Category: Property

Welcome back to part three of our series on property investing with Graeme. In this installment he shows us how to use mortgages to our advantage:

Above is the number one mantra of a professional property investor, and if you want to build a successful portfolio it really helps to know how you can get a property for free and income for life.

Property is a major route to life-changing wealth and the main reason is because you can use other people’s money to make money. Even if you use your own money, an important point is how you buy a property and get your money back whilst making a rental profit each month. In many countries, (UK, USA, Canada, Australia, New Zealand etc.) not only can you pull your money out of a property by remortgaging and make a monthly rental income, you can also increase the property’s equity over time.

Money Out with a Mortgage

The principle of money in money out works because of mortgages. Mortgages are available in all countries, however the calculation to find money in money out deals may vary slightly from one country to another. For example, in the UK we focus on getting our money spent on a property back in 6 months because this is the legal amount of time it takes to get a remortgage after purchase. In other countries this time frame may be slightly different, however the basic principle of using mortgages (the bank’s money) to return your personally invested money is the same around the world.

To use the U.K. example, whenever a serious investor analyses a property he or she asks the question:

What is this property worth, refurbished to a good standard in 6 months time?

We want to refurbish properties to a good standard because the mortgage company will increase the loan amount and six months after purchase we can get all our invested money out of the property. Furthermore we want to refurbish a property to a good standard because we want to be good landlords – property is a people business and a good property attracts good tenants who stay longer and pay full rent on time. Initially it costs more to refurbish a property to a good standard but in the long run this is the smart business thing to do.

So how do we know what is a money in money out deal? This is best explained with an example:

Money In Money Out Example

Lets say we find a property on the market and comparables suggest it is worth 100K in good condition. To keep things simple and based on standard UK mortgage lending we will assume a loan of 75% to the value of the property.

If we want to get all our money back we do a simple calculation:

100K x 75% = 75K (loan amount)

– refurbs e.g. 5K

– other costs 2K (legal fees, survey)

= 68K

So we know our maximum offer to the seller is 68 K and we can invest a total of 75K if we want to get all our money back on the remortgage.

With this example let’s assume we have the 75K in savings and our offer of 68K is accepted. We buy the property for 68K, pay the survey and legal fees and refurbish the property with 5K. Then 6 months later, when the property is already rented, we take a remortgage and the mortgage company’s surveyor looks for comparables in the area and finds the fair market value is 100K, and because most UK mortgage companies give 75% of a property’s value, they give us 75K and hey presto we now have the 75K spent back in our bank account.

Comparing Apples with Apples

“How do we find good comparables?” you may ask. “How do we know the true value of a property?”

Well, we have to think like a surveyor because surveyors are the people who actually put the values on properties.

A surveyor looks at similar properties that have sold in the same area recently. In the U.K. we use websites such as nethouseprices.com, mouseprice.com or ourproperty.co.uk as these websites use Land Registry data. (the organization which stores official property title deeds)

Specifically we want to know if anything has sold within the last 6 months that is very similar to our property, in particular comparables should have the same number of bedrooms. Ideally these comparables are in the same street. If not the same street then within ¼ of a mile, and if not then expand your search out further which is easy to do when you input your information into a property website’s search engine.

Look for properties in a high price range and in good condition.

If the comparables are a bit tired or fully distressed call 3 estate agents and ask for an honest appraisal and take the average of the 3 predictions. Another method is to call a local surveyor and ask “What will this property value at in the current market, once refurbished?”

To be extra safe you can use all the techniques together and take the average.

The Power of Persistence

Now, one mistake amateur investors make is believing the seller’s asking price. Our research tells us the value of our example property is 100k after refurbishment, however the asking price might be 110k or 130K or 90K or whatever the seller thinks it is worth. The only thing you need to remember is: The asking price is irrelevant!

Of course you may say, “This is all very interesting but no seller will accept such a low offer” and you would be right that it is unusual. However it is possible, and successful investors actively search for such below market value (BMV) deals.

Property investing courses say that 1 in 40 such BMV offers are accepted. The truth is it depends on the market. It might be 1 in 60 BMV offers in a buoyant market, but when sellers are desperate you might only have to make 20 such offers. The point is there are motivated sellers in every market and professional investors have a variety of ways of finding them.

