When it comes to property purchases, property investments, property sales or even building property portfolios, what are some of the key things that everyone should look for – the property fundamentals if you like.
There are often many opinions, many differing views or many alternative viewpoints given regarding property fundamentals but we’ve outlined our top ten points below, which we feel should be considered before you carry out any of those property purchases, investments, sales or portfolio building.
1: Invest in Yield - not just capital appreciation
Remember the last property crash? For some of us, it is hard to forget, with many properties and portfolios falling into negative equity overnight! For those who were only focusing on capital appreciation believing that any immediate shortfall in value would be offset by continuous growth, they were at best left with a difficult to manage portfolio and at worst were ruined financially. A painful lesson for many of us. However, if, when deciding to purchase an asset, you look at the profitability now (the yield) and not just focus on the long-term growth, then the asset will continue to wash its own façade even in the difficult times (provided your loan to value is not overstretched but that’s another point)!
2: Don’t let your asset stagnate - add value
You’ve signed on the dotted line and the property is yours. What now? Well, if you’ve bought at a price to allow for repair or the property is in need of renovation, then it would be a good idea to have your ducks in a row, so that repairs or renovations can start immediately the sale has been finalised. This will mean that the property can be rented or sold sooner depending on your strategy. So, have your team ready to go, have your work schedule sorted out and have the materials needed lined up to order or at least be aware of where you can purchase for the best price (don’t complete the purchase of materials or pay for labour until all the i’s are dotted and the t’s crossed on the sale contract – house buying can be a precarious thing!).
When planning your renovations, make sure you don’t ‘over add’ – be aware of the house prices in the area and if the cost of adding value would be greater than the return from a sale based on the maximum house price in the area, then proceed with caution. If a luxury finish will not achieve more rent or end value to the property, then there is no need for the outlay – a standard finish would suffice.
Also, yearly inspections on the properties will let you know of any major repairs needed, what could be done to freshen up the property and anything else that might now be viable to add, which would help to increase the value. If a property is kept in good repair, then the asset should continue to grow.
The potential to increase the square footage of the property based on permitted development (PD) rights is also something to consider. Keep an eye on neighbouring properties and any planning permissions passed that might also benefit your property. It is also worth noting that some neighbouring planning permissions may negatively impact your asset, so be aware.
And don’t be afraid to buy the “ugly” property that everyone else seems to be overlooking – you may find a hidden gem that a cosmetic overhaul will add substantial value to.
3: No such thing as ‘get rich quick’ in property - invest for the long-term
It has been said that “behind every overnight success, there is at least ten years of hard work”. Most people only see the outcome, not the input!
Going by past property cycles, the value of property has continually increased. Of course, there have been many crashes but the trajectory over time has always been upward making property one of the most exciting and consistent asset classes.
If your strategy is to buy and flip then you will need to ensure that the short-term gain would not have been outstripped by holding the property for longer-term gain – rental yield plus eventual cash-out for capital appreciation. Selling a property has the effect of reducing your asset base and impacting your long-term wealth and if the asset is producing credible net yield, then you are effectively impacting short-term gain too.
However, if a property is not performing well, costs are not offset by yield on a regular basis, it is in an area you are no longer ‘comfortable’ owning property in or the value you will obtain from selling a low yielding property is substantial, then this would make selling a viable option. If the gain from this ‘early’ sale could then be used to fund the purchase of another, potentially better performing asset, then the long-term gain will not be ‘lost’, just reinvested.
4: Buying at a discount – finding the below market value (BMV) properties
One of the best property fundamentals is buying below market value (BMV). And the first tenet of this fundamental is to know what the local market value is!
Do your research: find out what else is available in the surrounding area, how many similar types of properties are on the market, get familiar with the local selling agents and keep abreast of the current market.
Once you’ve narrowed down your search, do your sums and figure out your viable offer price. Also, pinpoint those sellers looking for cash sales or no chains, as there is usually more room for negotiation. And, as mentioned above, don’t overlook the ‘ugly’ house or the one that has been on the market for a considerable period of time. Providing they are structurally sound and there are no title defects, then they are ripe for a BMV.
By buying BMV, you make it easier to recycle your deposit, as you’re securing equity at the point of purchase and if planning to remortgage, then the loan to value on the full market value, may allow you to remove the cash you have put into the deal.
5: Use your knowledge base - invest in what you know
We’ve all seen the glossy brochures that promise beautiful apartments with luxury finishes in an idyllic and sunny location. Or the villa in a gated, safe area minutes from the picturesque traditional village. Often the reality or the mechanics of the purchase is a very different thing from the ease and tranquillity promised by the sales brochure or agent. Buying overseas, in a different legal jurisdiction, without the ability (or funds) to make regular site visits to check on progress, can often be fraught with difficulties. Unless you are relying on a trusted agent, who has an established track record (and this will come at a cost), then it may be best to leave this one alone. Believe me – many have been burnt from their forays into the overseas market!
Also, off-plan and buying in an area you are unfamiliar with, can also present difficulties. For off-plan, there is no guarantee that the houses will ever be built or built to the correct standard: a recent development in England saw over 80 homes demolished due to issues with foundations. And who knows what will become apparent once contracts have been exchanged for a new build and before snagging has been completed. If considering an area that you are not familiar with, additional due diligence may be required, leading to extra time spent to ensure that you don’t overlook anything. It is also harder to determine whether the location is good or not, what socio-economic factors could be at play and whether the area is up and coming or in decline. Added to that, travel time to visit the property plus knowledge of the local contractors and additional costs can quickly mount up. One way to circumvent this would be to cultivate relationships (or establish JVs) with other property professionals in different areas or with the local selling agents, although there may be advantages and disadvantages to both of these arrangements.
