whether the freeholder is doing a good job ornot. Time will tell, but the only comfort is that it’s probably true that most flat-owners aregenerally happy with things the way they are and inertia may set in.

Despite all the talk at the time So far no specific new form of tenure has been introduced toallow common ownership in the way envisaged by Commonhold. However, I have alreadydescribed in ‘stuff you need to know if you want to be a landlord’ that tenants have rights totake a first refusal if the landlora wishes to sell his freehold interest, and can own thefreehold of their building through a nominee.

I mentioned at the beginning of this chapter that the same principles outlined here forresidential blocks of flats apply largely to other types of property let on long leases as well.Commercial ground-rent investments tend to be sold less often, but occasionally it ispossible to find town-centre shops and offices for sale that produce ground-rents.Commercial property is regulated by different legislation to that of residential propertyand commercial tenants have different rights and security of tenure. A buyer of acommercial freehold ground rent may pay what appears to be an excessive amount but thiswill probably be because he is anxious to buy the investment in the hope of getting vacantpossession some time in the future and making large profits from re-developing the site.

The price paid may bear no relation to the actual rent received.As a final thought, you may wonder about the wisdom of an investor putting money into alot of relatively small investments, instead of putting all his eggs into one large basket. TheGrosvenor Estate, which is owned by Britain’s wealthiest man, the Duke of Westminster,

97

is a good example of a property portfolio which comprises a high proportion of freeholdground rent investments including many prestigious houses and commercial propertiesthroughout the West End of London. This just goes to show how in time carefully selectedsmall investments can produce great value.

98

Garage mania

I once read that about ninety percent or so of the exercise bikes bought forhome use end up as extremely expensive clothes horses in someone’s bedroom. Frompersonal experience I know this to be true. I would guess that a similar thing happens withgarages. Let me ask you, do you have a garage and if you do, do you keep a car in it ? If it’slike my garage it‘s probably never seen a car and has only ever been a very large andexpensive store cupboard and garden shed.

Perhaps after you have squeezed your lawn mower away for the last time this winter youwon’t give your garage another thought until the spring, but if you did would it cross yourmind that it could be an attractive investment ? If you rent your garage from someone elsethe chances are that it already is.

If this sounds a bit far fetched just think on this. Lock-up garages are bought and sold asinvestments and in the right hands can produce a very attractive return for a small investor,for relatively little money.

So what is a lock-up garage? You’d know one if you saw one but as a rough guide you’llfind them in public and private housing estates the length and breadth of the country, usuallyin terraces of anywhere between two and a hundred in length, often with flimsy corrugatedasbestos/cement sheet roofing, and more likely than not with the paint peeling off the by nowsomewhat battered up and over doors.

It’s true that they are not highly thought of or regarded as being secondary, or eventertiary, investments in the property market. You will not find pension funds or otherlarge property investors trying to buy them. In fact the market for lock-up garages isdominated by a few specialist firms like small property companies. Don’t let this put youoff as there is plenty of scope for individuals and there are many small investors who do verywell indeed from them.

Alright, I agree that they don’t sound terribly attractive and unlike other forms of investmentI’ll talk about in this report, with garages it’s very much a case of what you see is what youget. Basically they pay a rent, pure and simple.

Having said that it isn’t unknown for an astute owner to get planning consent to redevelopthe site with a different and more valuable use such as housing. It doesn't happen often but itis to the small investors favour that a lot of the larger investors in the garage market don'thave the time or inclination to look into getting consent on individual sites. So if you areprepared to do the donkey work you may make a substantial profit if you choose andresearch your purchases carefully.

A single garage in an average location can pay you anywhere between £5 and £10 a week inrent; in parts of central London they are like gold dust and you could almost command anyrent you want if you could just get your hands on the garages in the first place.

The weekly rent from an individual garage may not appear much at first sight. However,lock-up garages are not a straight forward investment, and pose their own unique problems,and this is reflected in the relatively low price you will pay. Because of this I would expect

99

you to achieve a return on your capital invested well into double figures even if the rentappears fairly modest. Depending upon where the garages are it is more than possible thatyou could make 20 % or more on your investment. In money terms this means that youshould be able to purchase individual garages for somewhere between £1500 and £5000assuming an annual rent of between £250 and £500. So you can see that it isn’tinconceivable that you could buy a batch of say five reasonably well located garages foraround £7,000 which will pay you the equivalent of 18 % on your money even if the rent isonly £5 a week for each.

Returns at this level are very attractive but depending on the quality of the location and theoccupiers you will earn every penny you make. Common sense will tell you that garages insome locations are better than others. In urban areas where there is high density housing andlimited space demand should be highest and on the face of it this would make inner cityareas particularly attractive; but this will need to be balanced against the greater risks ofvandalism.

These are the hazards of the twenty first century and there is little you can do to guardagainst them unless you spend a fortune installing automatic entry barriers, floodlightingand employing 24 hour security patrols. Ironically anyway you may find of limiting accessto the garages by burglars and vandals will also limit their accessibility by potentialoccupiers who will want to be able to use them with no fuss or aggravation.

So it’s important to establish whether the garages are in an area where there is likely to besustained demand from potential tenants but whether the advantage of this will be offset bythe need for on-going repairs and insurance claims. In the long run it may be better to buygarages that are in a more affluent and less densely developed area where, despite a lowerdemand for garages and lower rents, the crime rate should also be lower and the loss of rentwill be outweighed by savings on repairs and lower insurance premiums.

This all probably sounds a bit over-dramatic and I have laboured the point only to show thatyou need to think carefully and be aware of all the angles before you spend your money. Buthaving said all of that I am confident there must be many thousands of lock-up garagesthroughout the country that are suitable for small investors. Common sense and a littledigging around for local knowledge will soon alert you to those garages to avoid. It could bethat the asking price is much lower than you would expect. If so try to find out why and tryto find out how long those garages have been for sale. If they have been on the market along time there could be a very good reason why nobody has bought them.

Like all property investments the key to success is to carefully select the garages beforebuying them because unfortunately not all of them will be suitable.

Lock up garages can be very management intensive and you will need to keep a careful eyeon cashflow especially as the value of the garages is directly related to the rents that theyproduce. Ideally you want all of the garages in a block to be fully let all of the time but this isprobably an unrealistic expectation even in areas where demand is high. Every occupier willmove on eventually and unless you have a waiting list there will be some gaps, known in thebusiness as voids. There are ways to reduce voids, the best being to make sure you get atleast one month's notice in writing before any one goes. This gives you a chance to advertisefor a new occupier to take possession immediately the garage becomes vacant.

100

You will also want every tenant to be up to date with rent payments and using standingorders to your bank will help. The trouble is that in inner city ”bedsit land” tenants come andgo and a lot will want to deal in cash. This often makes taking references pointless and willmean a lot of chasing around for you collecting rent door to door, unless you can get them topay for the whole letting period up front rather than weekly.

It‘s unfortunate that some occupiers treat garages less carefully than others and you willprobably find that even well-cared for blocks in pleasant residential areas will require regularinspections and probably an on-going rolling programme of repairs although most repairsshould be fairly minor and should not be too expensive.

If you don't have the time or inclination you could give the management to a specialistmanagement agency instead who will undertake organising rent collection, letting andmaintenance but using agents isn’t cheap and they will charge a fee of between 10 % and15% of the rent plus vat.

Most garages offered for sale are freehold. Very occasionally a batch of garages may be soldon a long lease, sometimes as long as 999 years and in addition to the purchase price aninvestor will have to pay a ground rent. If the garages are vacant or are let only on shortinformal licences then it probably doesn't matter if you can't buy the freehold. The criticalthing is that to maximise their investment potential the garages must be capable of being leton the open market so that you can receive a regular income from them.

As I have already explained lock-up garages are relatively cheap investments partly becauseof the small amount of income that each garage produces, partly because of the risksinvolved, and partly because they require a lot of management. This usually means that themost neglected garages, the one which are in most need of repair, or the batches where ahigh proportion are empty, or the occupiers are in arrears with their rent, can be bought a lotcheaper than a prestige batch that is actively and efficiently managed.

