Whats really happening?

I have recently spoken with a lot of potential newcomers to this business who are confused about how to 'play things'

On one hand they hear that the worst appears to be over, yet they also are reading some reports (that we could face another slump shortly.

I thought it might be worth, therefore, sharing my thoughts on the current situation with you.....

In any industry, the importance of timing for traders or investors is crucial. The UK property market is no different in this respect.

I imagine that anyone who commits to investing in UK property is, by definition, ‘sold’ on the notion that property, over time rises in value. Typically property doubles in value every 10 years.

Some 10 year cycles have shown slightly better returns than this – some 10 year cycles slightly less. Typically though, UK property rises at 7% per year on average– which compounds to 100% over 10 years approximately.

So, as long as you are always acquiring your properties at least 30% below market value, then you are almost certainly going to protect yourself from even the most savage market falls.

Even in a scenario where prices slumped temporarily, the owner of the property would benefit from the rental yields given by their investment. As a welcome ‘balancing tool’ in this industry, typically, when a temporary market slump occurs, rental demand increases.

However, I do have to say that even though we think there is no bad time to buy property – if you always buy well below current market value, there are some times in the price cycle when circumstances just could not be better for potential investors.

I believe that this time is upon us now.

What do I mean by this?

Simply that it is quite evident at the time of writing (September 2009) that the UK housing market has ‘bottomed out’. For the last 3 months, positive reports from unbiased organisations have been finding their way into the news. Basically, house prices have started to rise again. The key suppliers of this critical data are bodies such as…

• Nationwide building Society - monthly house price index
• Halifax - monthly house price index
• Royal Institute of chartered Surveyors (RICS) - monthly surveyors report
• Rightmove monthly reports - (activity based)

There are many more suppliers of such unbiased, solid evidence – but these 4 are probably the most high profile reported ones to pay attention to.

I firmly feel that anyone who gets involved in UK property now will benefit more than someone who gets involved at a later date.

The timing currently, for someone looking to invest,in my opinion, could not be better.

There are many fundamentals constantly working away in the economy that make it obvious to any impartial observer that UK property has a lot of positive drivers working in its favour in order to ensure that property will continue to rise in value over time

Let’s look at the main ones

Interest rates are low

Anyone who has any amount of cash on deposit at a bank right now will be well aware that cash at the bank has little or no investment value these days.

This is one of the factors however that are working in the favour of the revival of the housing market.

Whilst we know that base rates are at 0.5% presently – with no indication of them moving further north in the near future, we also know that the banks have not reduced their typical mortgage rates in line with this downward shift

However, they have been, very slowly, offering more and more money for mortgages – also at rates that are slowly creeping downwards, than they were previously doing.

This is one of the factors that ensured that mortgage lending in July 2009 exceeded lending in the same month for 2008. This is a certain sign that the banks are waking up and gaining confidence in the property market.

As that confidence grows, as prices continue to rise, they will be prepared to lend more money (and probably, eventually, raise their loan-to-value (LTV) percentages on monies offered too) . Also, as the inevitable eventual battle for market share between banks ‘hots up’ – the competing banks will have to be prepared to cut their margins (reduce the interest that they charge new customers) in order to gain market share. It’s a classic chicken-and-egg economic scenario in action. It has already started to happen.

Demand

Government figures state that in order to keep pace with the growing population, the UK needs to build 300,000 houses approximately each year for the foreseeable future.

This is not happening. We are building fewer houses now than at any time since the Second World War ended. Prior to the credit crunch, around 160,000 houses were completed each year in the UK. This is just over 50% of the targeted amount of 300,000.

When you take into account, that as a result of the poor economy, with many builders ‘moth-balling’ their sites until things improves – and also laying staff off, in 2008 only around 85,000 completions took place!

I feel that it will be a very long time before the 300,000 figure is reached – if ever. It will also take a long time to return to the levels of completions of around 160,000 that took place prior to the credit crunch. This is still 50% short of Government targets of 300,000 completions per year.

This will have, when the confidence that is already returning to the market – along with the necessary finance available, a massive effect on levels of consumer demand, and therefore on the positive direction of prices.

Once again, this is simple basic economic theory in action.

Population

Going hand-in-hand with the shortage of housing stock – is the fact that the UK population is rising in an extremely dramatic way.

Recent official figures show that the UK population grew by a staggering 434,700 in 2007, an increase equivalent to a city larger than Cardiff.