6: Ready for a rainy day – cash at hand
We all want our properties to be self-sufficient with enough to cover the mortgage payments and a credible net yield to increase our profits. But what about the hidden payments or the surprise repairs that crop up every now and then or a void period where the property is untenanted or empty for needed repairs/renovations. Will you still be able to ‘afford’ the property if you were not able to collect rent for 6 months? A cash buffer of around 6 months of payments per property is recommended to cover the unexpected, offset potential interest rate rises and subsidise any void periods.
7: Leave the emotion out of it – be clinical
How many times have you looked at a property with your heart and not your head? Many of us are put off by the décor, the scents, the surroundings, and more. But these things are usually just cosmetic and after a good clear out, the true potential of the property is often revealed.
However, if we rely on these emotions or view the property as somewhere where we would not like to live, then we could be overlooking a diamond in the rough.
The reverse of this is also true, where we see too much in a property because we are ruled by our positive emotions and this can sometimes cost us financially, as we are determined to have the property at any cost!
Best course of action? Be clinical, ignore the cosmetic, evaluate with your head, tamp down on your excitement and if you can’t secure the asset at the price you set, then move on – there will be other deals!
8: Making the assets work for you – cashflow is king!
So, you’ve got X number of properties and are feeling very proud of yourself. But having ten properties or two properties or 20, doesn’t tell the full story. Unless the properties are producing a net positive cashflow, either individually or combined, then it really doesn’t matter HOW MANY properties you have.
Each property needs to be doing its best to produce cashflow after all costs (not just those of rent vs mortgage payments). If the asset does not pay you monthly to own it you are taking on a liability and you will need to supplement the revenue for the property in some other way. However, if the property does pay you each month (after all operating and mortgage costs) then you can afford to hold the property for the long-term - in this scenario you are buying an income stream and not relying on future appreciation (as mentioned in our first point). At the end of the day, only the cash in the bank demonstrates that your strategy or investment is working. And if say 80% of your portfolio is working as an income stream, but the other 20% is a liability, then it may be time for a cull and a reinvestment of any potential profit in ‘better’ assets.
9: Avoid the pitfalls - do your own due diligence (DD)
So, you’ve found an amazing property. It looks sound, the numbers seem to stack up and it’s thought to be in a good location. Do you jump straight in with an offer, maybe more than the asking price, for fear of missing out? Do you take the blurb from the selling agent as gospel? Or do you take the word of your mate who recommended it to you?
In our opinion? No! Do your due diligence (DD) first! Before you part with your hard-earned cash do some homework on the property itself. The selling agent’s report can be a good starting point for information but remember they are a “selling” agent. You don’t walk in to a shoe shop to be told that the shoes you are planning to buy are ‘just alright’, that they are ‘not that comfortable’ and you’d probably ‘get better value if you went to the shop next door’. An unlikely scenario but it would be wise not to take everything the seller says at face value either. It may all be true but a little bit of checking into the title, the property’s structure and value, and the surrounding area will only benefit when it comes to making a more informed decision.
Also, do a thorough review of the numbers. Is the selling price on a par with similar types of property in the local area? What potential or hidden renovations are needed and how will this add to the overall costs? If planning to rent, what are the current rental levels in the area and will this produce the required yield to cover costs? If the property is already tenanted, are you able to get confirmation of the rental amounts and the current situation with the tenant? A disputed tenancy or a tenant in arrears may continue to impact on the viability of the project going forward.
Lastly, look at how the purchase or inclusion of this property in your portfolio or strategy will impact your future goals. Are you buying for emotional reasons? Or do the numbers stack up in such a way that they will help you reach your long-term goals? Have you figured out potentially how much the project will make – this needs to be worked out before you make the purchase or invest?
10: Assess your target market – continue to evaluate your property
You might think you’ve learned all there is to know about property, about all the different facets of the market, about all the different strategies and which one(s) will work best for you. But it is crucial to keep pace with market trends, new legislation, compliance and regulation and to constantly assess your target market in the area surrounding your property base.
Perhaps when you first purchased the property, the area was mostly filled with families but with school closures and an increase in businesses in the area, it is now filled with young professionals. This obviously impacts on the type of rental you can offer and the type of client you can attract, as a family home might not appeal to or be affordable by a young professional.
It is also important to remember to not individualise a property to your own taste, as your notion of an ideal home could be radically different from that of the person you plan to let to. It is better to ensure that you match your target audience whether students, families, young professionals, affordable housing tenants, business rentals and so on. And to adapt your property as the needs of the area changes. It may also be advantageous to bear this in mind when renovating a property in the early stages after purchase, so that retrofitting will not have as huge an impact on the existing structure.
So, strategies may have to change and target markets catered for, allowing you to continue to maximise your revenue. And the best way to do this? Keep evaluating and keep learning. And if you want to find out more about learning opportunities see below.
So, that’s it for our top ten tips for Property Fundamentals. If you want to learn more or are interested in deep diving further, just drop us a line at Support@PropFundrs.com and we can talk to you about strategy, funding options and maximising your property business. Or fill out the form on our website - link here
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