If you buy a neglected garage investment and are prepared to put in some initial effort youcould work on bringing the garages back into active management by finding reliableoccupiers, using standard agreements and standing orders for rent collection, and byorganising regular inspections and a programme for maintenance. Once you do all this andestablish good relationships with your tenants you should be able to maintain the maximumincome with the minimum of effort.

If this sounds like too much hard work for you or if you know from the start that you will nothave time to take on the management yourself, particularly if the garages are located somedistance from your home, then there are tdo options available to you.

The first would be to buy a garage investment that is already actively managed. This shouldsave you the initial effort needed to turn it around and hopefully the investment should beeasily maintained. However, like most things in life you rarely get something for nothingand no doubt you will have to pay for the convenience through a higher purchase price thanfor an equivalent, but run down, garage investment.

The second option is to buy a neglected or rundown investment and give the managementto specialist management agents. They will undertake all the hard work of organising rentcollection, letting the garages and keeping then occupied and organising the maintenance,

101

and you shouldn't need to be involved in the day to day running and decision making at all.There are firms that specialise in the management of lock-up garages but if you cannot findone then I am sure there will be firms of chartered surveyors and estate agents in your areawho will be prepared to do it for you.

Whether you wish to appoint managing agents or not will depend not only on the type andnature of the investment but also on your investment requirements. Obviously if you aregoing to pay someone 15% of the rental income then the yield on your investment will needto be much higher than if you were to undertake your own management and keep all the rentyourself.

However, money spent on professional management is usually money well spent and youshould benefit through a higher sale price if you ever need to sell. It is generally thought thatthe capital value of lock-up garages, which is mainly related to the rental incomereceived, should at least keep pace with inflation as rents rise. Of course this assumes thatthe garages are maintained in good condition and are not allowed to deteriorate to the pointwhere they will require total re-building.

Like other forms of investment the lucky owner with a batch of lock-up garages can findhimself benefiting from unforeseen windfall profits. This can happen where for example, asrecently happened in my home town, the local council imposed a strict control on on-streetparking and as a result the demand for garages and parking spaces increased dramatically.As a result rents and capital values also increased.

Another potential windfall that many investors in lock-up garages have been keen to exploitis redeveloping the site with a completely different use such as housing. This is possible ifthe garages are situated on a big enough plot of the right shape and with access that makesit suitable. If planning permission can be obtained from the local council the site can beeither sold on to a developer at many times the price that it would fetch as a garage blockinvestment, or the owner can develop it himself and sell the finished house or houses at aprofit.

I should stress that these opportunities are few and far between but as the existing stock ofland available for development declines it is possible that in the future local councils will beforced to view plots like these more favourably. Having said that it is by no meansimpossible that even today, if you are lucky, you may be able to purchase a garage andcreate a development opportunity that no-one else has spotted.

If you want to buy a lock-up garage investment the best place to start would be by contactingthe specialist agencies who deal with garages. Most of them advertise in the Estates Gazetteand other major property journals. They are constantly buying and selling lock-up garageson their own behalf and for their clients and should be able to provide you with an up-to-datelist of what is available.

It would also be worthwhile putting your name down on the list of some of the majorproperty auctioneers, as lock- up garages are often sold at auction.

102

How holiday makers can pay for your dream cottage

You may not realise that owners of second homes who rent them out as furnishedholiday homes can obtain generous tax concessions and of course can also use them for funand inexpensive holidays for themselves when they aren't let.

Have you ever thought that you would like to own a cottage in the country but thought youcouldn’t afford it. However, if you choose carefully and buy a property that is suitableto rent out for holidays, and as long as you follow certain rules laid down by the InlandRevenue, the tax concessions available and the income that it can produce could make thedream a reality.

To qualify as a holiday home the property has to be available to let for holidays for at least140 days a year and must be actually let for at least 70 days. It must be furnished and has tobe let on a " commercial " basis which means that a realistic rent must be charged.Charging friends or relatives concessionary rents does not count as commercial.

In addition the property must not be occupied by the same tenant for more than 31consecutive days in any seven month period.

If an owner can comply with these rules then he will be able to claim tax relief on anymortgage he has taken out to pay for the property even if he is already receiving tax relief onhis main home.

Maintenance costs and management fees are also tax deductible and can be offset againstany income received. As net profits from the lettings qualify as "relevant earnings" forpension purposes an investor can invest up to 17% of any profit that he may make in apension plan each year.

The advantages don't stop there. If he sells the property and re-invests the proceeds tobuy another holiday home which qualifies under the same rules then he will not be chargedcapital gains tax. Investors over the age of fifty-five can take advantage of "retirementrelief" which means that if the holiday home is furnished, it will be treated as a business.When they sell the property they will not have to pay capital gains tax on the first£250,000 of any capital gain, and the next £750,000 of gain will be taxed at only halfrate (figures at 1999/2000).

All in all the extremely generous tax concessions, in particular the unlimited mortgage taxrelief, makes the purchase of a holiday home a very attractive investment if you are in aposition to afford it.

The only small down side is that if you let a holiday home DSS rules mean you are obligedto pay National Insurance Contributions as if you are running a small business. Howmuch you pay depends upon the profit you make. All legitimate costs can be offset againstrent for tax purposes and this should also mean you should be able to keep NI contributionsto a minimum and leave you with a very worthwhile income.

103

Appendix One

104

How a lodger could pay your mortgage

Unfortunately not everybody is able to afford to buy a second home and have to rely uponmore modest means of raising an income. I wonder how many people have ever thoughtabout trying to obtain a rent from the house that they live in. If you have a spare room orrooms then the answer may be to take in lodgers. Any contribution they make to yourmortgage is effectively some one else buying your home for you. If you live in rentedaccommodation or have already paid off your mortgage you could use their contribution tostart saving so that you have ready funds for using in the property market.

The Housing Act 1988 makes taking in lodgers much easier than before. Under the oldsystem if a lodger had refused to leave it is possible that a County Court Order would havebeen required to make him go. Since the introduction of the Housing Act 1988 anyonewishing to take in lodgers or wanting to rent out part of their house will always have theright to get their property back.

The main condition is that the property is your only or principal home and that you live in itboth when the tenancy is first granted to the lodger and when it ends, and that in betweentimes you have shared the accommodation with your lodger. If for any reason you areunable to live in the property, it may be that you have to go to work abroad, then a memberof your family can live there instead just so long as it is still your principal or only home.You do not have to give the lodger the freedom of the whole house but the sharedaccommodation must be living rooms such as a shared lounge or a shared kitchen orbathroom.

Once you have decided that you want to take in lodgers you will then need to think aboutwhether you need permission before doing so. If you own your house outright then youprobably wont need permission although if you have a mortgage the building society mayinsist on being kept informed of who stays and their status.

If you are a council tenant you probably have the right to take in lodgers but if you are aprivate tenant then you will need to check the terms of the lease first. The next thing you willneed to consider is where you are going to find your lodger. If you live in a university townthen it will probably be easy enough to find student lodgers. The best thing to do would beto contact the Accommodation Department at the university. If you don't live in a universitytown then you may be able to find lodgers by advertising in your local paper or by askingaround your friends or work colleagues whether they know someone looking for somewhereto live.

Once you have found a lodger you will have to think, about the practical arrangements. Asthe lodger is in effect a licencee, and not a tenant, a written agreement isn't usuallystrictly necessary although it is useful to have one so that everyone knows the ground rulesfrom the start. Any agreement should be drawn up at the outset and in particular you shouldspecify the accommodation that the lodger is allowed to occupy and which accommodationis to be shared, any controls on visitors and the hours during which they may visit, andwhether you want a deposit to be paid at the beginning of the agreement. By law you areallowed to charge one just so long as it is not an unreasonable sum.

105

Probably the most important thing you will need to agree will be how much rent the lodgerwill pay, and whether and when it will be reviewed and increased if necessary. There areno legal restrictions on the rent that you can charge but obviously it is unlikely that thelodger will agree to pay more than the going market rate in your area. If you are not surewhat levels of rent are being charged look at advertisements for similar accommodation inyour local newspaper or you could even ask a local estate agent now that many of them dealin rented accommodation because of the recession in the housing market.

How much you can charge a lodger will vary from region to region. If you are relyingmainly on students the amount they can pay will be limited by the grants they receive andthey will not be able to pay over the odds. As a general guide, depending upon where youlive, you could get £50 a week or more, extra with full board.