As you can see you will have to experience a lot of rejections in order to get a real BMV deal. You will have to kiss a lot of frogs to find a prince. Amateurs hate rejection but it is part of the game, and if you don’t embrace rejection it may crush you to the point of giving up. However, just because someone says “No” it does not mean they won’t say “Yes” at a later date. If a seller rejects your offer simply record the offer in your property database and move onto the next property. Then 3 weeks later re-offer. You will probably offer 3 or 4 times on the same property and that is fine. Your database is a simple chart that shows property address, offer, date of offer, refurb estimate and rent per month. Your database is a simple, powerful tool that will grow and, given time, help you find good BMV deals. Remember to put all your offers into the database because as my mentor likes to say, “The money is in the database”.

The number one mantra of a professional property investor is:

Money in, money out, asset for free, income for life.

In the next article we will examine the final piece of the mantra i.e. how to get rental income for life, even while paying a mortgage on the property. For now however, let’s summarize this piece which has focused on getting your money out of a property and gaining an asset for free.

Summary

1. Research and make many BMV offers
2. Buy BMV
3. Refurbish
4. Roll onto long-term finance with a bank.

 

Following our interview on property investing with Graeme, here is a second post from him with some practical advice on how you can actually get started and research your investing area:

In the previous post we discussed SAP (Strategy, Area, Property) and how a serious investor starts by identifying a clear strategy. We will return to the topic of strategy, however you’re probably saying “OK, strategy is important, but for now just give me some actionable advice to help me get into my investing area and find good rental properties and good agents to manage my houses.”

Know your Area! – The Green Pen/Red Pen Game

To make money from property you need to know your area because if you buy in the right area, most likely good tenants will move in, pay the rent on time, take care of your house and stay a long time. Needless to say, buying in the wrong street is more likely to result in voids, bad tenants and arrears. So how can you learn about your area quickly?

The average investor goes to the estate agent and asks them for info on the local area. The problem is that the estate agent will sell you almost anything, regardless of whether the area is going up, down or stagnating. Estate agents just want to sell and only focus on a property’s good points so that they make money. Instead, first go to a lettings agent and bring a photo-copied map of the area, a green pen, and a red pen. Get the lettings agent to highlight in green all the streets on the map where property can be easily let, i.e. the desirable streets.

The exact words to say to your lettings agent are:

“If I were to bring you a house in a decent street, that you could rent today, where would it be”?

Notice the language we are using. The phrases make it sound as if you are helping them. Agents get time wasters everyday who ask random questions but take no action, so you want to separate yourself and make it clear from the start that you are here to do business.

Also ask the lettings agent specifically what type of house is in demand? (2 bedrooms, 3 bedrooms, apartments, properties with gardens etc) and why?

After they have shown you the good streets then ask them to highlight any dodgy streets with the red pen so you know the places that are best to avoid. Even if there are no rough streets in your area, it is still worthwhile getting to know which are the most desirable and least desirable streets and why.

I suggest doing the green pen/red pen game with 2 or 3 lettings agents to cross check you are getting the right info. You are also interviewing the lettings agent to see how much they know and whether you want to work with them in the future. In short you are quickly gathering accurate information about your area while doing a job interview.

So, now you should know which properties are renting fastest, in which streets and why.

Next, go to your local estate agents, show them the green streets and ask “What properties do you have for sale in these streets?” Once you have the estate agent’s list of good properties, take that list back to the lettings agent and say “Is this the kind of property you mean?”

How much rent will I get for it?

What kind of tenant (unemployed, student, family, young professional, retired) will want this property?

Is there anything I need to do to the property to get the maximum rent?

What are your fees as a lettings agent?

By doing this you are double checking your information and gleaning extra nuggets of wisdom about your investment area.

There are 2 Ps in the word property

In the previous post we talked about using the bank’s money to buy property and this is called OPM (other people’s money). In this article we are using other people’s knowledge (OPK), and this expert knowledge can be gleaned in a single day, preferably face to face but, if necessary, by phone.

OPM and OPK when combined are very powerful tools for building a successful property portfolio. From OPM and OPK comes one of the most important property investor mantras and it is this:

“There are 2 Ps in the word property. The first P is for property and the second P is for people.”