That is in just one year alone! The rate of growth is projected to rise at around 16% per year more than this figure!

Officially projected to rise by about 0.7% a year to reach 71 million by 2031 - an increase of nearly 10 million on today - population growth in the UK has reached near-record levels, and growth at the current rate of 0.6% a year, if continued, would take our numbers to 100 million before the end of this century. That’s around 40 million extra people on this crowded island by the end of this century.

Those property investors, who are looking to lay down an investment plan to be benefited not only by themselves, but by the future generations of their family, should be more than interested in this remarkable fact!

It’s quite obvious that as around 400,000 extra people begin to live every year on the cramped, tiny island that is the UK – they have to have somewhere to live.

As there is a housing shortage already, AND nowhere near enough new houses being built each year to accommodate the growth in population – then the repercussions to property investors, and their families, (people who ‘collect’ houses for future exploitation) are going to be massively profitable ones.

Demographics

Not only is the population increasing, but just as importantly, there are more households than ever before. There are less and less traditional ‘family’ unit scenarios in housing in the UK than there was years ago. More people are living on their own as a result of divorce and people are waiting longer to get married – if, that is, they ever do get married. If this trend continues, and there is no evidence to suggest that it will not do so – then the demands on the nation’s housing stock will be even harsher than now.

The fact we are an island also means that we tend to have a captive market. In mainland Europe, it is easier, in theory for a house buyer to cross a border to another country in order to buy a property. It is not as simple to do so in the UK. This is the main reason why the UK is projected to have, by far, the highest population growth of all EU member countries in this coming century.

UK culture

It appears to be inbred in UK residents that it is essential to own a property. Property ownership by occupants, as a percentage of all properties built, is constantly rising. Our culture is strongly skewed towards investing in ‘bricks and mortar’.

This orientation can only help those people who find themselves, one day, with properties that have accumulated massively in value – and which they want to sell.

The other side of this coin is that those people who decide that buying a house is not for them – have to live somewhere. They therefore have to rent. This is also a healthy situation for property investors who are holding onto property for future exploitation and who need a tenant in situ during that process.

Hopefully it is clear now that we have established

• Bargains abound – even when the market is strong
• The property slump appears to have stopped
• The market is definitely rising
• Interest rates are very low
• Demand is high and not being met currently
• The population is increasing and will do so by 400,000+ per year
• There is a massive shortfall in housing completions in the UK
• There are more households being created in the UK
• The UK ‘bricks and mortar’ culture supports the notion of property investing long-term.

All-in-all, these facts should give a balanced view of reality to anyone who is puzzled about how to 'read' the property market currently

continuancy of tenancy

I thought you might like to hear of a recent situation involving what is often bad news for a landlord - a departing tenant. A departing tenant is basically a lost customer to a landlord. Not only that, but it means that there will usually (if a loan has been taken out to fund the purchase) still be a monthly mortgage to pay - without the rent coming in to cover it.

That's why customer retention is important in this business. Very often though, even with the best customer skills, a tenant leaves. ..things 'happen' This means that the landlord has to act quickly to replace them - for obvious business-like reasons.

This happened to me, as I said. The tenants were in their early 60s and had been my tenants for a good number of years. the house is a 3 bed semi on a good quality Local authority estate - with about 70% of properties now privately owned. They simply wanted to downsize to a 2 bed bungalow nearby. These things happen.

I knew that this estate was well-sought after locally, and I also knew, via my local knowledge, that there is a strong market for such properties currently. so, rather than appoint a letting agent, or advertise in the local paper to find a new tenant, I decided to leaflet drop the houses on the 3 surrounding roads - explaining that a 3 bed property would soon be available.

I find through my experiences, that local authority estates tend to have strong communities - rather like everywhere seemed to have 20 years back and beyond. Many people have lived on them for years and have strong ties. Therefore many people seeking accommodation don't want to be far away from their ties if they need somewhere else to live.

I figured that by 'contaminating' the estate with a few leaflets that word would get around quickly on the grapevine. In 3 days I had 5 phone calls!

I managed to find a great tenant simply by visiting all 5 applicants and vetting them thoroughly. I wasn't desperate to take the first one who came along - I took the best of the bunch. Every potential tenant knew there were 4 others 'in the queue' - because I told them (in order to create a bit of a frenzy) this made them realise that I was the one in control and that they weren't the only potential new tenants in the picture for me.

I have managed to raise the rent £25 per month (£300 per year) above the previous rent, spent nothing on the house as either - it was in acceptable condition already.