It would also be as well to consider in advance how you intend to bring the agreement to anend and how much notice each party will have to give the other. There is no legalrequirement for a specific form of notice and a simple letter giving a reasonable period ofwarning that you wish the lodger to leave will be sufficient. Reasonable is not defined in theHousing Act but 2 or 3 days should be enough.

You should be aware that there is a legal distinction between taking in a lodger and lettingpart of your property. If you are able to provide totally self-contained accommodation suchas a granny flat then obviously you will not be fulfilling the conditions concerningshared accommodation. If this is the case then any tenancy granted will probably be anAssured Shorthold Tenancy and you will need to give two months notice to get possession.

One last thing that it is very important to consider is the tax implications of the extraincome you will be earning. As rent is treated as earned income it is important that youinform the Inland Revenue when you take in a lodger and it is possible that you may have topay income tax on it.

The Government have kept the tax position simple and an allowance is available under therent a room scheme of £4250 for the 1999/2000 tax year.

106

Appendix Two

107

"How to Buy a £60,000Investment Property for

£22,500 -or other InvestmentProperties at a 62.5%

Discount!"Dear Fellow Investor

Here's your free report. But before I give you all the details, just take a look at how you couldbenefit from buying property bargains like these:-

A house is valued at £60,000. Because it's tenanted andonly a nominal rent is paid, you can buy it for £22,500.If house prices rise by an average of 5% each year andyou sell it with vacant possession (V.R) ten years later,you would sell for £98,000 - a profit of £75,500!

But look what happens when you repeat the process.Your £98,000 will now buy investment property withV.P. value of £260,000. With average annualappreciation of 5%, ten years later you'll own propertywith a V.P. value of £425,000!

Not many other investments could turn £22,500 into £425,000 in 20 years.... and with lowerthan average risk!

Whether you're an experienced property professional - or know nothing whatsoever aboutproperty investment - this letter will tell you all you need to know about how to buy these bargainresidential investment properties with all the following benefits....

• You can buy tenanted properties at between 35% to 50% of their vacant possession valuation butyou sell at 100% of the valuation when the tenant leaves. This includes all of the appreciationfrom the date you bought it.

• You never need to find tenants.• You can invest from as little as £10,000.• Your tenants supply, and replace when necessary, carpets, curtains, furniture, light fittings, fridge,

freezer, microwave, TV, VCR, washing machine - in fact everything!• Your tenants arrange and pay for repairs to faulty electrical goods, the electrical system, broken

windows, the plumbing system, blocked drains, pipes & W.C.'s, the central heating system,gutters, roof, chimneys, fences, paths, - in fact everything!

• Your tenants arrange and pay for all repairs, maintenance and redecoration inside and outside yourproperty.

• You can manage each property in an hour or two a year - even if you live abroad! Our freemanagement guide shows you how.

• Your tenants pay for contents and building insurance.

108

This type of property investment is known as a 'life interest' or a 'reversionary propertyinvestment' (RPI). They work because they are simple to understand and they benefit both yourselfand the seller as well as being ethical and tax-efficient.

So exactly what is a Reversionary Property Investment (RPI)?

There are millions of retired homeowners whose only major asset is their property. Many ofthem are desperately short of money and live on a meagre annual income of a few thousand pounds ayear, yet they live in mortgage-free properties worth £50,000.... £75,000.... even £100,000 or more!As one report states, they are "asset rich but cash poor".

We arrange for these homeowners to sell their property at a substantially discounted price toinvestors such as yourself. At the same time you grant them a lease (we'll send your solicitor aspecimen lease free of charge) which requires them to look after the property, pay all outgoings andexpenses and keep it in good condition. Because they pay a very low rent - usually £10 a year - theyreceive an average of only 38% of their property's value. That's why with this scheme you can buyproperty at a discount of up to 65%, but receive the full value including all of the appreciation, whenthe property is sold.

From the homeowner's point of view, this is one of the only ways they can release some ofthe money tied up in their property, without having to move to another house.

We receive many letters of thanks from homeowners we've helped over the years. Here areexcerpts from a few of them:-

"Yes, this is the best decision we have ever made." "I can now look forward to the future

knowing I can keep my standard of living with no money worries."

“1 really don't know how I would have managed without your help." "Having available

cash for personal needs, holidays, gifts to friends is tremendous."

Since 1985 we've specialised in RPI's. We've sold them to private buyers funding theirretirement, pension fund or Trust and to large financial institutions and property companies who wantto expand their portfolio or diversify into new areas.

Here are more of the benefits of RPI's...

• You don't need large amounts of capital. You're buying properties for little more than a third to ahalf of their open market value.

• You don't need any property experience. The original owners become the tenants and in effectare resident caretakers.

• You don't need to visit the property. Of course you can if you want to but an inspection by achartered surveyor every two years is generally all that is required.

• You don't need to advertise for tenants. When the tenant leaves you can sell the property for itsfull value and make an immediate and very substantial profit.

• You're not responsible for maintenance, repairs or insurance. Your tenants pay for everything.• You benefit from an excellent tax shelter. Because your return is entirely from capital gain, you

don't have to pay tax on rental income. Also, until the property is sold, your profit is not knownso it can't be taxed and when you do sell it you can take advantage of Capital Gains Tax reliefs.

109

• You can buy further afield. As you don't need to be on hand to sort out problems or repairs youcan increase your potential profit by buying properties anywhere in England or Wales.

If you're an experienced property investor you may prefer to turn to page four. If you're newto property or other types of investment, please read on....

Thinking about the future is something most of us do a lot of, but not a lot about.

Planning ahead is something we tend to put off until another time. After all, there's alwayssomething more pressing that needs doing today ... and tomorrow will take care of itself, won't it?

Unfortunately not. Only about 12% of people over 65 are financially secure. The 'nanny'state is gone forever and all of us have to take charge of our own financial future.

"Without investments, the average person has little chance to savefor his heart's desire. He has little chance of obtaining anythingthat he cannot purchase from his ordinary income. It's the oldwork-play story. The average person spends everything he earns onliving. If he receives a raise in salary, it is eaten up quickly by a risein living expenses."

(How To Get Rich While You Sleep. Huskin & Monsees)

Of course you may already have savings, pension funds and other forms of investments. Butwill they be enough to provide you with a comfortable, worry-free future?

Don't rely on your job or business alone. Few people become wealthy trom their job,whether they work for themselves or for others. Almost everything most people earn always seems toget swallowed up by taxes and everyday living expenses.

Don't rely on your pension. We're all aware of what can go wrong with poor performingpension funds. Even the better pension schemes can give a mediocre return after management fees,commission and inflation. Also, when you retire your pension fund must be used to buy anannuity, so you have no control during your lifetime and when you die you can't even leave it toyour family!

Don't rely on savings. Savings are important, but the interest rates offered by even the bestbanks and Building Societies mean that your money grows very slowly after tax and inflation takesits toll. By all means keep some savings for emergencies, but you must make the rest of your moneywork for you in a far more profitable way.

You'd probably have quite a shock if you sat down and worked out your projected retirementincome. If you're earning £25,000 a year now and you want to retire in 25 years on an equivalentamount, you would need a retirement income of £52,000 after allowing for inflation of 3% a year.Then, if your investments paid interest of 6.5% you would need to invest £800,000!

But help is at hand. Something can be done - and the information in this letter could be theanswer! I'm not suggesting that you abandon your pension or reinvest all your savings. Far from it.My view is that a balanced portfolio of savings, pension and sound investment is the right wayforward.

You may have heard the saying.... 'Money doesn't buy happiness'. Well, that may be true -but most of the time it buys something so similar it's hard to tell the difference!

110

I remember many years ago watching a television show starring the late comedian, MartyFeldman. He was sitting in a deck chair, sunbathing on his yacht which was moored next to a tropicalisland. In his right hand he was holding a glass of champagne. His left arm was round the waist of abeautiful young girl in a bikini. Marty looked into the TV. camera with his deadpan face and hugeround eyes and said, "Just look at the sea.... the sky.... the palm trees.... the beach..... with all this,who needs money"

Sometimes you have to decide exactly what you want out of life. It's wonderful to have thesecurity and confidence that wealth brings but what do you really want? Material things certainly butperhaps also to work only a few hours a day, two or three days a week.... or maybe not to work at all!Best of all is the time it brings. Time to spend with your partner, your children, your friends. Time toplay or watch golf, tennis, football or any other favourite sport or hobby. Time for more holidays,shopping, travel, entertainment....