The importance of having the right people on your team cannot be underestimated to your net worth. Property is a people business. It’s all about the people we interact and transact with. Build good relationships with the right people, understand how they operate and know how to talk with them.

If you want to have a good relationship with your agent, you need to understand their system. For example, when you go into the estate agent, ask specifically to speak with the agent who deals with investors. Usually the young, inexperienced, agent is put front of shop. You want to navigate around them and talk with the experienced agent who knows the area and the business inside out. They may well be at the back of the room or have their own office off the main shop floor. It is this person you want to do business with and make your offers to.

This post has provided advice on how to build your area knowledge and how to work with agents. You might not be ready to put in offers but for now grab your pens and maps and get out there asking the right questions!!

In the next post we will examine the goal of any serious investor. How can you buy property without using your own money and how do you calculate what the right offer is?

 

I get asked all the time about investing in property overseas, but investment property is not an asset class I have any personal experience with. Luckily I have a friend who I have watched go from beginner to professional investor over the course of many years, and I have persuaded him to share some of his knowledge with us. Although he is back living in the UK now, Graeme lived in Japan for almost 20 years, and built up a large chunk of his property portfolio while he was living here. He was not a “rich expat”, just a guy with a regular job. He values his privacy, so I’m not going to publish his full name and contact details, but if you have any questions for him he is happy to answer them through the blog. I hope you enjoy the interview and find some value in his knowledge:

SMA: How did you come to live in Japan?

G: I came here directly from university and like many people, planned to stay only a few years. In the end I stayed a lot longer and thoroughly enjoyed my time in Japan.

SMA: What made you start investing?

G: A good friend recommended the personal finance book Rich Dad Poor Dad. The book was written in plain English whereas other finance books used complicated terminology and were difficult to understand. Reading this book I realized I did not have a financial plan for the future. This concern about not having financial control of my future was the starting point.

SMA: Can anyone really become a property investor?

G: In my experience not everyone is cut out to be a successful property investor. One mistake people make is to think property is a get-rich-quick scheme, but it takes time to be successful. If, however, you surround yourself with good people and the right knowledge, property can develop into a dependable source of income for the months, years, decades and even generations to come.

Not everyone can make it as a successful investor and a personal example comes from a couple of years ago when I enrolled in a property-investing course.  About 40% of the participants did nothing with the information, 50% turned property into a hobby and now make some money from it and 10% are becoming extremely successful and gaining financial freedom. Anyone can go on a property course but you have to be motivated to be successful.

Ask yourself the question: How motivated am I to be a property investor? If the answer is less than 75% I wouldn’t bother. However if you are serious then it is worth getting educated, taking action and making a positive impact on your financial future.

SMA: Don’t I need a lot of money for this?

G: No, you don’t need as much money compared to other investments. For example, the average stock investor who wants to buy $100,000 of stocks needs to invest $100,000. However a property investor who wants to buy a $100,000 property only needs to invest $25,000 because the rest can be secured with a mortgage on a low interest rate.

This is one of the big differences between the stock market and property and gives you hard evidence about which one is more secure, because your bank will not give you money to invest in the stock market but will give you money to invest in a property. The ability to intelligently use other people’s money through leverage is one of the key skills of a good property investor. (SMA – leverage is available for stocks, but only for highly qualified investors)

SMA: What is the first thing I should do if I want to invest in  property?

G: Many people think the first thing to do when you invest in property is find a good location, others think the first thing to do is find a good property. Both of these things are important, however they are not the first thing to do.

Before anything else it is wise to consider your property strategy.

Your strategy is an overall plan to know in which direction you want to move. Strategy is crucial because it drives all your decisions and actions. Having a clear property strategy means answering questions such as:

* What is your long-term goal?

* What specifically do you want to achieve and gain from property?  – Do you want monthly cash flow from rental income or do you want large chunks of money from capital gains?

* Do you want to invest in small buy-to-let properties at the cheaper end of the market, or do you want to invest in multi-let properties, which cost more and have more regulations but offer a bigger return?

* Or do you want to focus on a strategy such as social housing, which is a longer-term project, perhaps in riskier parts of a town, but can give you a steady return?

