Investment Highlights
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Since the peak and start of the subsequent property market crash in mid 2007, we have all heard horror stories from and about investors who were buying multiple investment properties in the few years preceding 2007. I’m talking about those who caught buy-to-let fever; which seemed to grip the UK after a decade of consistent capital growth and ‘easy’ lending. Those who bought plenty of property that was ‘washing its’ face’ so to speak and only covering costs in the good times; but then fell in value by 20% when the market fell, leaving these investors in negative equity. Many investors who started buying investment property 3-4 years ago thought they would struggle to survive when the crash commenced – with some investors facing 100’s of thousands of pounds of negative equity and cash-flow that was neutral at best.
What we have seen since has turned many of these investor’s situations around completely. Now many of these investors are still in negative equity which is a given, but they are not overly concerned because their cash-flow neutral portfolio is suddenly producing a healthy profit each month. Take the following example:
Investor takes out £100,000 mortgage which tracks at .05% below base rate in July 07. At this point, the base rate was 5.75% so his mortgage had repayments of £5,250 per annum or £437.50 per month. Many investors were happy to buy property at the time with a rental income of £530 per month which, after management, insurance and contingency buffer would just cover monthly mortgage payments. They were happy to buy this way as cash-flow was not as imperative to them as the capital growth they anticipated based on previous years.
So when the market started to drop midway through 2007, many investors who had bought property in the previous couple of years started to panic. Until of course the base rate started to drop… When the interest rate hit 1.5% in January 2009 the investor in the above example was paying just 1% per annum on his money – just £1,000 per year or £83 per month against a rent of £530 per month. When rates continued to slump to just half a percent in March of the same year, many mortgages went down to literally zero! I have seen many a copy of a framed letter from lenders stating ‘The New Monthly Payment on your Mortgage is Zero’ hung on a proud investor’s wall!
Many other investors took out two & three year fixes before the market started to dip in 2007. These were typically fixed around the 5% mark, and once out of their fixed period, reverted to the lenders reversionary rates which were set at the time to track the base rate. A few years back for example, Mortgage Express had a reversionary rate of 1.75% above base rate. Many investors are reaping the benefits of this reversionary rate today. Offer money to investors looking to buy property today at this sort of rate and they will snap your hand off! If the investor in the above example had been on a 2 year fixed tracker in 2007, he would now see his mortgage down at £2,250 per annum or £187.50 per month versus rental income of £530. With cash-flow currently this strong and still on a tracker rate that far more attractive than any currently on the market, being in negative equity suddenly doesn’t seem so daunting.
A common saying I hear from investors and industry contacts alike is that, ‘You make your money in this game when you buy – not when you sell.’ IE you must be buying at well below market value in the first place to prosper from a market value sale at some point in the future. This has elements of truth – of course it helps to buy below market value, but it is not the be all and end all of successful investment in property. If you bought at 15% below market value in the peak of 2007 it wouldn’t help matters much if the market dropped 20% overnight!
A combination of buying below market value, with strong monthly cash-flow, and the ability to take a medium to long term view with property is key for success. It’s imperative to take a medium to long term view, as history shows, you will always prosper over the long run if investing sensibly. The market throws up surprises as we have seen a few times now – no one predicted interest rates would rise to 15% in the late eighties, nor did they see them falling to their current level of half a percent. Whichever market you are in however, hold tight for the medium to long term and you will generally do very well.
Now is as good a time to buy as ever – you will probably never be able to pick up deals at genuine discounts of 20%+ below today’s low market value for many years to come. If your cash-flow is strong and resilient to interest rate fluctuations and you can sit on these types of deals for the next sustained period of capital growth, you really can use today’s market to build good levels of income and genuine equity.
View our Current Deals & Example Deals
The latest Nationwide survey shows that house prices in the UK have risen for the seventh consecutive month. The average value increased by 0.5% in November, surprising many observers as the pre-christmas period is usually sluggish for the property market. The latest figures reveal that the demand for housing is buoyant and considerably more resilient to macro-economic conditions than many experts intially thought.
Having been at forefront of the property industry, this reinforces Alpha Property Investment’s belief that movements in the housing market tend to be the harbingers of the wider economic environment. Although the UK economy is still in a worrying state (notably in terms of unemployment , GDP growth, and a ballooning national debt), the green shoots in the property market are indicative of a modest, yet sustained economic recovery. Credit flows seem to be up-and-running again, thereby enabling mortgage lenders to ease their criteria and provide house-buyers with the financing facilities indispensable to maintain a healthy, wide-based demand in the property market. This could well be a self-reinforcing trend as lower interest loans helps consumers free up funds they can now spend on other goods and services, thereby spurring wider economic growth.
Deal Summary
Deal Structure
The structure we have put in place enables our clients to purchase these properties at a discount of 25%, which represents instant equity between £18,000 and £20,000. Furthermore the rental income will exceed the mortgage payments, thereby generating a monthly positive cashflow.
Here is a 2 bed example:
2 Bed Flat
Valuation: £75,000
Discount: 25%
Purchase Price: £56,250
Instant Equity: £18,750
Monthly Cash-flow
Rental Assessment: £450
Mortgage (BM 4.35%): £204
Ground rent &Service charge £ 41
Profit £205
Location
The flats are very well situated in Leicester city centre with all its amenities including shops, restaurants, bars and extensive leisure facilities. Leicester train station with direct links to London, Birmingham and Nottingham is only 400 yards away. The M1 motorway is the gateway to London to the south as well as Nottingham, Sheffield and Leeds to the north.
The centrality and convenience of the location means there is a very buoyant rental market for these flats.
Pictures
To obtain further information about this deal, please contact us by
E-Mail: Info@ventispropertyinvestment.com
Phone: 0208 940 9556
Before investing in property, it is fundamental to set out a strategy congruent with your financial objectives. These aims depend on your individual circumstances. If you are looking to consolidate your income, cashflow is essential (rental income – costs). If your primary aim is to profit from the re-sale of property, then the key will be to invest in areas with good capital growth prospects and buying at prices below that of local comparable properties.
Here is a breakdown of the two elements which invariably form the cornerstone of any investment strategy:
Buying at a Discount
The discount on a property is the difference between the purchase price and the value of the property, usually based on a Royal Institute of Chartered Surveyors (RICS) valuation. The discount is an essential factor as it represents instant equity and, crucially, enables to drastically reduce the capital input when the right deal structure is in place. In current market conditions discounts typically range between 15 and 30%, depending on the number of units for sale and the motivation of the vendor.
Using Appropriate Finance
Finance is the backbone of the great majority of property deals. The most important components of a mortgage are the loan-to-value (LTV) ratio and the type and level of its interest rate (tracker, fixed…etc). A higher LTV reduces capital input (thanks to a larger loan amount) but decreases the cashflow (due to higher mortgage repayments). A lower LTV boosts the cashflow but raises the initial capital input.
Result: A High Return on Investment
A successful investment strategy generally entails buying properties below market value using financing options striking the right balance between initial capital input and ongoing cashflow. A well-structured portfolio provides a constant income stream as well as long-term capital growth prospects.
We wish you successful investing in 2009!
Alpha Property Investment Ltd
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