You could make all this possible with reversionary property investments. They're low risk,yet offer an excellent opportunity for very substantial capital growth.

As I explained earlier, these are properties owned by the occupants, usually aged between 60and 90, who need to improve their standard of living but don't want to move.

This type of transaction enables them to sell their property now, but in return they receive alifetime lease so that they continue to live in the property but as tenants. You, as an investor, canbuy their property at a very substantial discount. You become the registered owner but don't have anyright to occupy the property.

The tenants pay you a nominal rent until they move or die. Possession of the property then'reverts' to you. You can then sell it, let it or live in it. If you sell, you sell for its full market value soyou not only receive whatever amount it has appreciated by, but also the difference between the priceyou paid and its value with vacant possession when you bought it. If you let it, you can charge thefull market rent based on its current V.P. value.

‘Gearing' can multiply investment returns. Many conventional property investments arebought with 'gearing'. This means part, or even all of the purchase price is borrowed. If theinvestment then grows by more than the interest you are paying, you're multiplying your return. Forexample, you buy an investment property and borrow half of the purchase price. You pay interest of10% p.a., but if your investment is returning 20% p.a., the net return on the money you have investedwill be 30%! But there's a catch! Unfortunately geared investments also magnify losses. If yourinvestment reduced in value by 10%, you would be losing 20% of the amount you invested.

RPIs are geared - but without gearing risk. An RPI bought for cash will still give you theeffect of gearing - even if you don't borrow any money. First of all, when it reverts, you profit fromthe difference between the purchase price you paid and the property's vacant possession value whenyou bought it. Secondly, any increase in value is based on the V.P. valuation - not the price you'vepaid. For example, you purchase for £30,000 an RPI with a V.P. value of £80,000. If its valueincreased by 5% in the next year, it would be worth £84,000, an increase of £4,000.. ..but this givesyou a 13.3% return on your investment. And if the property reverted in the first year, and of coursesome do, your £30,000 would be worth £84,000 - a profit of £54,000 (180%)!

Any investment carries some element of risk. We believe that reversionary propertyinvestments carry less risk than most as you're buying a property with a discount of up to 65%! Thisgives you a buffer between its vacant value and the price you paid. For example, you pay £22,500 for

111

a £60,000 RPI property. Even if house prices didn't increase you would still have a built-in profitof£37,500 (£60,000-£22,500) when you sell it with vacant possession.

Compounding and patience »the secret of getting really rich. Many investors try to getrich as quickly as possible - so they take big risks. As Warren Buffet, the second richest man in theworld advises.... 'Your investment objective must be to get the highest compounding rate ofreturn possible for the longest period of time, with the minimum of risk.? If you add to this aminimum of management, tax shelter and almost no expenses, you have an incredibly potentcombination. It's almost inevitable that anyone can become rich by earning consistently above-average annual rates of growth over a long period of time. The key to consistently successfulinvestment is time, not timing.

An RPI meets these requirements exactly!

It's said that Albert Einstein was once asked, "What is the most powerful force in theUniverse?" He replied, "compound interest!"

With a conventional investment property part of the return is capital growth and part is therental income. As rent is taxable you would have less cash to reinvest. RPFs concentrate on capitalgrowth rather than income, so your investment can increase with compound growth at themaximum rate possible and any tax on your profit is deferred. In addition there are various othertax advantages and reliefs and subject to your personal circumstances in many cases there may be notax payable at all.

So what would be the difference between a deposit account that paid interest of 5% a yeartax-free compared to 5% a year interest (or rental income) on which tax has to be paid?

Compound Growth Table - £100.000 InvestmentNETT YIELD 5% (Tax-Free) 3.85% f23% Tax) 3.0% (40% Tax)

5 YEARS £127,630 £120,790 £115,927

10 YEARS £162,889 £145,903 £134,391

15 YEARS £207,892 £176,237 £155,796

20 YEARS £265,329 £212,877 £180,611

25 YEARS £338,635 £257,135 £209,377

By the way, just to compare - if you had bought for £22,500 an RPI with a V.P. value of£60,000 and it increased in value by 5% a year and then reverted after 10 years, it would be worth£98,000. This represents an annual tax-free compound growth of 15.85%! An earlier reversion orhigher house price appreciation would give an even higher return.

Here are answers to six questions we're often asked:-

Who pays for Buildings Insurance?

As part of the tenancy agreement it's the tenant's responsibility to pay the premiums for afully comprehensive index-linked buildings insurance policy. This must cover the full re-instatement

112

value of the property. The agreement also requires the tenants to maintain the property in goodcondition. In fact, since they have usually spent many years in their home, most tenants take care ofthe property and subject to the investors' approval, sometimes even use the additional money toimprove, modernise or extend it!

What if the tenants outlive me?

This happens very rarely, as most tenants are elderly. In practice, properties often revertbecause the tenant has to move to a residential or nursing home or to live with relatives. In the eventof your premature death, your investment would form part of your estate and pass to your heirs.

What about liquidity?

If you decide that you don't want to wait until the property reverts, you can sell at any time.We'll be pleased to arrange this for you. We have an extensive list of reversionary investors and willhelp you to achieve the best price as quickly as possible.

You would have to pay for a valuation and our selling fee which is payable on completion of the sale.

How long will it take to sell?

It can take some months to achieve and complete a sale. Unlike equities, property is illiquid.However, this can be quite an advantage! When the property market is pessimistic, owners tend tohold on and wait for the market to improve. When the equity market is pessimistic, investors tend topanic and their over-reaction, and the relative ease of selling, drives the market down. The moreinvestors who want to sell, the lower the market makers price the shares. It becomes a vicious circle.

Can I make a profit if I sell my RPI before it becomes vacant?

Definitely! One advantage of RPIs is that they have automatic built-in growth. Let's assumeyou buy a property valued at £60,000. It's occupied by a couple, both aged 73. You pay £22,500.House prices rise 5% each year and five years later you decide to sell it. As you're selling subject tothe tenancy, you won't be able to sell for the vacant possession value of £76,500. However, not onlyhas the property increased in value, but your tenants are five years older. You'll be selling a propertyworth £76,500 occupied by a couple both aged 78. This means that you could expect to receive notthe 37.5% of £60,000 that you paid, but 45.9% of £76,500... £35,100.

But what if it's then only occupied by the lady who is now aged 78? You could then expect toreceive £40,500. And if it's only occupied by the man who is aged 78, you could expect to receive£46,300!

What management is needed?

Very little. If you can't or prefer not to visit your property, we recommend you instruct aqualified surveyor to inspect it every two years. It doesn't cost very much. He'll send you a report onany repairs needed that he's noticed and a valuation. We've written a simple management guidewhich is available free of charge.

Reversionary interests have been traded for hundreds of years. For example, in 1796 FrancisBaring, co-founder of merchant bankers Baring Bros. paid £20,000 to purchase the reversionaryinterest in a large house and estate in South East London. It reverted just four years later. Theincreases in house prices, home ownership and the cost of living have made RPIs an increasinglypopular investment proposition for investors both in the U.K. and abroad. The U.K. residential

113

property market with its high rate of owner occupancy is particularly well suited to this scheme.

The future of the property market....

RPIs can be an outstanding investment opportunity. Because of the large discount and withlittle or no expenses or management, you're always likely to gain substantially in the long run, even ifproperty prices stagnate or decline in the short or medium term.

Obviously I can't give any guarantee about the future growth of the property market, but all thesigns are excellent for long term steady growth. According to the Nationwide's property value index,since 1974 the growth in property values has averaged 8.3% a year.

That's at least 3% above the average rate of inflation. This is because property prices reflectnot only the increase in labour and material costs, but also the demand for a diminishing supply ofwell located building land. House prices also reflect interest rates and affordability.

According to Neil MacKinnon, an independent economist, interest rates should continue tocome down. MacKinnon's optimistic view on UK interest rates is backed by economists at brokersWarburg Dillon Read. They predict a huge global reflation which could drive UK base rates down farlower than they are now. Borrowers can look forward to a series of rate cuts over the next few years,with most experts predicting a bank base rate of 4% by 2003.

