I went to the pub last night with a fellow property investor who is also a good mate of mine.
We often get together to chew the fat. This is part of the mastermind theory of having a supportive team around you. This shouldn’t just be a team of technicians: solicitors, accountants, mortgage brokers, but also like-minded people who support and encourage each other and who share information and ideas, possibly in a role of reciprocal mentors.
Anyway, as we were chatting, Bob said something which astounded me. He said
“you know, when I first started, I didn’t have a clue what I was doing. I just bought my first property and hoped for the best. I didn’t even know when I bought it what rent I’d get”.
Now to put this in context, Bob and I are completely different characters, opposites in fact, which is probably why we get on so well. I’ve seen the way he operates his investment business, meticulous to the extreme, every detail considered and covered.
I sat there with my mouth hanging open as he continued.
“When I finished doing it up I thought that I’d get £300 a month in rent. I figured that would still be better than I’d get on deposit in the bank, and I’d have been happy with that. So I called the letting agent and he came and had a look and said he thought he’d get me £425. I couldn’t believe it. I was delighted, but it brought home to me how little I knew. I had been wrong about the rent because I hadn’t really checked it out. I was wrong in the right direction, if you like, but it could easily have gone the other way”.
He took a swig of his beer and then carried on.
“The next thing I got wrong was the whole idea of financing. I bought my first three properties for cash and just let them sit there and thought no more about it. I’d run out of money and so I stopped thinking about property investment. I assumed I’d got to the end of the line.
Anyway, I was talking to my accountant about my business and the properties came up in conversation. He asked me what mortgage rate I was paying on them. I said ‘I don’t have a mortgage on them. Why would I want to go into debt?’ My accountant couldn’t believe I had so much of my own money tied up in these properties and explained to me in detail all about gearing up. He also told me how I could claim tax relief on my mortgage interest. He said you should have about 10 properties not three. But at the time I couldn’t really see it. I said no, no, three is fine. Why would I want any more?”.
After a moment’s pause to let all this sink here, I realise that if someone as astute in business as Bob had made such fundamental mistakes when he was starting out, there are probably plenty of others who are also struggling.
Here’s my top 10 checklist for property beginners:
Tip number one – Know your objective
What are you trying to achieve and why? Really this is goal setting which I cover in some detail in An insider’s guide to successful property investing Part one. When I started in property I needed income, actually I still do. Bob on the other hand needed somewhere safe to put his savings.
Tip number two – Check that property is right for you
In my opinion property is a medium-term to long-term commitment. More experienced and professional property people are good at doing short term, quick deals and trades, and making quick cash lump sums. But you have to know what you’re doing to get this right. For the rest of us it’s probably better to buy and hold, either for the rent i.e. income or for capital appreciation. This means that if you need ready access to cash, property might not be right for you, you might be better with something more liquid like stocks and shares.
However, whichever way you look at it, property has historically proved a fantastic investment for many, many people, and I don’t see that changing any time soon.
But don’t forget that historically what property lacks in liquidity is always made up for in security. There is a lot of truth in the saying “as safe as bricks and mortar”.
Tip number three – decide on your strategy and make a plan before you start buying
You’d be surprised how many “wanabee” investors get this wrong and do it the other way around, just like my friend Bob.
When you know what you want you can decide on how to get it. At the basic level, you’ll need to decide what type of property best suites your objective, and which areas you should be buying in. For most of us, this will mean residential property, possibly, although not always, in our locality. In my opinion commercial property is too specialist and too risky for most private investors.
If your goal is capital appreciation you might decide to target high-value properties in better areas. If your goal is income you might want to look at lower value properties perhaps in less well off locations.
Tip number four – start thinking about whether you are going to use finance to fund your purchases
If you are going to finance your properties, where are you going to find the funds. Many banks and building societies will offer you buy to let finance, but you might want to consider a private loan from a friend or relative, or even a business angel or a sleeping partner.