* Or you may choose to focus on flipping property and making larger sums of money by buying distressed property, refurbishing them to a high standard and selling them for a good profit.

Once you have a clear strategy, next consider your area:

* How well does your area suit your strategy?

* What are the strengths and weaknesses of investing in this area?  – What types of tenant live in the area (families, unemployed, young professionals, students)

* In which direction is the area heading?

* Who can give you the information you need to choose a good investing area?

The more you understand your area the better your chance of success is.

Finally, focus on individual properties. This is when you start viewings and making offers. Viewing properties means identifying necessary repairs, calculating the cost of repairs and then having a trustworthy team in place to first refurbish and then manage the sale or rent.

The acronym to remember is SAP – Strategy. Area. Property.

First formulate your long-term strategy, next learn about a suitable area, and then start viewing and offering on properties.

The average, uneducated investor just goes out and buys a property without knowing enough about their property team, the area, and without a clear, long-term strategy for financial success. This is why so many investors get into trouble, with long voids, difficult tenants, or members of a property team who are a liability rather than an asset.

So, for safety and speed remember- S.A.P!!

SMA: How can someone in Asia get financing in the UK?

G: Raising money is one of the tests to see if you are truly motivated to be a property investor.

First of all you may have your own money to invest. If not, there are many ways of getting finance and today we will focus on bank mortgages. It often depends on your individual situation, for example there is international bank lending from big banks such as Nat West, Barclays and HSBC. These banks offer international loans. Of course they will ask a lot of questions and whether you get a mortgage usually depends on your existing relationship with that bank. If you have a good credit history with them you have a much better chance of getting the money.

Another possibility is to visit your local bank in Japan/Asia as they may have a relationship with a bank in your investing area. If so you may be able to borrow on property in your target location. The first thing to do is speak with your local bank and find out their international banking relationships.

A further option is working with a close family member in your investing country who can get a mortgage for you and will own the property. Together you sign a deed of trust so that you actually control the property and benefit from the rental income.

Whichever method you choose, ultimately your goal is to build a track record with a bank so you can borrow easily in your investing country.

A final point on this topic is that you don’t need to buy a property to financially benefit from it. With as little as $5,000 pounds you can angel invest and support professional property investors with a return of 6 – 10% and your money back within 8 months. A more complex option is to use lease options to control property. These strategies will be explored in future posts.

 SMA: What’s the difference between investing in the UK and in Japan?

G: You can make money from property in any country. There are however some important differences to remember. The main difference between Japan and the UK is that Japan is a rental income market, whereas the UK is a rental income and capital gain market. In Japan, the land typically holds its value but the property devalues. If you invest in the right area the income generating opportunity is quite strong, particularly compared to keeping money in the bank. In the UK, property is built to last and generally prices increase over time so you have the double benefit of rental income, and when you sell the property you should make a profit, sometimes a substantial one.

 SMA: Are you concerned about Brexit?

Brexit is a great opportunity for overseas property investors!

Since the referendum the pound has crashed and anybody transferring currency to the UK will see a massive difference. Your foreign currency is now worth 10% to 40% more than pre-Brexit vote, which means you can buy more property, and with historically low interest rates, now could be the best time to invest in the UK.

Furthermore if you start a limited company to hold your portfolio, from 2020 the corporation tax will be reduced to 17%. As tax is one of your greatest expenses this is an important factor.

Yes, there are some concerns about our relationship with Europe which will need ironing out, but people will always need a place to live and unlike Japan the U.K’s population is growing, which means more demand for the same number of houses.

We also need to consider that in certain areas, investment is already flowing into the UK. Examples of this are in the northern towns of England with new intercity train lines planned (HS2). In Yorkshire, Hull’s European City of Culture Year, combined with the opening of Siemens 310 million pound wind turbine factory, represents a big boost for property and property investors by bringing long-term jobs and money to the area.

SMA: Where do you see yourself in 10 years time?

G: My career has been in teaching and property investing so I would like to combine these two skill sets and become a property mentor. I have been strongly supported by inspiring property mentors, therefore to help other motivated people move forward and achieve their financial goals would be a dream come true.

SMA: Thanks Graeme, we look forward to talking with you more soon!