"We think that capital values are actually undervalued in themainstream market, using any measure of affordability. We expect abounce back after the millennium." (FDP Savills - October 1998)

^Bricks and mortar are back. Houses in Britain are massivelyundervalued, will more than double in price over the next ten years andrepresent a better investment than stocks and shares, according to a newforecast." (The Sunday Times - 16 March 1997)

The current pattern of steady growth in the property market is the ideal situation.

As with many other investments there have been some years when house prices have notrisen or have even declined. However, this is almost always a correction in the market, a way ofredressing the balance when in previous years appreciation had been well above the average trend.

According to Department of the Environment figures, the average price of a residentialdwelling in the UK was:- £ 4,640 in 1969

£15,594 in 1978

£49,355 in 1988

£83,031 in 1998

Of course, much of this period saw high inflation rates which offset some of the gains in realterms. The next few years should see a steady and more gradual increase in house prices, but withlow rates of inflation expected, the real return to you will be substantial.

There are also windfall opportunities. Earlier in this letter I showed a theoretical example ofthe growth potential of RPIs. Although you should always consider RPIs as a medium to long-terminvestment, there's always the possibility of a windfall. This happens regularly....

One of our Hong Kong investors purchased a property in Billericay, Essex for £27,500 -

114

40% of its vacant possession value. It reverted the next year and was sold for £72,000 - a profit of£44,500!

An investor in the Middle East purchased a property in Scunthorpe for £47,000. It \vasvalued at £90,000 with vacant possession. The investor paid a deposit of £27,500 and borrowed thebalance from his bank .The property reverted just three months later.

As I'm writing this letter, a solicitor has just telephoned to tell me that a property which oneof our investors bought for £38,450 four months ago, has Just become vacant. It's a freeholdterraced house in Croydon. It was valued with vacant possession at £89,000 when he bought it.

Here's some more information on how RPIs can work for you ....

Some homeowners only want to sell part of their property equity. They want to keep the restto either sell later or leave to their family. This is known as a 'part' or 'partial' reversionary sale.

You and the occupant(s) become 'tenants in common'. You would usually own 50% or 75%of the equity. As with a full reversion, the occupant(s) remain responsible for all maintenance andexpenses.

We often find that they decide later to sell the rest of the property equity. You would havethe first option to purchase it.

Normally a Trust Deed is used for this type of transaction but alternatively you could buy100% of the equity and the homeowner would hold a Legal Charge to secure their retained interest.The homeowner then becomes your tenant and a standard reversion lease is then granted by you.When the occupant(s) leave, die, or decide to sell, you sell the house for the highest offer and the nettproceeds are divided proportionately.

• If you buy part reversions you can afford to purchase more reversionary propertiesand this will increase the possibility of early reversions.

• With either a full or part reversion we find that properties are generally welllooked after, but this is particularly so with part reversions as the occupantsstill have a financial as well as an emotional involvement in their home.

You can even buy RTIs with rental income! Many of our investors have asked us to findregulated tenancies for them. However these are becoming more and more scarce as there is alimited number and when they become vacant they are generally sold with vacant possession.

Because there are fewer available, prices (as a percentage of the V.P. value) have beenincreasing and regulated tenancies have sold for as much as 70% of the V.P. value at recent auctions.

....But I can offer you an even better alternative! Some reversionary applicants need ahigher amount than our actuarial tables show they should receive. They're happy to pay a reasonablerent if they can receive 50% to 60% of the V.P. value of their property. We've therefore createdtenancies which are very similar to, but in many ways far better than, regulated tenancies.

They tend to be in much better condition. As the property is being purchased direct fromthe owner and was not previously tenanted, in most cases it has been well looked after.

They’re better maintained. Many tenants regard their property as if they still owned it and

115

take a pride in their house, garden and neighbourhood.

Tenants are liable for all repairs and maintenance. The tenants are responsible forinternal and external repairs, buildings insurance and maintenance. This also means they won't beasking you to see to, or pay for, any of these!

Tenants have to use part of the purchase price for any essential repairs. When anapplication is received, an independent professional report and valuation is obtained. The tenant isresponsible for any essential repairs and part of the purchase price is kept back until these repairshave been completed.

Properties tend to be in better areas. This makes them less prone to vandalism, more likelyto rise in value and easier to sell when they become vacant.

There's a wider choice of property. Properties tend to be typical suburban three bed semi's,but can be anything from seaside bungalows to large executive detached houses.

There's no right of succession. The lease only allows those named in the Agreement toreside there and no other members of the family (or anyone else) can occupy the property or claim aright of succession to the tenancy.

Rent reviews. These investments show a rental return of 6%. However, because there are noexpenses, this is also the net return. The Lease Agreement also allows for a rent review every twoyears with an increase in line with the Retail Price Index.

How we calculate the price of an RPL...

When we receive an application, we instruct a reputable firm of valuers to report on thevacant possession value of the property and advise on its overall condition. The firm has noconnection with us and the valuer must be an Associate or Fellow of the Royal Institution ofChartered Surveyors. Although it's not a survey, the report lists any urgent and any recommendedrepairs. The report is for the sole benefit of the investor. This means that the surveyor has a legalliability to you for the accuracy of the valuation and information given.

Based on the valuation, together with other factors such as the life expectancy of theowner(s), location and condition of the property, interest rates and market conditions, we can thencalculate the discounted purchase price using actuarial tables. This is calculated to give you a netannual compound appreciation of between 7.8% and 10.2% plus any house price appreciation.

Actuarial tables are compiled by actuaries (experts in statistics) taking into account the age(s)of the occupant(s), whether there are one or two occupants, and whether they're male or female. Theolder the owners are, the higher the percentage of the V.P. value they receive. From these facts andusing expectation of life tables, they estimate how long the occupants are likely to live in theproperty. The purchase price can then be calculated by discounting the value of the property afterallowing for how many years are likely to elapse before the property becomes vacant.

Although people are now living longer, in our experience and based on a wide range of ages,the average length of time before a property reverts is eight years and this has not changednoticeably. This is because many properties revert as the tenants are no longer able to look afterthemselves and have to move into a nursing or residential home.

The valuation report will list any urgent or recommended repairs. If the report mentions anyurgent repairs, an undertaking to have them completed within six months has to be given by the

116

tenant. Your solicitor will retain part of the purchase price to cover the cost of any urgent workrecommended by the surveyor. This will be held until the repairs have been satisfactorily completed.

RPIs are usually purchased for cash as the purchase price is so low it is usually below theminimum loan available for investment property mortgages. However, some investors obtain financefrom their bank. Usually this is on an interest-only basis and the loan is repaid whenever funds areavailable or when the property reverts and it is sold. An alternative is to borrow against othersecurities such as other property, shares, endowment policies.

Most investments suffer from two major disadvantages - their growth is significantly reducedby taxation and expenses. Reversion properties appreciate much more rapidly because their growth iscompounded without tax deductions or expenses. When they revert you'll be able to reduce anyliability for capital gains tax by any purchase, selling, or other expenses. These could includeprofessional fees, interest on borrowings, visits to the property, telephone calls and any otherexpenses incurred. I'm afraid you won't have had many expenses you can claim - but that's not a badthing either!

• If you're resident in the U.K. for tax purposes and purchase in your own name, you'll be ableto claim the annual Capital Gains Tax Relief and any expenses.

• If you purchase jointly with your spouse or partner, you will both be able to claim the annualCGT relief as well as all expenses.

• You’ll also be able to claim taper relief.• If you live outside the UK, when the property is sold, the net proceeds will be paid to you in full.

Obviously your circumstances are unique and in order to clarify your own situation you shouldtake professional advice.

What if your tenant wants to move to a smaller property? Many vendors are concernedthat when they are older they may have to move into a smaller home that is easier to look after orthey may need to live near their relatives. Without this flexibility many of them would not evenconsider a reversionary sale.

To allow for this, the Lease Agreement includes a clause allowing the tenant to move toanother property, but only at your sole discretion. The selling price of the existing property and thepurchase price of the new property must be approved by you first. Normally, it would only beacceptable if the new property is valued at no more than 75% of the vacant possession value of theexisting reversionary property. You would also have to be satisfied that the new property is a goodinvestment.