Now let me say a quick word about debt here. I was interested in the October 2003 issue of WHICH ? magazine which featured an exposé a type article on property seminars. They studied three seminar companies and concluded
“…at best they are overpriced for the information that they provide, at worst they encourage people into debt…”
Now let me say I am not supporting or recommending high-priced seminars and I am not encouraging people into debt. But let’s try to get some balance here. Property is a debt driven business. First, to enjoy the benefits of “gearing up” you will have to take on debt. Secondly, even cheap property is a very expensive commodity and most of us can only afford (more of) it by going into debt. Unless you have large cash reserves, using debt is the only way that you are going to be able to grow your property business.
A lot of the property “gurus”, and Robert Kiyosaki in his Rich Dad Poor Dad series of books, rightly draw a distinction between good debt and bad debt. They define bad debt as borrowing to buy a depreciating or wasting asset such as a new car or a TV. Good debt is defined as debt taken on for acquiring an asset. An asset in turn can be defined as something that will enhance either your cash flow or equity, preferably your cash flow.
This goes hand in hand with…
Tip number five – develop the right mindset
Despite what the WHICH ? researchers might imply, there is no totally risk-free way of being a successful property entrepreneur. The rewards of taking risk is gain. If debt makes you squeamish you will need to come to terms with before you start buying property.
If you are nervous about debt, that is probably a good thing – you don’t want to deal with it lightly. With a any deal there will be risks.
But if you are serious about property investing, get focused and start to concentrate on your goals.
Tip number six – learn how to reduce your risks before you buy
Proper analysis before you buy will help you to eliminate a lot of unnecessary risk and will help you sleep easier at night. My friend Bob took a big risk when he effectively bought his first property “blind”. He had the right mindset, in that he was prepared to accept risk, but that needs to be counted by being able to assess the risk so that it is not taken on irresponsibly. In this context, this means that he should have analysed the deal and assessed the risk first.
He could have done this through prior research. For example, these are the sort of questions he should have been asked himself and found the answer to:
- § what are similar properties selling for in this locality?
- § what rent do similar properties achieve?
- § is there strong tenant demand? Poor demand could mean the property will sit empty more than it is occupied
- § is there strong owner occupier or investor demand if I ever need to sell to get my money back out?
- § will the rent cover my mortgage payments, management fees, repairs and other likely costs?
This may all appear a commonsense process, but it is essential that you do your due diligence before you buy. You’d be surprised how many people just “buy property” with no thought as to whether it fits their strategy or not.
Tip number seven – start small
Start with one property and practice for a while. When you feel comfortable with what you’re doing and with the idea that you are now a property entrepreneur, buy another. There is no rush.
If house prices continue their historic trend, and if you use the power of gearing, the chances are that even buying only one property a year could make you a very successful property entrepreneur after just a few years.
Tip number eight – start to build your team
Property investing is not a “solo career”, you will need help from specialists who have knowledge and expertise you do not have time to develop. Your team should include a good, switched on solicitor who realises he is there to help you, and not the other way around; an accountant, particularly one who is good at property and business taxation; a mortgage broker to help you get the best finance deals; an tem of friendly estate agents to help you source the best deals; and a tem of like minded entrepreneurs to encourage you if things get tough from time to time.
Tip Number Nine – Improve and continually update your education
If you are going to be a landlord, you’ll need a basic grasp of tenancy law, and health and safety regulations. There are plenty of good books about Residential Property Law and Property Management.
Read books about property investing and how others became successful property entrepreneurs. If it fits your goals and style, try and emulate what they did. There are plenty of good ebooks available about property investing, including my own! Just immerse yourself in the subject. It is said that if you read on a subject for just one hour every day, within two years you’ll be “an expert”; with in three years you’ll be a “world expert”!
Tip number ten – “Take action”
As Robert G Allen, the American self made property millionaire and “guru” says “There’s only one good time to buy real estate and that’s now”.
Prepare to take calculated risks, overcome your fear and get out of your comfort zone. Remember, taking action drives out fear…so go for it !