The cost of this? £10 - to the grandson of the departing tenants - he posted the leaflets through the letterboxes for me.

Get rich quick?....not really

I was asked again today, for what seems like the thousandth time, 'How quickly will buying below market value properties make me wealthy?'

As you can imagine, three is no standard answer to that, however I often feel that those people asking it are assuming that the answer from me will be 'very quickly'. Most people assume that because there are big equity gains to be made if you master the art of finding below market value deals (bmv deals), then it follows that you can make yourself into a millionaire very quickly.

Actually, you can.....

If you bought 30 properties at £35,000 below what they are really worth then you will have created yourself wealth of just over £1 million. You would certainly be able to say you are a millionaire. However, if you were going to trade (sell) these houses immediately, without holding them as an investment, then you would probably find yourself paying tax at a rate of 40% of your profits. You would also, very importantly, lose the asset (the house) and would therefore not be able to benefit from its growth in future.

To negate that situation, you could hold the houses over time and become an investor as opposed to a trader. The problem with this is that your profit of just over £1million (and growing over time) is not liquid - it is tied up in property. So it looks good on paper - but you cant get your hands on all that lovely cash - which can be off putting for many people - those who want a Ferrari NOW..

The other matter to be aware of here is that whilst 30 properties at £35,000 below true market value each is nowhere near impossible to source - it wont happen overnight - it all takes time and patience.

I mislead you again somewhat here because it is humanly possible to find 30 houses discounted heavily in a short space of time, lets say 12 months, but the logistics and risks involved are akin to you driving your car constantly at 150mph on the motorway over a long period of time. Basically, you are asking for trouble - you will probably crash, burn and hurt yourself badly!

So, whichever way you look at it, as with many things in life, the middle option is probably the best. This is what I try to educate people about - to be business-like and ALWAYS buy well below market value (this allows you to buy today's house at a price of say 5 years ago - thus saving you time). Also to have patience - patience to make a second profit over time. so if you made £35,000 through good negotiation when you bought the property, AND you are prepared to wait another 5 years minimum to make say another £35,000 capital growth - making £75,000 in total for one house - then how many houses do you really need to achieve your goal?

Many newcomers tell me they are going to buy 20 houses per year for 5 years. I tell them that unless they have incredibly massive financial goals, or a massive ego that needs to be massaged, then they should aim lower. its crazy to put oneself under massive pressure - especially when it isn't required! 100 houses is too many for most people.

Not many people actually need more than 10 houses - as long as they do the right things right. I repeat, they should buy very cheap, and be prepared to sit on their hands and wait for even more profit.

Just 2 houses per year for 5 years on this basis (£35k initial profit/£35k growth profit) would make 70k per house over ten years - or almost three quarters of a million pounds.

Do this for ten years and it doubles (20 houses @70k = £1.4million). If we assume that you don't automatically sell each house after it hits its ten year ownership mark...then the capital growth will, more than likely, increase over time too - giving you even more!

If you are holding these houses as an investor - you will be renting them out too. This example mentioned doesn't even take into account the monthly profits on rents received (especially in say years 3-5 onwards as you increase rents in line with market rises) - that would be a very welcome bonus!

The only real 'catch' to this 5 or 10 year plan is that you have to exercise some patience.

its called delayed gratification. Unless you desperately need to sell a house which you've just bought for £35k bmv - then why not sit on it - and ultimately make more money long-term? Sit on it like a farmer lets a hen sit on an egg - rather than take the egg and sell it. The farmer is rewarded with a chicken that he or she can either sell for meat or use to lay even more eggs if he is patient and waits a bit longer - rather than eat or sell the original egg.

If you are interested in making your wealth via property, but feel a little deflated now knowing that you should really wait 5, ideally 10 years before you think of 'cashing in' - ask yourself this.

If I don't get into the game, in ten years time I will still probably be ploughing the same old furrow in the same old, or similar, line of work. I will have wasrted that time, and, worse still, i will be cursing myself by saying something like 'That house down the road was worth 100k 10 years ago - its worth 150k now. Ive I'd bought one like that at 70k then - I'd have made 80k now! what if i'd bought one per year like that for ten years? that would be almost £1million!'

And thats why I hear another thing very regularly these days from people who have sat on the fence 'I wish I'd got into property when it was really cheap - in the nineties'

Doesn't it make sense to have a 10 year (or 520 week - if that's sounds more attractive to you) plan?

Until next time.....