You'll be pleased to know it's the tenants' responsibility to find a buyer for the property at aprice agreeable to you, to find their new home, also at a price agreed with you, and to pay all legal,moving and estate agent fees. In practice, very few vendors choose to move, because of the troubleand expense involved. In fact this is the very reason they choose a reversionary sale in the first place!

However, if they do move, it can be very advantageous for you. The move to a lower valueproperty means that you could receive back most or even all of your original investment, leaving youwith the ownership of a property for which you've paid little or nothing!

Here's an example. A couple live in a house valued at £80,000. You purchase thereversionary interest for £30,000. Some years later one of the occupants has died and the survivorwants to move into a bungalow costing £70,000. The house is now worth £130,000. You sell it for

117

£130,000 and spend £70,000 of this buying the bungalow. Where do you stand now? Well, first of allyou've received back all of your original investment of £30,000....plus a profit of £30,000....(so youhave £60,000 available to spend or reinvest) and you still own a property valued at £70,000!

It's conventional with reversionary investments to pay a small additional amount to tenants ifthey voluntarily vacate the property.

The maximum additional amount paid is 20% of the original purchase price (not the vacantpossession value). This reduces by one percentage point each year after completion. The lease alsocontains a formula which deducts an additional percentage point for each year the youngest occupantis aged over 65 at the time of the reversionary sale.

This gives higher compensation to younger vendors who have received a comparativelylower amount for their property.

Here's an example. A couple aged 73 and 77 sell the reversionary interest in their propertyfor £20,000. The property has a V.P. value of £55,000. Five years later one occupant has died and thesurviving partner wishes to move and live with a member of the family.

• The additional payment is first reduced by eight percentage points as the youngest occupant wasaged 73 (eight years older than 65) at the time of the sale.

• The payment is then reduced by another five percentage points as five years have elapsed betweencompletion of the sale and voluntary vacation.

• This means that the additional 20% payment is reduced by a total of 13%. Therefore, 7% of theoriginal £20,000 purchase price is payable by the investor = £1,400.

The result is that after five years you would own a property worth perhaps £70,000(assuming annual house price inflation of 5%) for a total investment of £21,400. It's worth bearingin mind that without this small additional payment, the tenant may not be able to afford to move.

A short time ago a lady contacted us. Two years earlier she had sold the reversionary interestin her property to one of our investors. She was finding it hard to manage on her own. She wanted tomove out and rent a small flat near to her daughter who lived in Leicester - about 100 miles away.Unfortunately she didn't have enough money to pay for moving and furnishing the flat. However, theextra vacancy payment of £1,200 was enough to pay for her expenses and allowed her to move.

How does an RPI compare with a conventional investment property? In the examplebelow. I've assumed you have £67,500 to invest, that house prices, rental income and expensesincrease by 5% a year, and that the property becomes vacant after 10 years. The figures will beslightly different if either investment is bought with a mortgage but I think they speak forthemselves!

Conventional Reversionary Investment Property

Acquisition costs, fees, stamp duty, furnishing etc £ 7,500 £ 5,800Net capital available £60,000 £61,700This buys property with a V.P. value of £60,000 £165,000

118

Rental Income (Year 1) £ 4,800 £ 10

Management cost after voids (12.5% + VAT), say £ 660 £-Maintenance and repairs, gas safety certificate £ 500 £ 30Rental voids (5%) £ 240 £-Cleaning after tenancies £ 50 £-Insurance £ 250 £-Miscellaneous & professional fees £ 200 £-Fund to supply and replace furniture, redecoration etc £ 300 £-

£2,150 £ 30

£2,650 £ (20)

£ 583 £ -

£2,067 £ (20)

Net income

Less Tax

Net income after tax

119

.... comparison table continued Conventional Reversionary

Value of property after 10 years £ 98,000 £266,000Plus net rental income £ 25,920 £(370)Plus interest earned on rental income £465___ £124,385 £265,630Less initial investment £ 67,500 £ 67,500

Net profit after 10 years £ 56,885 £198,130

Because with RPIs the return is based entirely on house price appreciation, I thought it only fair toshow you a comparison assuming a lower average annual appreciation of 3.5%. This would producethe following figures:

Value of property after 10 years £84,650 £232,750Plus net rental income £23,950 £ (370)Plus interest earned on rental income £ 435 £-

£109,035 £ 232,380Less initial investment £ 67,500 £ 67,500

Net profit after 10 years £41,535 £164,880

120

Obviously these are only hypothetical illustrations and the figures will be different for eachproperty. Even so, you can see why I believe the compounding efficiency of RPIs, together with theminimal management and expenses, and far lower risk, puts them 'streets ahead' of conventionalrental income properties.

Is it best to only buy reversionary investments when house prices are increasing rapidly?

All investments go through cycles. If you can buy shares or property when prices are at theirlowest and sell when they're at their highest, you will of course make the most money....unfortunately this is virtually impossible. So should you only be looking at buying RPFs whenprices are rising strongly?

First of all, let's look at the alternative. If you don't invest in property and keep your moneyon deposit, what return can you expect? Let's say your deposit account pays annual interest of around5%.

After basic rate tax your money will earn 3.85% each year. If you pay tax at 40% it will earn3% a year. So the question is....will an RPI give you a better return than this and will any higherreturn be enough to justify less liquidity and higher risk?

For RPFs to match the return on your deposit account you only need around 1.5% a yearincrease in property prices and this is without taking into account your profit from the differencebetween your purchase price and the open market value.

How much is this difference worth? When you buy an RPI for say 40% of its open marketvalue, you know that at some time in the future when it becomes vacant it will be worth 100% of itsopen market value. So even if it hadn't increased in value you would have 150% built-in potentialprofit.

We've found that properties revert on average after eight years, but let's assume yours revert after tenyears.

This means even if your RPI was only worth the same in ten years as it is now, your £40,000investment would be then worth £100,000!

This alone is equivalent to 9.6% a year compound tax-free growth!

If property prices suddenly increase - and at times they have increased by over 2% in amonth -your RPI investment is automatically geared and if you paid say 40% of the open marketvalue, that 2% increase translates into 5.0% - in one month!

Just like shares and most other investments, an RPI must be looked on as a medium to longterm investment. During this time the value may reduce, be static, increase slowly, or increaserapidly. Over a period of time it may do all of these. However, over the last 30 years the trend hasalways been for house prices to increase. This has averaged between 2% and 3% more than annualinflation and closely follows average earnings. In addition, there are other market forces which havean effect, such as the increase in demand for property due to more single or divorced people wantingtheir own home and, of course, the increase in the cost of materials, labour and land.

Also... any appreciation will grow tax free as no tax is payable until your property is sold.Even then you can take advantage of various tax reliefs and depending on your circumstances theremay be no tax payable at all.

121

There's another point you should take into account. When the house price market isperceived to be slow we find we receive more applications and these also tend to be better properties.This is because vendors often don't want to sell the reversionary interest in their property when theycan see prices rising but often will only go ahead when they are not increasing or increasing slowly.

So where do we find these properties?

Unfortunately RPIs don't 'grow on trees!' You wouldn't believe what's involved before wecan add a new property to our list.

There isn't even a good 'second-hand' market. It's very rare that an investor asks us to sell anRPI for them. In fact I can only think of two since we started selling them in 1989! I expect that'sbecause investors know that they'll make the most profit by holding each property until it reverts andthere's always the thought in their mind that it could happen just after they sold it!

I first came across RPIs in 1984.1 was then very involved in running another business so Iliked the idea of building up a property portfolio but without problems and management taking up alot of my time. I started buying them regularly from a reversion broker.

After a time one of the partners decided to retire and I bought her half of the business. Thesame thing happened with the other partner some years later. What had I bought? Well, ten years ofknowledge and experience, a list of active investors, but most importantly, a network of introducerswho regularly came across older clients or customers who needed to raise money. I've been buildingup that network ever since.

What happens when we receive an enquiry from one of our introducers or direct from ahomeowner?

First of all we have to ask them a number of questions to find out whether a reversionary saleis the most suitable plan for them and whether or not they're eligible. From that information we useour specially written computer programme and actuarial tables to calculate how much they canexpect to receive. We print an estimate and send it to them. We then discuss with them how the planworks, whether it's the best option for them, and answer all their questions. They then discuss theplan with their family and professional advisor.

