9pm...it’s getting warm

So we have seen a rapid decline in property prices. Repossessions are higher than they’ve ever been in the last five years, negative equity has swamped the nation – who in the hell would want to get in to property investment? Well, to be frank – not a lot of people! Only people like me. Professional investors hate having money in the bank. There is absolutely no excitement in keeping your money in the bank. The return is guaranteed two things:

• a)it’s certain
• b)it’s low.

Basically it’s certainly low! If you are a true business person you would never accept a low return on your money even if it was certain.

So amongst the carnage below that is happening within the property market the vultures, being the professional property investors, hover above waiting to swoop. The professional investor will know that it’s a buyers’ market rather than a sellers’ market. They will accelerate the fall in prices as they know what price will put money in their pocket. So for example if they see a property advertised at £100,000 and know that the property is worth buying at £85,000, then considering it’s a buyers’ market they will simply place a cheeky offer of anywhere between £75,000 to £85,000. If the vendor is desperate to sell they will entertain this offer so as to limit the damage of holding this property.

9pm – 12 midnight

Interest rates have peaked. Property has got a bad name. Property investment is now considered a stupid thing to do. People who had bought properties to then sell, banking on historic growth rates, are now left with a hot potato. For the fortunate people who have money and who want to still speculate are heading towards their nearest stockbroker to play the stock market. The professional property investor however, never favouring the stock market, watches property prices on a daily basis to see when the price falls to a level that will put money in their pocket.

So who buys at 9pm? It’s the professional property investor who will accept the lowest yield. In my experience the lowest yield will be a 2% loading on the current borrowing rate on the most desirable rental properties. So if the interest rate is 8% and buy to let mortgage rates are 9.5% then the lowest yield acceptable will be 11.5%, being 9.5% + 2%= 11.5%. Their reason for choosing the most desirable rental properties is because a 2% loading does not allow for too much void periods. Look at this example.

There are two properties for sale, with current rents and corresponding yields:

Due to the yields being equal the professional investor will assess the likely voids of both properties. With the ex-local authority studio flat it will be likely that the tenant will out-grow the flat quickly as it is only a studio flat. Also, being an ex-local authority flat, it will only appeal to a limited audience. A two-bed private house will be a decent sized living space for a single person, couple or one child family and it will appeal to a wider audience due to it being in a private area. The investor will estimate that the voids will be longer with the ex-local authority studio flat compared to the two-bed private house.

However, the yield is below their target of 11.5%. They have to buy the property at:

to ensure that they get a 11.5% yield. So the professional investor will go in with a bid of around £80,000 (as professional investors are cheeky and do not care if they offer 20% below what the vendor is asking!) and will happily negotiate at a price of around £87,000.

Sometimes vendors will accept less than £87,000 as they are desperate to sell thus pushing prices down further. So in the above example an offer of £80,000 might get accepted thus setting the new price levels for two-bed private houses.

Ex-local authority studio flats need to come down even further! As this is at the undesired end of the market professional investors may require a loading of 6%. If borrowing rates are 9.5% then a yield of 9.5% + 6% = 15.5% will be needed from the most cautious of investor! This equates to:

So a bid of £38,710 is all that the professional investor will pay. So prices have fallen further.

Now notice that I have not mentioned the owner-occupier in all of this. The owner-occupier does not operate to fundamentals. The owner-occupier will be solely focused on the property price itself. If they see prices falling then their worst fear is buying a property that immediately falls in value. The owner-occupier will wait until prices bottom out. The problem is the owner-occupier doesn’t spend every day doing this like a professional investor! The professional investor does as it’s their livelihood. The owner-occupier has other things to do – like their job!

Property prices will continue to be bid downwards, the best rental properties being bought first with the lower end rental properties having to fall further. New entrant professional investors will enter, with higher loadings on their requirements causing the prices to fall further but the lower end of the market just simply having to fall further to attract any interest. There comes a point, however, when prices at the lower end of the market catch the eye of one investor (someone like me!) who thinks – hang on a second, these properties are cheap! They start to buy where the market has bottomed out and as a result provide fantastic returns. So fantastic that other investors get wind of it and before you know it – the clock strikes 12 midnight!

So here we have the complete loop. As the clock strikes 12 midnight we are simply back to a hot spot. Then all the principles in Chapter 5 are applicable.

Looking at it as a sweeping hand of a clock:

Strategies within a warm spot

The key strategy is to bid low. Do not be scared of insulting the vendor with your offer. An offer is an offer no matter what price you bid at. It’s up to them to say yes or no. At least your offer is on the table for them to consider now. It may get rejected now but accepted a few weeks down the line. Do not wait for the prices to fall to your desired level – this is apathetic! It’s up to you to drive the price down. If you simply wait it is likely that another investor will get there before you.

Making your offer stand out

If you’re going to bid low, then make sure it’s serious. Not seriously low but a serious offer worth considering. A vendor may accept a lower than anticipated offer if it is one of the following.

Financing

You may well find that obtaining finance in a falling market may not be that easy. This is because the banks would have got their fingers burnt due to defaulters in negative equity. Lending criteria will be stricter. They may require:

• A larger deposit – to lower the risk to the lender. If, for example, they restrict lending to 50% loan to value then the property price will have to fall by 50% before the bank starts to get worried. This will be a big problem for you as you have to come up with the other 50%!
• Full status – instead of the bank lending on the strength of the property to pay the mortgage they may look at the property and your status. They may ask that you earn in excess of £50,000pa and that you can prove it. This will mean payslips, tax assessments or certified accounts. Visit www.accdirect.co.uk
• A proven background – as the banks become more cautious they may restrict lending to professional landlords only. This may be decided on how many years you have been in the business or how many properties you have got.

So to ensure that you are able to buy within a falling market you need:

• Cash – for a deposit. More cash may be needed than expected. Ensure that you’ve remortgaged yourself to the hilt! This means that you will have the cash to put down. You do not want to be in the situation where you can get a flat for £25,000, that rents out for £500pcm (24% yield!) but you can’t raise the 50% deposit (£12,500) from one of the few lenders still remaining in the buy to let market. Once the market recovers you will be able to re-access the £12,500 (and more!) put down as lenders warm back to the idea of buy to let. Once the flat recovers to £50,000 and lenders are willing to lend 85% loan to value then your £12,500 put down will raise an extra £30,000 to buy further properties ((£50,000 × 85%) – (£25,000 × 50%) = £30,000).
• Status – make sure you can prove your income. If you are employed then be in a good job. If you are self-employed ensure that you have been so for three years and you have certified accounts.
• Experience – make sure you’ve got a well performing portfolio under your belt. The threshold is usually around five properties and three years’ experience. This will make you stand out from the rest.