One of our biggest problems is explaining why they don't get the full value of their property.Many of them think they should! We then have to answer further questions by letter or phone. If theythen decide to apply, we arrange for their property to be valued.

The valuer will make an appointment to inspect the property. Afterwards he contacts localestate agents as well as his own estate agency if they have one locally. He'll find out how muchsimilar properties in the area have recently sold for. He'll make allowances for any materialdifferences such as a better or worse side or part of the road or area, a garage, any modernisation,double-glazing, a conservatory, an extension. We then receive a copy of the report.

The valuation is almost always for a lower figure than the amount the applicants haveestimated. This is because they are generally over-optimistic and base their estimate on the askingprices of similar properties. We then have to recalculate the reversionary selling price, based on thevaluation report. Our computer prints a revised estimate and we send it to the applicant. Then westart again -discussing the new amount and the plan, answering their questions, and their relative'sand professional advisor's questions. If they still want to proceed, we put details of the property onour list.

122

In many cases a financial advisor (to whom we pay commission) has to visit the applicant todiscuss the plan with them. It often takes up to six months from the time we receive an enquiry to thetime the property can be offered for sale.

At every stage, some applicants drop out of the scheme. I recently calculated that out ofevery 87 inquiries, only one property goes on our list.

When you complete a purchase we charge you a fee of 2.5% (+VAT) of the vacantpossession valuation of the property. Now, you're probably asking why is our fee based on the vacantpossession value of the property and not on the purchase price? There are two reasons:

It's conventional in the reversion industry to base fees on the V.P. valuation. This is becausethe transaction is actually a residential 'sale and leaseback'. You are, in effect, purchasing theproperty for the full open market V.P. value and then granting a lifetime lease to the vendor. The rentfor the anticipated length of the tenancy is commuted (paid in a lump sum instead of instalments) andthen discounted because it is paid in advance. Because the tenant does not have this lump sumavailable, you then deduct it from the purchase price.

Due to the work and expense necessary to 'create' each reversionary investment, and in orderto ensure a constant stream of new properties for our investors, our accountants have calculated thefee we need to charge to make our service viable. If we were to base our fee on the purchase price wewould have to charge much more than 2.5%.

But please bear in mind our fee is only payable on completion and you should allow forit and your legal fees in any offer you make.

To complete the picture, let's look at how RPIs have compared with other forms ofinvestment. If you'd invested £20,000 in 1987, ten years later it would give a return of:-

• £37,300 from a Building Society = 86.5% growth (HSW 30 day Building SocietyAccount sector average, nett income re-invested)

• £53,940 from an average UK equity growth fund = 169.7% growth (ReutersHindsight: UK Growth UT's Sector Average, nett income re-invested)

• £94,390 from a typical RPI = 371.9% growth (assuming property purchased for 40%of V.P. value, and based on DOE house prices, all dwellings, U.K. average).

If you'd invested in RPIs 10 or 15 years ago, just imagine what they would be worth today!Think what they could be worth in 10 or 15 years time if you start investing NOW!

So what do you do next?

You should seriously consider buying RTIs if you're concerned about the volatility of thestockmarket.... if you need to diversify your share investments or existing property investments.... orif you need to invest more for your future.

If any of the above describe you - or you simply want to find a safe home for your moneywith low risk but high profit potential - you should make sure you're on our mailing list.

Here's all you have to do....

Complete the enclosed Priority Registration Form and return it to us by fax or post.When we receive it we'll add your name to our mailing list. We'll send you a table of propertytransactions and house prices for 12 areas of the U.K., and also our current list of reversionary

123

investments. Each list has photographs and details of 60 or 70 reversionary properties in all areas ofEngland and Wales. It gives the age(s) of the tenants and details of the property. We'll send you newlists regularly and also any press cuttings or other information which we think could be of interest toyou.

When you receive a list, let us know which properties you're interested in. We'll send youmore information, a photograph and a copy of the valuation. If you'd like to visit any property we'llarrange a viewing.

Because most investors don't plan to live m the property, they rely on the valuers' report andbuy RPFs without viewing them. It's entirely up to you. Then, if you want to go ahead, let us knowhow much you'll offer. We'll put your offer to the vendors and if it's accepted, we'll write to everyoneconcerned. Your solicitors will then arrange the conveyance and the lease. Within eight weeks yourpurchase should be completed and you'll enjoy every penny of appreciation from the date of thevaluation.

We’ll give you all the help we can at every stage. We'll advise on the bestproperties and areas, liaise with your solicitor and the vendor and help inany way possible if you ever need assistance or advice at any time in thefuture.

A package deal from solicitors We know of a number of solicitors who specialize in actingfor purchasers of reversionary investments. They've agreed to offer our investors a special package.They will act on your behalf throughout the entire transaction for a reasonable fee and will quotetheir fee to you before beginning any work. They'll deal with all the legal requirements andtechnicalities and will supply all the legal documents free of charge. You should find it much quickerand less expensive to use one of them but of course you're welcome to use any other solicitor if youprefer.

By the way, you never send a penny of the purchase price to us. You pay it direct to yoursolicitor, the title to the property is registered in your name at the Government Land Registry andwhen you sell your property, your solicitor will send the sale proceeds direct to you.

Do you need any more information?

Call 0113 228 4488 between 9.00 a.m. and 5.30 p.m. Monday to Friday with any questionsyou may have. Or fax 0113 228 4489 or send an E- mail to cavendish.group@dial.pipex.com at anytime. If you're calling from outside the UK telephone +44 113 228 4488 or fax +44 113 228 4489.My friendly staff and I will be very pleased to give you any assistance or information you need.

Our Guarantee -

We guarantee that it, for any reason whatsoever, during the first 12 months you're notcompletely satisfied with any RPI investment you've bought from us, you can ask us to sell it for youand we'll waive our 2.5% selling fee. We'll arrange another valuation if necessary, at our expense,add your property to our list, send details to all our investors in the U.K. and to our agents in HongKong, Singapore, the Middle East and South Africa. We'll arrange viewings and do all we can to helpyou achieve the price you want including any appreciation from the time you purchased it andany increase due to your tenants being older.

Could we offer anything fairer than that?

124

From the information I've given you, and on the strength of this guarantee, I ask you toseriously consider investing in RPIs. I've enclosed a Registration Form. Don't hesitate - complete andpost or fax it to me today!

Yours sincerely

^^Raymond Linton Managing Director

PS. When you buy an RPI you immediately start to gain from any appreciation on up to three timesthe amount you've invested and the difference between your purchase price and the V.P. value. Thiscould be one of the best chances you'll ever have to make a fortune for yourself. For hundreds ofyears shrewd investors have been buying RPIs. Why not copy them?

P.P.S. No one can accurately forecast future property prices but all the signs show that as RPFs areset for continued growth - and this will be stimulated with reducing interest rates.Remember.... when you buy an RPI you have a full 12 months to decide whether you'recompletely happy with it. If for any reason you don't think it's an excellent investment, simplylet us know and we'll arrange to sell it for you without any selling expenses and at a price thattakes into account the higher age(s) of your tenant(s) and any increase in value.

© Copyright 1999. CAVENDISH PROPERTY INVESTMENTS LTD

CAVENDISH PROPERTY INVESTMENTS LIMITEDCliffdale House, Cliffdale Road, 376 Meanwood Road, Leeds LS7 2JF Tel: + 44 (0) 113 228 4488 Fax: +44 (0) 0113 228 4489

E-Mail: cavendish.group@dial.pipex.comRegistered in England No. 1946389

125

“Action steps to get youstarted”

126

I’ve identified ten simple steps to start you on the roadto owning your own profitable property portfolio usinglittle or none of your own money. Here they are…

127

Number one – “Get focused -resolve to do it”.

“Until and unless you can form a clear and distinct and accurate picture of what yourvision for the business is…you can’t possibly build or fulfil or achieve your dream forthat business”. Jay Abraham.

Decide what you want to achieve – “begin with the end in mind”. Know where you aregoing, why you want to get there, how you are going to get there.

Count the cost. What are you prepared to do to be successful. What are you prepared to givein terms of time, money and commitment. “I did the best I could” isn’t always enough,millionaires do what is necessary.

Set stretching but achievable business & financial goals. If you think small, you’ll staysmall. “As we have to think anyway, we may as well think big” - Donald Trump.

Set personal, spiritual, physical, family and social goals as well to keep your life in balance.

Set a time-table for each goal. Make a plan for achieving each goal in the form of simpleaction points with deadlines. With the end in mind, make your plan working backwards fromwhere you want to be back to the present time.

Review your goals regularly to make sure that you keep on track and do only those thingsthat are important.

128

Number two - Decide on a suitable vehicle

Are you going to own property:

a) in your own name, as a sole trader.Advantages are that you keep full control of the business and all the profits.Disadvantages are that there is unlimited liability and you are fully responsible for allthe business’s debts if it fails. The amount of money you will be able to raise willdepend upon your personal circumstances.

b) as a partnership (i.e. with your spouse – there may be tax efficient reasons fordoing this) or with a financial backer.

Advantages are that you can use partners money for finance, and they shareresponsibility for running the business (in some circumstances this may be adisadvantage and you should be thinking of a sleeping partner only i.e. someone whoonly puts in their money and leaves the running of the business to you).Disadvantages are that there is unlimited liability and you are fully responsible for allthe business’s debts if it fails, including the debts incurred by your partner.

c) through a Limited Company.Two main advantages. Firstly, there is limited liability and shareholders assets areprotected if the business fails. You will only loose the money you put into thebusiness. Secondly, when you want to raise finance you can do so through issuingshares and not have to loose control of the day to day running of the company.Two main disadvantages. Firstly there are strict rules about accounting and recordkeeping including sending copies to Companies House and keeping a CompanyRegister for inspection. Secondly, some banks do not like lending to LimitedCompanies and will want to sign as a Guarantor for any loans. Often there is no wayaround this if you want the money.

Talk to your accountant and agree which is best for you as there as tax and accountingimplications. If you don’t have an accountant, find one – see step Number four.

129

Number three – “Make a plan”

Write a business plan

For you – so you know where you are going and so you can keep on track

So you can show it to your bank manager, financial backer or a potentialpartner.

Include:Cash flow projections – monthly for the first year, then quarterly for yearstwo & three

Separate projections for income, expenses and profit

An overview of the business – property types, your chosen geographic area,the projected values of the properties you will be buying, how you intend tobuy and how you will manage owned properties.

Your Curriculum Vitae.

An asset / liability statement for both you and the business.

Confirmation of how much of your own money you intend to put in.

Advantages to making a proper plan – if it doesn’t work on paper it won’t work inreal life – to be forewarned is to be fore armed, or put another way, to be forewarnedsaves an awful lot of money.

Disadvantages to making a proper plan – NONE. Worth every minute spent andthen some.

Review it regularly, along with your goals, and keep focused.

130

Number four – “Build a team”

“Nobody ever rises above mediocrity who does not learn to use the brains ofother people and sometimes the money of other people too…it takes acombination of the two.” Napoleon Hill

Build a mastermind group. Find a friendly and helpful

SolicitorAccountantBank ManagerSurveyorEstate agent(s)Mortgage broker

Nurture these people and make them your friends.

Calculate their weight in gold and think yourself lucky to know them. Without them yourbusiness will fail. With them you have every chance of success.

131

Number five – “Decide on your strategy”

Answer these questions in the light of your goals and your planning.

Do you want to be involved in property

as a businessas an investment ?

Do you want income or capital growth, or a combination of the two?

Do you need you money out soon, or later i.e for a pension, or can you let it accumulate?

Do you want to refurbish and trade properties for quick capital gains, or buy investments tohold

for incomefor capital growth?

Can you buy at auction

or do you need the certainty of buying

by private treaty?

Does it suit you to buy

individual propertiesportfolios

Is your goal a specificcapital value of a property or properties i.e. a portfolioora specific income requirement as rent or as a net profit

at some defined point in the future?

132

Number six – “Decide on what type or types ofproperty”

To achieve your goals, what do you want to buy ?

Residential Houses HMO’s Flats

Purpose builtConversionsRefurbishments

InvestmentsStatutoryAST’sFreehold ground rentsReversions

Commercial Shops Retail parades Retail warehouses Shopping centres Offices Serviced offices Industrial Warehouse Call Centres Internet Hotels

Leisure Pubs Hotels Restaurants and take-aways Clubs & dance halls

Others Fishing rights Telecom masts Advertising hoardings Lock-up garages Petrol filling stations Agricultural & grazing

Development Situations

ETC ETC ETC ETC ETC ETC ETC ETC ETC ETC ETC ETC ETC ETC ETC

133

Number seven - “Choose your target location”

Is it local? If it is…

Study your local estate agents windows to get a feel for your local market and the possibilityof a quick profit opportunity.

Start getting to know your local or chosen area inside out. Drive around regularly to get anidea of what’s on the market. Send for the details and get to know values in specific areasand streets.

Register with all the local estate agents for properties costing no more than four times yourdeposit and order all the local papers which have property pages.

Start to get a feel for rents as well as prices in your area.

Start viewing properties with a view to actually buying one.

If it isn’t…

Consider how you are going to find property.

Do all of the above i.e. Visit the area as often as you can and

Study all the estate agents windows to get a feel for the local market and thepossibility of a quick profit opportunity.

Start getting to know your chosen area inside out. Drive around regularly to get anidea of what’s on the market. Send for the details and get to know values in specificareas and streets.

Register with all the local estate agents for properties costing no more than four timesyour deposit and order all the local papers which have property pages.

Start to get a feel for rents as well as prices in your area.

Start viewing properties with a view to actually buying one.

and register to receive auction catalogues from all the main auctioneers, and the ones local toyour target area.

Start to consider how you will manage any property you purchase. Will you do it remotely,or will you use local managing agents?

134

Number eight – “Get your finance arranged”

Calculate how much of your own money you can afford to put in

Write a business plan (see step Number three)

So you know where you are going and can keep on trackSo you can show it to your bank manager and other potential sources of funding

Investigate which is best for youBuy to LetCommercial loansPrivate fundsOther

Make a list of everyone you know

Ask your bank manager for an overdraft with an agreed limit which you can call on at anytime – as a back up.

Open up a new bank account with a new bank and do the same.

Start making a list of all your financial and material assets for future reference.

Go through your local Yellow Pages and talk to a couple of mortgage brokers about whatyou want to do. Do the same with a couple advertising in the Business section of a broadsheet Sunday newspaper. Then look through the classified section of the Estates Gazette*.Explain what you are trying to do and ask if they can help.

Start thinking of ways in which you can raise a deposit. Think of all the sources open to you.

Work out what value of property you can afford with that deposit.

Start a proper savings scheme so that you won’t always depend on borrowed money.

Start looking for situations which you can introduce to a backer where you will both “win”.

* Available Saturdays at larger newsagents.

135

Number nine – “Improve your education”

Become an expert in your chosen area. Read for one hour a day about property law,planning, construction, in fact anything that will help. Remember, no knowledge is everwasted, you cannot know too much.

Start reading the weekly property section of the weekly broad sheet newspapers to get a feelof who in property is doing what.

Start to read financial newspapers regularly, if you don’t already, even if it is only once aweek. Start to get a feel of, and always have a view on, how the economy is really doing.

Go to your local library and start to read as much as you can about property.

Subscribe to the Estates Gazette and read it from cover to cover every week so you can get ahandle on real world property trends.

Keep an eye on the classified section of the Estates Gazette. See who is selling what and forhow much. Make contact with the agents who sell high yielding properties and tell themwhat you are after. Ask to go on their mailing list.

Contact all major auctioneers. Start taking auction catalogues and regularly attendingauctions to get a feel for the market and prices. Keep an eye on the prices paid for propertiesat auction and practice calculating yields and undertake other financial analyses. Try puttinga valuation on properties to be sold using your previous analyses and see how close you are.

Read “An insiders guide to successful property investing” from cover to cover and take theopportunity to have a days consultation to see how you can apply this to your circumstances.

136

And last but not least…

Number ten – “Take action”

“There’s only one good time to buy real estate and that’s now”. Robert G Allen(self made property millionaire)

Prepare to take calculated risks, overcome your fear and get out of your comfortzone.

Remember, taking action drives out fear…so go for it !

Peter Jones 2001